Insurance Premiums Up Again?

Posted on November 1, 2004 by LCT Staff - Also by this author

We heard you loud and clear. In our 2004-2005 Fact Book survey, we asked what was the most important issue affecting the chauffeured transportation industry today.

For the second year running, you answered overwhelmingly that it’s insurance rates. In fact, 41 percent of you ranked it as the No. 1 issue. The next closest problem, at 11 percent, is fuel costs.

When we asked if your vehicle insurance premiums increased from 2003, 70 percent answered yes. About 52 percent of operators had a 25-percent rate increase, while 14 percent saw a 25-percent to 50-percent increase. Another 4 percent saw their insurance rates rise more than 50 percent!

We hear from operators all over the country that insurance premiums have increased dramatically, even though they were accident free.

Yet, 30 percent of respondents answering our survey said they had no rate increase or saw their rates decline. How did they manage it?

For Wayne Blanchard, president of Starlight Limousine Service in Scottsboro, Ala., the answer was switching companies. He held a policy with a well-known insurer, but dropped it when his rates jumped $1,850 on two limos after an accident-free year.

When Blanchard complained about the increase, he was told that his insurer “no longer does mono-line policies,” meaning he would have to insure his entire business operation to get better rates. Since Blanchard rents out space in an office building, he didn’t require building insurance. Instead, he was pointed toward National Interstate Insurance. Last year, his rates for three cars jumped about $30.

Some limousine companies have reported big insurance savings by using such devices as DriveCam Video Systems, a feedback program that monitors chauffeur driving habits. Bill Schoolman, president of Classic Transportation, a provider of ground transport in Bohemia, N.Y., says his company reduced insurance losses by more than 50 percent in one year using the system.

The Impact of 9/11 on Insurance

If you ask limousine operators when their insurance premiums really started to rise, they’ll point to the aftermath of Sept. 11. Our Fact Books over the past three years back this up. With massive insurance losses following that tragedy, insurance rates in all business sectors have escalated significantly.

Interestingly, a study recently undertaken by Ball State University researcher John Fitzgerald says that not one insurance company went bankrupt specifically because of 9/11. The same can’t be said in the limousine industry, where hundreds of companies folded.

Even though the terrorist attacks of Sept. 11, 2001 caused insurance companies to pay billions of dollars in damages, the insurance industry survived. Today, terrorism coverage is considered an expected expenditure, says Fitzgerald, a finance and insurance professor at Ball State, located in Muncie, Ind.

In his study Fitzgerald found:

“American businesses have adapted to the changing climate. Today, terrorism is simply thought of as a natural part of doing business. It has become a simple risk management issue.”

The Sept. 11 attacks resulted in an estimated $30 to $35 billion paid out in damages and claims over the past three years. This amount is much lower than the $70 billion figure estimated by insurance executives in the weeks following 9/11. Fitzgerald says the amount was lower because most of the victims’ families chose to participate in the federal government's compensation fund, rather than sue for damages.

By using the practice of reinsurance, or allowing other companies to purchase portions of a property insurance contract, no single company took the brunt of claims in New York City, which contains some of the most costly commercial property in the world.

“The American insurance industry did a pretty good job of spreading out the insurance contracts and this is the reason why there wasn't a single (insurance) company to go out of business due to Sept. 11," Fitzgerald states.

“Insurance companies have long used this practice. State Farm insures hundreds of thousands of homes in Florida. If they didn’t farm out the contracts, they would have been put out of business by one of the hurricanes” that recently hit the Sunshine State.

What the Insurance Companies Say

Michelle Silvestro, national marketing manager of National Interstate Insurance Company based in Richfield, Ohio, says “9/11 didn’t cause the insurance rates to go up. Insurance rates are a cyclical business. They were already going up. We were already seeing increases before 9/11 happened.”

She says her company has a retention rate of over 97 percent. “We’re the company that offers captive alternative programs” called Calypso and Trax that “finance their premiums rather than follow cyclical changes,” resulting in steadier insurance rates.

Silvestro says at some companies, “When you buy insurance, you’re at the mercy of that company” when it comes time to renew. “Other drivers may not be doing well, “ so even though you didn’t have an accident, “everyone else had accidents they insured, so your rates went up.”

If you want to reduce rates, “Go to the pros and explore all your options,” she advises. “The biggest thing is to work with an insurance agent in a company that knows your business and will explore all your options.”

