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Market Update: Claims costs continue to skyrocket despite new transportation risk management techniques and technologies


Moving nearly 71% of all domestic freight shipments, commercial trucking is the lifeblood of the U.S. economy. According to the Bureau of Transportation Statistics, in 2015 alone those goods totaled some 176 million metric tons worth about $700 billion; since then, both the total tonnage and its value have only increased.

For commercial trucking insurers, thanks to chronic driver shortages, pressures to make same-day deliveries and exploding claims costs, there has never been a more challenging — or more opportune — time than now.

Driving for rate

Large trucks in particular have a higher fatality rate in collisions, though most of those fatalities are the drivers and passengers of other vehicles. A 2007 report commissioned by the Federal Motor Carrier Safety Administration (FMCSA) pegged the average cost of a police-reported crash involving a large truck (those with a gross weight rating of 10,000 lbs. or more) at just over $120,000, as adjusted for inflation. Crashes involving tractor-trailers average out to $382,000.

Crashes that only involve property damage average $20,000, while those involving fatalities average $4.8 million. But even those numbers are likely low, as they do not account for rising repair and liability costs in the 11 years since the study was published. The FMCSA has not produced more recent numbers, but insurers hardly need them. They know how bad the claims situation is.

The average cost to settle an auto fatality has increased from nearly $1.9 million in the mid-2000s to more than $3.5 million, Jonathon Drummond, head of casualty brokerage for Willis Towers Watson, writes in its “Marketplace Realities 2018” report. Both calendar years 2015 and 2016 witnessed auto fatalities grow in excess of 2,000 compared to prior year norms, he added. Combined with settlement growth, this has created additional industry-projected liabilities of $6.4 billion.

“We’re seeing rate increases of 20% or more across the board,” Drummond tells NU. “With accounts with bad loss histories, rate increases are 50% or 100%.” The swiftly hardening market is keeping companies in this segment, he notes, adding that Willis is seeing few companies leave the space — and those that do soon regret it once they reconsider the possibility of 100% rate increases.

Scott McCrae, executive vice president of product and technology for Carlsbad, Calif.-based CTC Transportation Insurance Services, says that the commercial trucking insurance segment has experienced a combined ratio of 106 to 109 since 2016 with no relief in sight, especially because a lot of older $50,000 trucks are being replaced with new $150,000 models that are far more expensive to repair.

Between that and a low interest rate environment, says McCrae, most outfits writing commercial trucking coverage are currently losing money on it. Across the market, rate increases between 6% and 12% are normal.

Most U.S.-based, admitted domestic carriers would love more rate, he says, but few states will give it to them, so they must settle for successive rate increases year-over-year to get where they feel their premiums need to be. In this loss environment, McCrae says that will take most carriers two to three years if they haven’t started already.

“Now, if the insured is with a non-admitted carrier or a risk-retention group not faced with those same rate restrictions, those carriers are much less encumbered,” McCrae notes. “We own two risk-retention groups, so if we want to double our rate in one year, we can do it. We have that greater flexibility. We took rate over the last two years, so we don’t have to take as much this year. We’ve already taken it.”

It will take even longer for the cargo segment to get the rate it needs, says Chris Daggett, head of CTC’s cargo practice. “There are a lot of markets out there now that are charging roughly the same premiums they charged 20 years ago, and were content just to break even,” Daggett says. At larger carriers, he adds, cargo is usually folded into a larger book of inland marine business, so there is not as much sense of urgency to get rates to a sustainable level.

Safety first

Controlling losses is the other half of the equation, and on that front the big story is the December 2017 implementation of a long-awaited rule from the FMCSA that trucks must have an electronic logging device (ELD) to accurately track and manage a vehicle’s records of duty status. Synchronized to the vehicle’s engine, the ELD automatically records driving time, enabling carriers to better comply with federal limits on how long drivers can safely drive in a day.

It took years for the law to overcome industry objections, but forward-thinking firms pre-emptively installed the ELDs and used the telematics data they provide to monitor driving behavior, coach inexperienced drivers, reward safe drivers and dismiss unsafe ones.

