The signs that insurance rates are finally turning around started to show in January, when renewals for some operators were handed out without an increase for the first time in years. Operators have been seeing rate hikes of between 15% and 50% each year, regardless of their loss runs, since before the stock market took a nosedive in 2001. Rate increases are expected to be far less dramatic in 2004 – on average, somewhere in the range of 5% to 10%, according to eight insurance executives interviewed by LCT.
While news of smaller increases may seem like a dubious blessing, it is the first step toward stabilization, notes George Hansen, vice president of Iselin, N.J.’s Sondheim & Laughlin Insurance Agency, a company that has been writing limousine insurance since 1983. After several years of what he considers the largest rate spikes he has ever seen, a flat renewal may seem like a winning lottery ticket for many operators.
“We started 2003 seeing 20% to 40% rate increases and finished up the year seeing 10% to 15% increases,” agrees Michelle Silvestro, assistant vice president and national marketing manager of National Interstate Insurance. “I think you are going to see rates stabilize and start to come down by the end of 2004 or early 2005.”
A Historical Perspective
Limousine insurance rates are historically cyclical, following the peaks and valleys of the economy. A look back at the past 20 years shows that a return to lower rates was probably inevitable, even if it couldn’t come fast enough for operators.
Sondheim’s Hansen recalls that in 1984, operators were at the tail end of what is called a soft or buyers’ market, meaning that rates were low. Full insurance coverage for the average limousine in New Jersey, including $1 million in liability, plus comprehensive and collision, was about $1,500 a year with a $500 deductible.
Then around 1986, rates began to rise; the stock market crash of 1987 drove rates even higher. Average rates went up to $2,600 per limousine or sedan, and continued to climb to $4,000 by 1991, according to Jack Rolfe, vice president of Georgetown Insurance in Washington, D.C.
Hansen watched the bottom drop out of the market in New Jersey when insurance companies either went out of business or refused to sell limousine insurance. Making bad investments and selling unprofitably low rates sped up the demise of many insurance companies.
New Jersey operators were forced to purchase insurance from assigned risk companies, which charge higher rates. These insurance companies were only writing liability on limousines; operators were forced to get comprehensive and collision on separate policies from companies like Lloyd’s of London.
In New Jersey, the cost of $500,000 in liability was roughly $2,800 a car in 1987, says Hansen. Comp and collision coverage cost an additional 3% to 5% of the vehicle. By the time rates hit a peak in the early 1990s, Lloyd’s was charging between 7% and 12% of the value of the vehicle.
“As bad as things are now, it was an even bigger crisis back then because you couldn’t find companies to voluntarily write the insurance,” says Hansen.
In 1991, the rates began to fall again, and stayed that way until about 1997. Insurance companies started voluntarily selling to limousine operators again in New Jersey, which meant you could get liability, comp and collision in one policy.
Average rates dropped back down to $2,600 or less in the New York City region – excluding New York’s five boroughs – according to Bill Lindsay, vice president of Long Island’s HRH Insurance in Syosset, N.Y. By 1995, people were insuring limousines in New York City for about $2,200.
“Renewals would come up, and instead of telling people how much of an increase they would see, we’d be reducing their rates,” says Hansen. “It went that way for three or four years.”
As the stock market heated up, insurance rates continued to drop. Then, in 1997, the pendulum started to swing in the other direction and rates started to rise again. Companies offering super low rates began going belly up because they weren’t collecting enough to cover their losses. Since the market was still strong, more insurers came into the market even as other companies went out of the business.
“By 1998, rates were definitely on the rise, and it has stayed that way until today,” says Ray Gooley, Jr., vice president and program manager Managing Agency Group, a division of HRH Insurance.
By 2000, the average rates were up to about $4,000 a year for limos and sedans. Now the average is about $5,000 to $6,000 in the New York region, says Lindsay. Hansen has seen rates as high as $8,500 per vehicle.
What’s Behind the Ebb and Flow
The biggest reason that rates have fluctuated so significantly over the past 10 years is that a lot of insurance companies started operating as investment banks when the stock market began to soar in the late ’90s, says Randy O’Neill, senior vice president at Lancer Insurance.
“They weren’t underwriting to make a profit, they were just trying to get money to invest,” he adds. When interest rates dropped and companies weren’t getting the returns they thought they would, it was a rude awakening.