She says that just because you’ve always done things the same way, doesn’t mean you’re with the right insurance company. “If you’re with a company who doesn’t understand the transportation industry, they won’t understand how to handle your claims properly.”

Silvestro believes “we’re reaching the end of that cycle” for rate increases. She sees “single digit increases for the rest of this year. I think the worst is over. We’re probably at the end of this market. Things will probably loosen up over the next 12 to 18 months.”

Fran Walsh, vice president of underwriting for Lancer Insurance in Long Beach, N.Y., says a business can get the best insurance rates by having “a stellar claims history, which usually revolves around hiring/finding the best drivers. Continually training and managing one’s driver force is also a key to continually keeping claims cost down,” he says.

Did Lancer raise rates significantly after 9/11? “Yes, but rates had already been increasing prior to 9/11, due to 10 years of continual rate deterioration. The losses suffered by the reinsurance industry forced them to recoup the losses by dramatically increasing the excess costs on all lines of business. Since the commercial auto loss ratio results were at an all-time high, commercial auto carriers were the ones most affected by these huge increases.”

Walsh says, “While the effects of 9/11 forced many limousine operators to shut down in 2001, there has definitely been a big resurgence and the number of operators – based on the amount of business we underwrite – is back to where it was three years ago.”

Walsh believes that “while rates will continue to be adjusted for inflationary costs, the only significant increases that should be seen are for accounts with a below average claims history and/or for those accounts that are underpriced to begin with.”

Rick Kline, president of Kline Transportation Insurance in San Diego, explains, “First of all, we are Insurance brokers/agents, not insurance companies. We work for the limousine operators and obtain insurance for them. We are essentially the middleman.”

He advises operators: “Don’t just call up several agents and ask them to shop. Find out from each and any agent you work with, which insurance companies they represent. Get it in writing.” He says “the key in a nutshell” is to “find out who the insurance companies are that write limousine insurance, and then find the broker who can quote those insurance companies. In other words, don’t shop at Home Depot for lingerie.”

Although it’s tempting, Kline says, “Do not have two or three brokers trying to get you a quote from the same insurance company. It slows the process and annoys the insurance company and they get the appearance you’re just shopping and will spend less time on your account.” Klein says, “All legitimate ‘A’ rated insurance companies increased rates after 9/11. It was a partial function of 9/11 and a continued downward spiral of the stock market, which caused many insurance companies to lose investment income.”

Is business back to normal? Kline says his “business demand is strong from an unusually large amount of new operators coming into the limousine industry. Many other companies are consolidating, merging and some are going out of business. There is a strong supply of business for insurance in the limousine industry, but there also are more limousine companies going out of business due to operating costs, such as insurance being too high. Workers’ Comp is so high in California that it is amazing that limousine companies can survive.”

He explains, “If you have no accidents, you are more likely to receive better pricing than someone who has accidents, but it is relative and other market conditions are mixed in.”

Kline says, “Insurance by definition is the ‘spread of risk.’ What that means is that each and every one of us will pay a bit more when catastrophic events occur, like the hurricanes now in the South. Our rates on our homes will creep up, even though we don’t live where the hurricanes are. The fires in California caused people in states far away to receive increases in their home insurance.”

He adds that insurance companies “spread their risk and they spread their operating costs out throughout the country, so every catastrophic event no matter where, eventually trickles down and costs us in one way or the other on our insurance. Your insurance premium is never 100 percent based on your operation.”

Klein foresees insurance stabilizing, saying there may even be a decline in rates over the next three years, but he warns that terrorism may “have to be factored in if an event occurs.”

Manufacturer Advice

Weighing in the insurance issue is Doug Walczak, limousine and livery manager at Ford, who says, “The Lincoln Town Car has been the market leader in the limousine and livery industry prior to 9/11 and continues as the market leader today. Several factors have made a negative impact on the insurance industry over the last several years.”

He cites the stock market decline, which “increased the need for insurance companies to raise premiums” and “the terrorist attack of 9/11 has had a negative impact on the overall U.S. economy. The limousine industry was severely affected due to the reduction in travel. However, Lincoln Town Car limousine sales continue to increase as the economy recovers.”

When it comes to getting better insurance rates, Walczak suggests vehicle maintenance, driver education and taking advantage of new vehicle warranties. “Lincoln vehicles provide warranty coverage for both base vehicle and extended service plans to support the limousine industry.

Operators should review their vehicle usage and determine the proper time/mileage to turn over their fleets,” he says.

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