In the two decades since the publication of his book Unsafe at Any Speed, Ralph Nader has become nationally recognized as the founder of the consumer rights movement. Through his Washington, D C.-based organization, Public Citizen, Inc., Nader has advocated a wide range of industrial and governmental reforms.
After his keynote address at the Limousine & Chauffeur Show in Atlantic City, Nader discussed a number of issues concerning the limousine industry
Limousine & Chauffeur: The limousine industry is becoming more regulated at every level of government. Would it be better for operators and coachbuilders to set guidelines for themselves rather than wait for the government to get involved?
Nader: Well, as an industry expands, there has to be a higher frequency of problems. There will be more accidents and problems ...and those will be publicized. So the question is, in the race between increasing outside regulation, and more discipline inside the industry, who’s going to win?
You want adequate standards for driver training, maintenance, and general loss prevention inside the company. This can be fertilized by the association of the industry, and by the insurers of the industry.
Then the day will come when there’s a spectacular accident that gets a lot of headline space …and that will call for greater regulation. I think you need a mix of the two. It doesn’t clearly need to be just a private sector discipline, it also needs to be a public sector discipline.
Limousine & Chauffeur: Is it typically difficult for regional associations to coordinate their efforts with a national organization?
Nader: The division is pretty traditional. On the state level they deal with driver problems, vehicle maintenance and inspection, parking and traffic, and the rest of it.
On the national level, the government handles, and is concerned with, the manufacturer...such as whether a limousine needs to be recalled, or whether the warranties are clear.
Limousine & Chauffeur: Is the need for more affordable liability insurance an issue that is best tackled by a national association?
Nader: Up until now, insurance was almost entirely an issue for the state government but, last year, the risk retention bill was passed through Congress. Now, any state law that has obstructed or prohibited the purchase of group insurance, say by a group of limousine owners, has been overridden by this federal law. The federal law only relates to commercial liability policies. Still, the state laws are still there to obstruct group auto insurance purchasing and group home owners insurance purchasing by consumers.
What we’re going to see is an explosion of group purchasing...striking a better deal because of the combination of businesses who have pooled their purchases. Then, secondly, we’re going to see more companies that are self-insured. When you’re self-insured, first of all, there’s a greater incentive for loss prevention because you can see the savings immediately.
Secondly, with self-insurance, you can get the loss experience very easily. You know who has a great track record and who should be charged a high premium. Strange as it may seem, the commercial liability insurance companies do not experience loss rate in the way they say. They will charge an obstetrician who has a perfect record for 30 years the same premium they charge one who has 35 malpractice claims filed against him. So there are a lot of advantages to self-insurance. As long as you can get reinsurance. That’s the key.
Limousine & Chauffeur: What is the process for developing an industry risk retention program?
Nader: First, you need a certain number of customers. That shouldn’t be a problem. The main problem is getting the reinsurance. And, increasingly, that’s less of a problem because more and more companies are going into the reinsurance business.
Limousine & Chauffeur: What is reinsurance?
Nader: A reinsurer will buy some of the risk of the primary insurer. It’s basically insurance for insurance companies.
Limousine & Chauffeur: So, when Congress passed the risk retention bill last year, it wiped away state laws that might have kept certain operators from being eligible for a national program?
Nader: Yes, and there are going to be responses from big insurance brokerage agencies like Alexander and Alexander. They will begin to service group buyers and then you’ll get a higher quality of competition because your regular insurance companies are going to say, “Look you don’t have to group buy because we’re going to give you everything you can get by group buying, .but without any headaches or paperwork. We are going to experience a loss rate, and we are going to share the data with you. So self-insurance and group buying will stimulate a more competitive response by the professional insurers because they will lose the business permanently to the self-insurers and the group insurers.
Limousine & Chauffeur: The rise in liability insurance rates seemed to come about very abruptly across the country.
Nader: When somebody begins to raise their prices...everybody else decides to do it as well. A kind of lemming type behavior but, instead of going over a cliff, they’re going to the bank. A second reason is that a hundred insurance companies can be made to behave the same way if their reinsurer tells them to cancel a certain area or increase their rate.
I’ll give you an illustration. In sworn testimony before the Maryland government investigating committee on the insurance crisis almost two years ago, the head of the medical malpractice insurance company owned by the doctors was asked by an actuary on cross-examination, “Why have you increased the premiums for obstetricians by 70-75 percent when my figures show you should’ve decreased them by 10 percent?” The answer, by the president of the insurance company was, “Well, our actuaries actually don’t agree with the 70 percent increase but we got the word from Lloyds of London.”
Another reason insurance companies act together is that they are exempt from federal anti-monopoly law. They are used to colluding, and having fixed rates and rating bureaus. That’s why people in your industry say it stopped all at once.
Limousine & Chauffeur: What’s the cycle of change in the insurance industry?
Nader: As far as we can see from the last time, it was a ten-year cycle but we think it’s going to be shorter than ten years this time. That is, the profit curve, which started going up in 1985, is going to hit a tremendous high in 1988. Then there will be price-cutting again. Perhaps, by the early ’Nineties, you’ll be confronted with another crisis unless the states head it off.
Limousine & Chauffeur: Is that cycle based on what they think the market can bear?
Nader: Yes, I’d say so. Premiums are not likely to drop if interest rates stay low. The price wars are on when interest rates are 14 or 15 percent. Then they try to get marketshare from each other by cutting premiums.
Every state insurance department in this country, all 50 of them, have the basic authority to make sure the insurance rates are “reasonable, adequate and non-discriminatory.” That kind of wording exists on every state law. States can not only require the reduction of rates when they are too high, they can require increasing the rate when they are too low, as in a price war.
But that isn’t enough to get the insurance departments regulated. You actually have to get them more explicit authority to get data from the company by subpoena, and you’ve got to give them more actuaries. Then you might head off the next insurance cycle with its volcanic eruption of rates, reduced coverages, and arbitrary cancellations.
Limousine & Chauffeur: Is there a benefit in rate shopping, or are you dealing with the same rates and coverages from one company to another?
Nader: Well, there’s still a benefit because there’s going to be another competitive cycle starting up. There’s a greater benefit to rate shopping if you are group buying.
Limousine & Chauffeur: Let’s talk about automobiles .When someone buys a limousine, a portion of their warranty is from Cadillac or Lincoln, and the stretched portion is warranteed by the coachbuilder. What is the best way for a buyer to deal with a situation where neither the dealership or the coachbuilder will help resolve a warranty problem.
Nader: I suggest that they invoke the Moss-Magnuson warranty law and sue them both at the same time. Then the defendants will have an interest in dividing their responsibility better.
The real problem is where stretching a limousine renders components like brakes inadequate. For example, the Cadillac Company says, “We gave you adequate brakes, and you bought a stretched vehicle,” and the stretch company will say, “Well, we weren’t told that stretching the vehicle will make the brakes fail.” So you have to deal with them jointly. If you deal with them separately then they’ll each say that it’s the other party’s responsibility.
Limousine & Chauffeur: Is that something that should happen through the national association?
Nader: Yes. Suppose all the limousine buyers got together and, through their trade association, drafted a model warranty and said to coachbuilders, “We like your limousine but you’ve got to comply with our warranty, which is a little different than your warranty.” We all assume that we have to take or leave the seller’s warranty, but that isn’t true.
Limousine & Chauffeur: Has that taken place in other industries?
Nader: No, it hasn’t, and that’s what bothers me because a big function of a trade association is to do things on behalf of its members that they cannot do by themselves.