Insurance Recovery Shattered
$50 billion in claims will drive everyone's premium up.
PATRICIA SMITH
SENIOR EDITOR
Before September 11 Bill Prester was optimistic about truck insurance. The president and managing director of Aon Truck Group wasn't necessarily predicting lower premiums, but he was seeing signs that prices were starting to level off. Carriers with poor safety records were still in for a tough ride, but the very best trucking companies — those with controlled losses and effective risk management programs in place — had likely seen the worst of this latest "market adjustment."
The terrorist attacks shattered more than his business outlook. Prester's group is based in Illinois, but Aon Corp., one of the world's biggest insurance and risk management consulting firms, had some 1,350 employees at the World Trade Center. Approximately 750 were in those offices when the hijackers hit. Some 250 are missing.
Prester says there were also insurance company representatives and clients in Aon's WTC offices that morning. Moreover, many of the company's clients had offices in the area. Aon grieved, but couldn't ignore business.
"They're our friends and partners," says Prester. "We're going to take care of them."
Within 24 hours the company had recovered and relocated New York-based systems needed to help clients process insurance claims. It secured 60-day extensions with companies that held insurance on affected property so Aon clients wouldn't have to worry about overnight policy changes or cancellations.
The Truck Group began looking for ways to protect its customers from the inevitable insurance crisis. It will be a long time before we know the full monetary cost of the September attacks, but estimates are at $50 billion including property damage, life insurance and business interruption claims. Until now, the country's most expensive disaster was Florida's Hurricane Andrew which cost insurers over $19 billion.
There is widespread agreement that this will raise rates for everyone. Prester predicts that trucking companies will see increases of 30-100%, depending on the product line. He worries that it will dramatically reduce the number of insurance companies that are able and willing to write trucking insurance, which is generally considered to be high-risk.
His prior optimism was based on capacity. While the number of insurance companies courting trucking companies has diminished considerably over the past couple of years, there were still insurers out there with plenty of money in the bank to pay claims and write policies against.
"As long as they've got capacity and financial strength, they're available to write insurance," he notes. "And as long as they're available to write insurance, they'll be a participant in trucking."
Many of those companies will now have to reach deep into their bank accounts. For some, says Prester, the draw on reserves could be 10 times more than they would normally expect in a year.
The hardest hit will be reinsurers. These are basically insurance companies for insurance companies, the industry's high stakes players that take the big dollar risks. For instance, ABC insurance may write a $1 million policy for DEF Trucking. ABC retains the first $500,000 of risk but finds a reinsurance company that, for a fee or premium, agrees to pay any claims between $500,000 and $1 million. DEF Trucking's premium is based on ABC's costs, including premiums paid to the reinsurer.
A few months ago, there were perhaps 15 reinsurers willing to cover trucking liability, says Prester. The September tragedies have likely reduced that to three or four. Moreover, he adds, we could be left with just three insurance companies capable of carrying a $1 million policy in-house. (Federal regulations mandate a minimum $750,000 for interstate for-hire carriers. Hazardous materials transporters must have from $1 million to $5 million, depending on the substance hauled.)
"This is creating an environment that is less competitive," he says. "And when it's less competitive, prices will go up."
The American Trucking Assns. has already sent letters to state insurance commissioners, asking them to "vigorously enforce" laws prohibiting excessive premium hikes. A major concern is unscrupulous companies that may try to take advantage of the situation by imposing huge increases on truckers. (Prester serves on the ATA executive risk management committee, also the Truckload Carriers Assn. board of directors.)
Meantime, brokers like Aon are trying to line up reliable insurance sources. "My thrust has been to go out and really focus on doing business with insurance companies that are strong financially, that have plenty of capital, have been in business a long time and can sustain a withdrawal from their surplus to pay the claims," says Prester. "For the time being, start-ups are out of the question."
He's also working on ways his clients can save — or at least avoid huge increases. Good safety programs may help, but limited availability is bound to mean higher prices for everyone.
There are two basic components of insurance costs: premiums and claims. Prester says trucking companies will have little or no control over their premiums — that will be decided by the marketplace — but they can control claims.
Whether it's in-house or through a broker or insurance agency, trucking companies should have a claims management team with expertise in accident investigations and litigation.
"A good claims manager knows which defense attorneys to use in which part of the country, which adjusters to use to investigate claims, when to settle, when to go to trial," says Prester. "If you don't have the right person on the scene of an accident and you don't manage the police report so it accurately reflects what happened, you're behind the eight ball."
Carriers also need to take control of small claims by raising their deductibles. When insurance was relatively cheap, premium costs accounted for up to 95% of a trucking company's total cost of insurance. It was cost effective to buy insurance with a low deductible or no deductible.
Prester now recommends that trucking companies with effective risk management programs consider raising their deductible to a point where claims paid out-of-pocket represent 50% of the total cost and premiums represent the other 50%. "At least under that scenario, you take control of 50% of the costs," he notes.
While the basic concept applies to everyone, he does caution that one formula isn't right for everyone. Fleet managers, he says, should work with their insurance brokers or agents to determine the right program and mix.
At the other end of the scale, "umbrella" policies that protect against losses in excess of standard liability coverage ($1 million for most carriers) will be scarce and expensive. Prester, in fact, is concerned that there may be only two or three insurance companies willing to write trucking umbrellas. Thus some companies are looking at restructuring operations to shield their equity from huge liability claims.
One bit of good news: low interest rates. In the past, insurance companies have financed annual premiums by allowing carriers to pay in monthly installments. But the high number of trucking bankruptcies since mid-2000 has made many insurers nervous about extending credit. Many now want as much as 20-30% of the annual premium up front. Today's low interest rates may make it cheaper to borrow the money and earn a discount by paying the annual premium in one lump sum.
If fuel prices continue to slide, or at least remain stable, insurance may be the cost that makes or breaks a fleet. But Prester cautions against buying on price alone.
"Shippers should want to do business with trucking companies that are financially sound, and should be prepared to pay more," he points out. "Trucking companies should want to do business with insurance companies that are financially sound, and should be prepared to pay more."
More Coping With Crisis
Before & After The Terror
Hazmat Safety
• Fast Facts on Drivers
Wheels of Hope
• Dumps To Ground Zero
• Going A Mile For America
• From Victims To Victims
Builders Hunker Down
• Used Trucks
Staying The Course
