Lancer’s Tim Delaney, an industry authority on chauffeured transportation insurance, advises that trying to aim for the lowest insurance rates could backfire on operator finances.
LAS VEGAS — While the subject of insurance may seem boring, operators repeatedly tell LCT via surveys that it is one of their top three industry concerns.
At the 2011 International LCT Show, one of the industry’s foremost insurance experts addressed this subject, which is about as relevant and permanent to operators as taxes.
The 2010 insurance industry revenues related to insuring commercial vehicles such as motorcoaches and buses is estimated to be about $20 billion, said Tim Delaney, senior executive vice president of Lancer Insurance Company, who lead the session on insurance. Delaney knows that operators always wonder how to protect themselves from dramatic budget-busting price swings. On that note, Delaney provided a short insurance primer to the audience.
Insurance that profits both parties
Delaney explained that insurance companies need to be profitable, just like chauffeured transportation operations. An insurance company can make money by either taking in more in premiums than it pays out in claims or it can offset losses paid out in claims by making up the difference in investments. But investments in this economy are a gamble. Prudent insurance companies keep it simple by pricing their coverage to make a profit through premiums.
However, within the limousine industry, a typical claim may involve many parties being injured in a single incident simply because limos, buses and vans carry many passengers. A single claim for one company could easily reach $5 million — the limit requested by most bus operators.
The lure of low premiums
Delaney said that in 2004-2005, Lancer faced stiff competition as many companies began insuring passenger transportation companies with low prices that failed to factor in the magnitude of the claims. The results were predictable.
Those same companies now may raise premiums significantly, or if the problems are irreparable, withdraw from the limousine insurance market and/or be shut down by their home state’s insurance department for failure to meet their financial obligations.
Delaney also explained the effects of catastrophes such as the February earthquake in New Zealand which is conservatively estimated to cost insurers more than $12 billion in claims. It shrinks the amount of money insurance companies have available to pay out in claims. They subsequently begin to eliminate under-priced accounts through non-renewals, and then the non-renewed company is usually caught off guard with much higher premiums that are more appropriate for the risk involved in insuring a limousine service.
Such a scenario could have a devastating effect on the capital of an operator. The most vulnerable are those who choose to “ride the cycle” by chasing the lowest price, Delaney said.
Build a bank
The best positioned companies are those that have established a long-term relationship and “built a bank” with an insurer committed to the long-term financial health of its limousine company clients, Delaney said. He explained that Lancer believes the key to its success has been building a core group of loyal customers by charging a fair price for the long-term, fighting aggressively on their behalf on every claim, and helping them improve their operational safety and chauffeur training by providing a wide range of free loss prevention and training products.
Lancer also believes that it should provide products, support and service to reduce claims and help the operator’s efforts. Delaney encouraged operators to reduce their annual insurance costs by up to 60% by prudently using deductibles on their liability and physical damage coverages.
Obviously the key message of the seminar was to view your insurance company as a working partner. Develop a relationship with your insurance company through long-term mutual commitment. As the insurance market fluctuates, the insurance company will consider the investment you have made through premium payments to them and compare that to losses paid out over the long term of the relationship. For those companies that jump from one insurance company to the next looking for the best premium, a rude awakening may occur in the future when the low price leader cannot keep up with the claims and cancels your policy.