Drummond says that self-insureds operating up to thousands of trucks and employing InsurTech and telematics are seeing retained losses in the $1 million to $2 million range — better than the insurance-industry average. Additionally, they have lower loss ratios on their primary limits.

Elsewhere, the American Automobile Association Foundation and the Alliance for Driver Safety & Security (the Trucking Alliance) joined forces late last year when the Trucking Alliance announced it would adopt the AAA Foundation’s new Truck Safety Recommendations.

Those recommendations — which include use of various warning, monitoring and braking systems — could prevent as many as 77,000 crashes and save up to 500 lives each year. The Trucking Alliance also requires member companies, which include 250 of the largest motor truck carriers in the U.S., to implement other safety measures such as truck-speed limiters, maintaining public liability insurance in excess of federal minimums (often $2 million), and extensive pre-employment screening and ongoing driver training.

Drivers? …What drivers?

As the trucking industry grapples with its chronic shortage of drivers, a new solution to that problem will present itself within a few years: autonomous vehicles. Robot trucks would shortstop a number of major risks, including driving while distracted, drowsy, rushed or impaired.

Most likely, says CTC’s Scott McCrae, we will begin seeing the trucks operating on routes from major ports such as Houston or New Orleans to distribution centers in Omaha or Kansas City, and then back again, like small trains. On such simple routes, the trucks will hardly have to turn, will drive at preprogrammed speeds, not enter cities, and not encounter much traffic.

Sure, these autonomous systems will make trucks even more expensive, but improved claims could well offset the costs. The big question is, who would insure them?

“We will,” McCrae says. “We’d put them in a [risk retention group] today. I’d love to insure them.”

It’s not easy being green

The training piece is especially important because the commercial trucking industry is facing a chronic driver shortage of about 50,000 drivers. As a result, many motor carriers are considering easing their hiring requirements down to as little as one year of commercial driver’s license experience or even less, just to get bodies behind the wheel. That makes insurers nervous: Are so many relatively green drivers creating higher overall risks, and possibly contributing to rising claims?

“I can’t imagine that it’s not an issue,” says Rich Soja, global head of Inland Marine for Allianz Global Corporate & Specialty. “But most carriers at the moment don’t capture a sufficient level of detail in their claims systems to actuarially state that the age and experience of their drivers, compared to that of other claims, makes a meaningful difference. No one can do that.”

Soja says that anecdotally, however, the feeling is that the driver shortage is indeed leading to a general erosion in driver safety, but getting the data to support that is easier said than done.

“This factors in as a matter of risk selection as much as pricing,” Soja explains. “As you speak with an agent, broker or wholesaler on a particular risk, you might question terms of turnover, hiring practices or minimum driver criteria. The reality, though, is you don’t often get answers to those kinds of questions with every risk.”

Smaller trucking companies, especially those operating 25 vehicles or fewer, just don’t capture that kind of information, or tend to build the kind of relationship with their agent to provide it. “It’s a legitimate question,” Soja says, “but you have to limit it to larger risks because you’re not going to get answers from a two-unit trucker.”

Scott Cornell, transportation business lead and crime & theft specialist at Travelers, says that the lengths to which companies are going to recruit new drivers also creates a need to educate rookie drivers not just on safety but on cargo theft prevention as well. Simply telling new drivers that they must employ a Red Zone strategy — fueling up, resting and eating before loading cargo, and then driving at least 200-300 miles before stopping to foil thieves who stake out warehouses and distribution centers — is not half as important as explaining why it is necessary. “When you’ve been robbed, you get that natural paranoia,” says Cornell. “But until then, you just don’t imagine it happening.”

Cornell notes that officially cargo theft is down by almost 17% from 2017, but those stats are voluntarily reported and not entirely reliable. “The economy is improving and freight is up. Cargo theft is most likely up, as well,” he says. Of special interest to thieves are food and beverage shipments, which have been the most common form of cargo stolen since 2010. Recovering it often is impossible because it’s consumed, has no means by which it can be tracked or, even if it is recovered, can’t be reintroduced to the supply chain.

Building materials have also proven a popular target, especially after major weather events or other disasters, when thieves know there are plenty of shipments moving in specific areas. “Thieves know when to strike at the worst times,” Cornell laments.