YOU’VE BEEN SERVED: Bodily injury lawsuits can result in years in court.
Shopping for trucking insurance just isn’t what it was in the late 1990s.
Since 2001, the lingering hard market has meant that your choice in insurance companies who’ll even consider your business has become more limited than it was in those extraordinary times.
While back then, there were many trucking insurers in Canada, over the past couple of years the market has returned to the “four players at one time” formula.
What happened to the departed companies?
And why have we found ourselves in a hard market where prices have risen significantly?
The reasons are best understood by looking at just what happened through the last decade.
Losses through the 1990s
Throughout the 1990s, investment yields and profits were on the upswing and insurers competed for more premium dollars by lowering their rates.
Some lines, like trucking insurance, took this philosophy beyond the extreme.
Overall it was a time of bargains galore for truckers when underwriters assessed risk over-optimistically and shelled out some amazing deals.
The prolonged bull market on the investment side meant it was possible for some non-trucking insurers to realize profits (even with falling premiums) by investing those premiums before losses had to be paid.
But when trucking insurers applied this same philosophy, they put themselves in real jeopardy.
While losses for general insurers were averaging about $1.10 (and sometimes more than $1.50) for each dollar of premium collected, trucking insurers faced much larger losses. Investment income alone could never offset such losses.
Lured by large premiums
Many novice and general insurance companies jumped on the trucking bandwagon at this time, lured by the tempting carrot of large premiums.
Too few recognized that these premiums were large only in size and not profitability.
They weren’t consciously operating at a loss – they just didn’t understand the costs – and they didn’t see these costs for some time because claims in trucking insurance often take more time to develop to their ultimate cost. Insurance is one of the only businesses where you sell your product today, but do not know your true cost of your goods sold for many years to come.
For example, a bodily injury lawsuit resulting from a trucking accident can result in a significant cost that only becomes fully known to an insurer after years in court.
These realities were not grasped by many insurers, who felt they had stumbled on a golden opportunity for easy profits. But, unfortunately, no magic formula exists to allow for deep discounting of trucking insurance prices. Sooner or later, somebody must pay.
The discounting death spiral
Long-haul trucking, after all, has one of the highest failure rates of all lines of insurance in North America.
So it’s hardly surprising that, for these inexperienced, investment-based insurers, the bubble finally burst.
After a few years, claims they were reserving started settling for much higher than their original estimates – as much as 10 times higher.
Multiply that by many claims over a period of years and by the end of the 1990s many of these insurers found themselves in a bank-breaking mess. Some even went bankrupt.
In fact, a total of 70 per cent of the players walked or substantially withdrew from the long-haul trucking marketplace after 1999.
Unfortunately, no magic formula exists for deep discounting of insurance prices.
Sooner or later, somebody must pay. For all these reasons, the remaining insurers have had to raise rates. Not to line their pockets or take advantage of their trucking customers, but to bring pricing back to a point where it makes economic sense to be in the business.
These remaining insurers must avoid the death spiral of their colleagues who discounted themselves into oblivion over the last decade.
They must ensure that they will be around for the long haul.
Will we see a return of these soft, inexperienced insurers one day?
But we won’t likely see a return of the late 1990s soft market, which was the most extreme in history.
The market is cyclical and when investment confidence returns, there will likely be one or two non-specialist companies naively ready to jump in after those sizeable long-haul trucking premiums. Just remember that these non-specialists have typically had a short-lived presence.
In the end, don’t be fooled by the fly-by-night discounters. Just like their counterparts in the trucking industry, they can’t survive like that.
They will come and they will go and it could end up costing you more than you bargained for.
When you’re taking stock of your total expenses, a stable insurer with a solid track record, a specialized team of experienced underwriters and claims adjusters and real staying power will be worth their weight in gold to you in the long run.
– Mark J. Ram is president and CEO of Markel Insurance Company of Canada. Please send your questions, feedback and commentary about this column to email@example.com. For more information about Markel, visit www.markel.ca