EDITOR’S NOTE: This is the first in a weekly series of informational Q&As from Transpo Insurance].
Question: Please explain why insurance premiums for Limo companies is so high and why my company pays higher rates when we have no claims and other companies do?
Answer: The basis of insurance is spreading a specific risk among a number of insured clients to reduce the expense and minimize the risk for each. There are several factors which drive the rates applied:
- Insurance companies are regulated and controlled by the states in which they operate. These regulations require that the insurance company file its rates which must address the potential for claims, the adequate funding of these claims, and a marginal profit. Most insurance companies have a combined ratio in excess of 104% of premiums paid. So for every dollar paid in premiums, most carriers are spending $1.04 in policy expense and claims.
- The limo industry is a commercial transportation risk and so the rate structure for commercial auto is higher than other risks. We all pay for all of us.
- The cargo carried is passenger thus increasing the exposure and potential risk. Clients sue.
- The next consideration is the geographic area and its overall loss ratio. North Dakota is less potential for loss than New York City, so the rates are different.
- The carriers look at the class code or use of the vehicles and their type. Buses are greater risks than limousines. Sedans, due to the mileage and usage, are also higher in most cases. The larger the vehicle or the more miles traveled, the higher the rate.
- Driver selection also can affect rates as tickets, accidents, age and licensing are all considerations. You end up paying for driver performance.
- Finally, your company’s specific performance over a five-year period is referred to as “loss ratio.” This is calculated by adding the claims which are closed and the “open” claims to get the total losses incurred. The “open” claims are then developed, which means an additional factor called a development factor is added to these as “open” claims, as these normally increase over time. The insurance company underwriter then totals the premiums paid versus the incurred claims and that is the “loss ratio.” A profitable loss ratio is <50% as a rule of thumb.
- Most insurance companies use a “credit/debit” worksheet to analyze the risk involved with your company. Management, employees, equipment and safety organization are areas which an insurance company underwriter will use to apply credits to save you money for having these items in place or debits which cost you money for not having these items in place. These are items you can control.
As in all businesses, the best you can do to assess the insurance marketplace is to shop. In most cases, you will get what you pay for, and just like there are discount limousine companies that offer low cost service, there are discount insurance carriers. The wrong time to find out about insurance coverage is when you have a claim, so please beware.
About Lee Martinez
Lee Martinez is the President of Transpo Insurance and has more than 20 years of experience in the chauffeured transportation industry as a broker, managing general agent, and an operator. He is one of only three LimoPro Council members for the Willis Programs, a board member of the Greater California Limousine Association, and he has offices in Denver; Long Beach, Calif.; and Las Vegas. His companies offer insurance products in 22 states and he insures more than 5,500 livery vehicles in those states. Martinez also developed an internet Safety Training Program which is available at www.stop-program.com and he is a managing partner of ProTrans West, a managing general agency, which offers livery insurance products to retail brokers in the 22 western states. He can be reached at (702) 364-4727 or firstname.lastname@example.org.