Transportation Can Expect A Soft Insurance Market Into 2011

Insurance rates have come down over the past three years, and we can expect the market to stay soft into 2011, said Todd Reiser, vice president of the transportation practice group for Lockton Companies, an insurance broker.

Reiser said insurance premiums are down for the transportation industry, and will continue this trend for the foreseeable future.

Reiser and Daniel Bancroft, senior vice president, transportation leader, Willis of North America, discussed trucking risk management strategies during a conference call hosted by Stifel Nicolaus Capital Markets Friday.

Bancroft echoed Reiser's comments about the softening market, emphasizing that the transportation market has experienced an improved cost of risk over the last three years. With the recession, there has been much less driver turnover among fleets, allowing them to retain the safest, most experienced drivers, Bancroft said. This has contributed to increased safety and a reduction in risk. Looking ahead, however, the question will be whether or not drivers will stay with their fleets, he said.

Cost of Risk

Within the trucking industry, the highest cost of risk can range from 2 percent of revenue to 10 percent of revenue, Bancroft said. Costs can include the insurance and claim; self insurance and insurance; staff, from risk management departments to claims departments; external brokers and safety experts; and collateral.

According to Bancroft, one size doesn't fit all within the trucking industry; each mode is characterized by different levels of risk.

Truckload carriers are characterized by irregular routes and over-the-road transportation, and costs are driven by automobile experience, Bancroft said. Their accident risk is typically high frequency and high severity.

Meanwhile, in less-than-truckload fleets, drivers are often touching the freight, so the key cost of risk involves worker injury and workers' compensation. Motor cargo claims are also common within this mode, he said.

Intermodal and drayage operations are characterized by high turnover, which will typically translate into high frequency of accidents. "If you have a lot of frequency, then you will have severity," Bancroft said.

Tank carriers involve regular routes, so they'll typically have less frequency. However, because of the nature of the commodity hauled, these carriers will see a higher severity when accidents do occur.

Retentions

Reiser said insurance retentions, or deductibles, have stayed fairly stable, as the markets have stabilized. Typically, deductibles will range from $1 million to $5 million per accident for the trucking industry.

Department of Transportation standards require fleets to purchase $750,000 in insurance coverage as the minimum. For hazardous materials carriers, the minimum is $5 million.

Bancroft said the $750,000 minimum is typically not a barrier to entry for carriers, but the shipping community expects at least $1 million. Bancroft recommends this amount as a rule of thumb for the industry.

Owner-Operator Use

The use of owner-operators is a very specialized area of insurance, Bancroft said. Carriers must recognize that they're responsible for worker injury insurance when they sign on with an owner-operator.

States have been putting pressure on the industry to mimic the employer role with independent contractors, with several states adopting new laws related to independent contractor status. Should fleets be required to pay workers' compensation to owner-operators, this area will become more complex and costly for the industry, Bancroft said.