At last winter’s 2011 International LCT Show, I related what we, at Lancer Insurance Company, believed to be some ominous storm clouds that were beginning to appear on the horizon for the limousine insurance market. I also suggested steps limo operators could take to soften the effects of a market contraction where insurers leave due to inadequate pricing of their products.
My message was a simple one: Limousine insurers will need to adjust their pricing in the near future because the claim payments they were making would outstrip the premiums they were collecting. And, in the absence of strong investment returns to offset their underwriting losses, they would either have to raise their prices a lot or withdraw from the market. I made these statements in February when the overall insurance industry was just beginning to quantify its losses from the New Zealand earthquake, which were then estimated to be about $12 billion.
Fast forward the tape a mere nine months to December 2011, and we quickly realize that the accurately estimated $12 billion loss from the New Zealand quake was only the beginning of what has now become the worst year ever for catastrophe claims-related losses in the property casualty insurance industry. From the earthquake and tsunami in Japan, to Hurricane Irene on our East Coast, and a record-breaking string of tornadoes and floods in our Midwest, the global insurance industry is looking at $75 billion in claims payouts in 2011. And the year isn’t over yet as I write this.
You may say: “That’s all very tragic and unfortunate for the insurance industry, but why should I be concerned? I own a 12-vehicle limousine fleet in Indiana, have a good claims record, and a bottom line finally recovering from 2008’s financial meltdown.”
The problem is that, like most financial sectors, the property casualty industry is an international enterprise, meaning that what happens in New Zealand, Japan or Vermont eventually affects the premiums you’re paying in Indiana.
The red flags are beginning to show as some large insurance players in commercial auto have withdrawn either fully or partially from the business in the U.S. One thing is for sure: There will be more to follow.
I understand that the prospect of any kind of insurance rate increase is not a popular message to deliver and I take no satisfaction in seeing my predictions made in Las Vegas last February begin to come true. But as a leading insurer of limousine companies in the U.S., we live by the old sailor’s axiom: “A good navigator questions where he is even after he’s tied up at the dock.” Questioning what lies ahead is what separates the living from the dead in both our businesses.
Damage from the 2011 tsunami that devastated Japan's coastline. Photo courtesy of BBC.
The fact is that the financials of many insurance companies are starting to show operating losses, and as I explained in my remarks at the ILCT Show, those insurers that were under-pricing their products have no other option than to raise their premiums significantly if they expect to stay in the limousine insurance business. It starts with them not offering renewals to their most underpriced and high loss ratio accounts. You will start to hear stories of marginal operators having insurance problems. Your first reaction is a small grin because you think it won’t happen to you. The next step is when insurers realize that getting rid of the bad risks might stem future losses, but does not help pay claims already in the pipeline. The only option is to sharply raise the premiums of their better accounts to outrun the claims tsunami looming in their rearview mirror. The lag on claims development in our business is three to five years, and this is our sixth year of price cuts.
And to further complicate the problem, that $75 billion in losses suffered by the industry will rear its ugly head in the form of significant increases in the premiums all insurers are paying to their reinsurance companies, which they desperately need to offer up the $5 million in limits we all require to compete in the limousine insurance sector.
Relationships are key
Is there any good news for limousine operators in all this? As I explained in my presentation, reported in the June/July 2011 issue of LCT Magazine, the companies best positioned to survive a severe contraction in the limo insurance environment are those that view their insurance relationship no differently than they do their banking, accounting and other pivotal financial relationships.
The goal is to establish a long term relationship with your insurer. Specifically, you must find an insurance company committed to the long term financial health of its loyal policyholders, and is not inclined to put them at risk by demanding crippling premium increases.
The insurer accomplishes this in two ways:
- FIRST, it does not follow the prices down to such a point that a crisis develops, but tries to maintain a competitive advantage through great claims service and expense management. In fact, many nervous insurers are offering huge commissions to agents and brokers in an effort to move business to them.
- SECOND, by using deductibles on small- and medium-size liability claims, it makes the system much more efficient and less prone to volatility because funding for these claims comes with no other expenses (e.g. commissions, taxes, overhead and reinsurance).
If properly managed, there is no reason to experience the pricing cycles “the herd” has to endure. Find an insurance partner with great claims service and take some risk on your account using deductibles. The risk you take can be limited by the use of aggregate stop loss protection. The result will be low overall cost with no rollercoaster ride. It’s that simple. The only variable left in the equation is reinsurance cost, so make sure your insurance company keeps a significant amount of risk so it isn’t subject to huge swings in its reinsurance premiums.
For those who might not now view their insurer as a key business partner and are only interested in finding a company that will give them the cheapest price, beware of the gathering storm. For those who understand the importance of “building a bank” and working closely with your limo insurer to help guide you through tough times, whether it is a serious claim or an insurance market contraction, you will be well served in the months and years ahead.
Tim Delaney is the senior vice president of the Lancer Insurance Company, based in Long Beach, N.Y. (www.lancer-ins.com). Delaney has served as a director of the Lancer Financial Group since 1982. His background includes 38 years of insurance and reinsurance experience with Frank B. Hall & Company, American Risk Management, Inc. (Reiss Group), Delaney Intermediaries, Inc. and Lancer Financial Group. He also is a frequent speaker at the annual International LCT Show in Las Vegas.