“In the casualty business, you don’t know you are writing yourself out of business until it’s too late,” says O’Neill. “You suddenly just don’t have enough money in the cigar box to pay the claims you’re supposed to pay, which puts you out of business.”
“Carriers that don’t understand the limo industry see limo insurance as an easy way to put a lot of money on the books in a relatively short period of time,” agrees Hansen. “They either suffer horrible losses that put them out of business, or they hang in there for two to four years, see they are losing money and pull out.”
There are other factors that contribute to rate fluctuations and the increases that occur over time – some of which are obvious and others that only insurance companies recognize. For instance, vehicles and vehicle repairs are more expensive than they were in 1984 and laws have passed forcing operators in some states or cities to maintain higher insurance coverage minimums.
In New Jersey, a Limo Law passed in 2001 mandating that operators maintain a minimum of $1.5 million in liability, which matches the federal law for interstate commerce. Prior to the Limo Law, most of Hansen’s clients bought either $500,000 or $1 million in coverage.
“Only a small percentage bought the $1.5 million or more,” he says. “The jump from $1 million to $1.5 million in coverage can influence rates by up to 20% or 30%.”
Corporate Work Now Dominates
The shape of the industry has also changed over time. When Hansen started writing insurance in 1983, he remembers a much higher percentage of part-time operators, or “weekend warriors,” doing limousine work for mostly weddings, proms and nights on the town.
“Now 80% of the industry is built on corporate sedan work,” says Hansen. “Drivers are better trained, but they are logging in more miles, which means there’s more exposure.”
A much larger percentage of operators misrepresented themselves when they requested insurance 20 years ago than is now the case, adds Lee Martinez, president of Mountain West Insurance in Las Vegas and Luxury Limousine in Albuquerque, N.M.
“They would just call up say, ‘I want to insure my Town Car,’ and not say it was a commercial vehicle,” says Martinez. “They did it to save money, but in the long run it hurt everyone.”
It costs more to insure commercial vehicles over private ones for a reason. Commercial vehicles generally spend more time on the road and therefore may be more likely to have an accident.
Insurance companies lost money when an inordinate number of claims came in from people they thought were private owners. After they were burned enough times and realized that the losses were coming from limousine operators, the insurance companies raised rates across the board for the industry.
Other factors that influence rates include the average cost of a jury award and medical costs. Even in a low inflation environment, both continue to increase each year at high inflationary rates, says O’Neill.
Another major factor is reinsurance costs. The fact that re-insurance prices are starting to decline is a good sign, according to Silvestro. Reinsurance is purchased by insurance companies to cover claims that exceed what they are willing or able to insure. Reinsurance was dramatically affected by 9/11 due to the size of the claims caused by the catastrophe, which further drove up rates for the insurance industry as a whole.
At the end of a hard cycle, when rates are high, insurance companies generally collect more than they need. This allows them to try new industries, such as the limousine industry. The result: competition heats up and rates drop.
“Now we’re seeing the light at the end of the tunnel,” notes Gooley. “What will inevitably happen is that you’ll see carriers enter the market and give ridiculous rates that people will jump at. But then those carriers won’t be around eight months after that because they’ll realize they are losing money.”
Use Your Loss Runs for More Than Just Shopping
Loss run records can be an operator’s greatest weapon against rate increases, so it’s important to demand them on bi-monthly or quarterly basis, examine them closely and use them to help prevent recurring problems.
Insurance companies are notorious for not wanting to provide loss runs, often for fear that their clients are shopping around. But operators should demand to see them.
Michelle Silvestro, assistant vice president and national marketing manager of National Interstate Insurance, recommends using loss runs to track which drivers are causing accidents and why they are occurring.
“If accidents keep happening at a particular intersection, chauffeurs should be instructed to be more cautious there,” she says.
If certain chauffeurs are causing multiple accidents, they should either be retrained or fired. Operators may also see trends that are consistent among all chauffeurs, which can be used in retraining and training sessions for new hires.
Accidents happen, but chauffeurs should not be consistently rear-ending other drivers. Training tips can include maintaining safe distances, frequently checking rear- and side-view mirrors, and proper braking, acceleration and steering practices.