The Roemer Report January 1985

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The New Trucking Insurance Market

SOARING TRUCKING INSURANCE COSTS: That's the principal subject of this month's issue. We’ll explain why your insurance premiums are increasing and what you can do to control the size of the coming wave of premium increases. Readers of this report will note that we've been issuing monthly warnings about a major shakeout in the insurance business. Its now arrived. We've had a flood of inquiries on this subject since a lead story on skyrocketing insurance rates appeared in the December 24 issue of Transport Topics.

THE INSURANCE PREMIUM ROLLER COASTER: Let's begin with the fact that the insurance business is a paradox. Ours is really two separate businesses…underwriting and investment. The property and casualty insurance sector has been in a protracted rate war since 1978, a period during which the industry incurred more than $30 billon in underwriting losses. The reason for this apparent financial insanity was that most firms felt they could offset their inevitable underwriting losses through offsetting increases in investment income. Indeed, during the days of our highest interest rates, the big insurance houses were making big money, despite major losses in underwriting insurance coverage.

Ours Is a cyclical industry that goes from a "soft" market of cheap rates and ready coverage to a "hard" market embodying just the opposite…increasing rates and a declining availability of coverage. During the five-year soft market cycle, the under­ writing philosophy was to price a risk as low as the company felt it could afford. In other words, a soft market cycle exists when all insurance companies rush like lemmings over a cliff in an effort to maintain market share by pricing their product to meet the needs of the prevalent cycle. In so doing, they lose money and reduce surplus. W.F. Roemer has been forecasting the emer­gence of a hard market for the past six months. It's now here and it will get much harder.

THE FACTS BEHIND INCREASING PREMIUMS: Most truckers are aware that the trucking insurance price war of the past six years has pushed rates to extremely low levels. The facts are that these have, in­ deed, been irrationally low by the yardstick of prudent insurance underwriting standards. insurance firms have traditionally priced their services based on an analysis of the risk, the level of ex­ posure, and the need for an underwriting profit. This practice was abandoned during the most recent cycle…and was replaced with what's called "cash flow" underwriting. Since 1978 the industry's premiums have failed to cover operating expenses. Recently, insurers have been paying out $1.17 on an average for every dollar they take in. As long as investment income temporarily surpassed underwriting losses, few took a hard look at the underlying soundness of the business that was being written. This short-sighted approach has now decimated our industry. Losses vastly surpassed expectations. Then investment income declined substantially. The consequences were a huge mismatch between loss levels and revenue. It is now expected that a process of mergers and wholesale bankruptcies will reduce to­ day's field of about 2,000 insurance companies to fewer than 600 in the next ten years. Today, the property and casualty insurance business is in the midst of a massive shakeout. In many ways its scope and consequences parallel what happened to the trucking Indus­ try as a result of deregulation. First, many non-specialized agencies Jacking financial resources, proven underwriting competence, and leverage with the biggest insurance companies won't survive. Secondly, the better managed firms should do well.

INSURANCE AVAILABILITY WILL GET VERY TIGHT: Let's begin with the fact that any insurance agent could have walked into your office a few years ago, asked you what your premium was, then offered to cut in by 20%. That's typical in a "soft" market. Many of these agencies were really not trucking specialists and were not quoting business based on sound underwriting standards. Today, they are no longer in the market. Hundreds of insurance companies have incurred losses so severe that they have depleted their reserves. Insurance companies are required by law to keep a prudent rate of surplus to written premiums. Now, with very anemic surpluses, they are severely limited in their ability to write new insurance coverage. The upshot is a significantly diminished availability of property and casualty insurance coverage across the board. In the case of trucking, the problem is even more severe, since it is a business characterized by a high level of risk and exposure and because it demands highly specialized underwriting skills. Our judgment is that many carriers who have obtained insurance from their local agent will be experiencing severe problems in obtaining adequate coverage… at any cost.

A LOSS OF UNDERWRITING COMPETENCE: One of the major consequences of a "soft" market is that it minimizes what must be called prudent underwriting practices, and this diminishes the ranks of truly competent underwriting specialists. We think it's really a factor in today's trucking insurance market. Now that almost all insurance companies are firmly focusing on the traditional objective of making an underwriting profit, they find themselves with insufficient specialists to write coverage in atypical industries such as trucking. The result is that many of the major insurance firms that once provided coverage for the trucking Industry are no longer doing so. Nonetheless, seasoned, competent underwriting is now absolutely strategic for any trucking outfit seeking to secure the broadest coverage.

REINSURERS REINFORCE HARD MARKET: The little understood reinsurance market is also focusing a new sense of underwriting discipline while driving up insurance premiums. Primary insurance companies price their products on the basis of how much reinsurance is available and the degree of availability. In the 1970s reinsurance was both cheap and plentiful. Hordes of newcomers flocked to the business. Now many of these firms have either folded or departed from the business after staggering losses. Moreover, about one-fourth of what remains of this market is written at Lloyds of London. In general, Lloyds and the other surviving reinsurance houses are shunning high-risk businesses such as trucking and demanding much higher prices. We see this trend gaining momentum.

RE-DOUBLE YOUR SAFETY AND LOSS CONTROL EFFORTS: During the days of the soft market, many insurance agencies wrote trucking insurance coverage with minimal regard for your safety program or loss history. Most of the agencies today cannot write trucking insurance at any price. Recognizing that there is going to be an inevitable increase in your insurance costs, you nonetheless can exert considerable control over the cost and availability of your coverage by having a comprehensive fleet-wide safety program. In many cases, these programs have suffered through the perverse safety control incentives prevailing in a "soft" market. Any sound insurance agency that remains in the trucking insurance market will have done so through proven underwriting competence and particular attention to a fleet's safety practices and loss history. Basically, Roemer and any other seasoned trucking insurance firm is looking to write only quality policies for quality companies that have demonstrated a commitment to safety matters.

HOW TO SELECT AN AGENCY: The "soft" market diminishes professionalism and underwriting competence. A hard market demands just the opposite. The truth is that the insurance agency down the street can write your business in a soft market. But it cannot provide the broadest possible coverage at the best possible value in a hard market. Specialized trucking insurance agencies with access and credentials at the large insurance houses now enjoy far more leverage…a reality that will exist for years to come. Those few large companies still interested in writing trucking insurance want such policies handled by solid underwriters with a thorough knowledge and proven track record in trucking. W. F. Roemer has been in the trucking insurance business for 45 years. We've provided quality coverage to quality truckers in both soft and hard markets. We’ll be providing coverage for years to come on the same basis.

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