State of the insurance market

State of the insurance market

Inquiries in recent months from shippers and motor carriers compel me to examine the current insurance marketplace. Effective marketing of transportation accounts to insurers has never been easy; today it's almost impossible. Despite recent stability in many premium areas for the first time since the Sept. 11 terrorist attacks, the insurance market for the transportation client remains constrained. I don't expect any improvement for the buyer in the foreseeable future.

Increases in workers' compensation insurance premiums are staggering in many states. In some states, the market for voluntary coverage is nonexistent. Medical and hospital costs for compensable injuries now exceed indemnity payments in many cases. Compensable low-back disk injuries, particularly if surgery is involved, now routinely approach $175,000 to $200,000. Fraud, stress and obesity factors exacerbate the crisis facing insurers and risk managers. Larger shippers often must accept loss-sensitive workers' compensation programs in which they assume virtually all claims under $250,000. When these aggregate claims exceed a specified amount, the excess claims are subject to penalty increases.

If premium costs are to be constrained, employers must concentrate their efforts on the administration of effective risk-control programs. This activity can be extremely frustrating, especially in those states where employers cannot control the providers of medical treatment.

In selecting insurers, shippers today face a new peril. Insurance insolvencies, once rare, are now occurring with predictable frequency. Since Sept. 11, nearly 50 insurers have failed. Many of these insolvencies include former citadels in the insurance marketplace that were active in the current underwriting of transportation clients. Due diligence in the selection process is critically important. Captive insurers and risk-retention groups have become active in these markets. Many of them are poorly capitalized or reinsured by offshore domiciles whose balance sheets are weak or nonexistent.

At the moment, my best guess is that there are fewer than 20 qualified insurers in the country that are actively soliciting the transportation client. I don't see that number dramatically increasing soon, especially on the East Coast. Of the insurers still active in the market, a significant percentage limit their interest to over-the-road operators, fleets of fewer than 10 power units, or motor carriers operating only on an interstate basis. Obviously this shortage impedes the aggressive marketing of the shipper's or motor carrier's account to insurers.

Unquestionably, pricing has stabilized, and we even see some modest reductions in cost this year. It's not much, perhaps averaging 5 to 10 percent in selected lines of coverage, but it does reflect some recognition of the substantial underwriting profits recorded by insurers in 2003. First-quarter results this year confirm continuing favorable results. This should produce a more competitive environment in 2005. Hopefully for the transportation industry, the disarray in the insurance marketplace will abate as more insurers enter the arena as alternative markets.

Insurance consultants, who do not sell insurance or act as brokers, are worth their weight in gold in this environment. They are experienced. They are extremely knowledgeable. More importantly, they have the unique capability of knowing the brokerage community and can identify the knowledgeable specialists required to market the shipper's or motor carrier's insurance program effectively. They earn their fees many times over for their clients. For the larger transportation client, their involvement is critical. While their fees may seem high, our recent reviews of their marketing results unequivocally confirm their effectiveness.

Large fleet operators today are routinely paying 3 to 6 percent of their gross operating revenue in property-and-casualty costs. Shippers and motor carriers who have recorded poor claims experience will pay an even higher percentage of their revenue to secure the coverage they require. We have seen several programs recently that approach 9 percent of the shipper's operating revenue. Insurance may now be the third-highest expense factor on the operating statement.

While insurance consultants may be more effective supervising insurance programs with premiums exceeding $2 million annually, they have become similarly effective for smaller clients whose annual premiums are $50,000 to $2 million. The stakes are high. Don't overlook their capabilities.

Thomas A. Laffey is chairman of Polaris Risk Managers Inc., a transportation insurance consulting firm. He may be reached at (973) 882-3100, or via e-mail at On Insurance is a monthly column.