LCT With You: Jim Luff talks a bit about the COVID-19 situation and how operators can make it through times.
ATLANTIC CITY, N.J. — As higher claims and costs wrack the insurance industry, operators need to stay more informed about ways to lower their rates.
A Nov. 5 education session at LCT East covered the big picture of commercial auto insurance to help operators choose insurance partners wisely.
Two familiar industry experts offered an insider’s guide to sound fleet insurance practices: Matt Mushorn, Vice President of Limo Underwriting at Lancer Insurance Company and a product manager for its car rental and van pool divisions; and Michelle Wiltgen, assistant vice president for National Interstate Insurance.
The industry has seen a lack of underwriting profit for the last seven years, Mushorn said. Over the past decade, the frequency and severity of claims have increased, driven by medical costs, litigation costs, injuries, and strong plaintiffs. “Insurers are either raising rates or pulling out of markets altogether,” he said.
At Lancer, closed claims over the last three-year bucket are up 25%, not only from the prior three years but the three years before that, Mushorn explained.
“There are more claims and they’re costing more. We’re seeing a lot more injuries, and injuries generally are followed by lawsuits. They’re up 33% since 2009, which would be over a 4% increase a year.”
As the economy resurges, the industry is seeing a collectively higher loss ratio, leading to higher premium rate increases in the last few years expected to continue into 2019. The loss ratio is the ratio of total losses incurred (paid and reserved) in claims plus adjustment expenses divided by the total premiums earned. Conversely, insurers that consistently experience high loss ratios may be in bad financial health.
“It’s important you work with insurance companies that know what you do and brokers who know what you do,” Wiltgen said. “You should be partnering with specialists.”
Showing a chart, Wiltgen explained how a loss ratio above the 100 mark hits insurers hard. “What that means being over 100 is for every dollar an insurance company takes in, the amount they pay out is the deficit. So if you look at 2018, it’s 114 combined, which means the insurance companies took in a dollar but paid out $1.14 in claims and expenses. So that is not good for insurance long-term.”
Insurance companies don’t know if they’ve made money on your business for at least three to five years after the policy year ends, Wiltgen explained. “And that’s kind of crazy if you think about it. We don’t know that until those claims get settled, and the lawsuits are closed, and we move on. So there is definitely a lag in the numbers, but lawsuits are costly and injuries are more costly.”
Adding to the pressure is the increase in overall number of miles driven with more vehicles on the road. That leads to more accidents and claims, some of which can involve multiple parties, which lead to even bigger claims. Some settlements can result in what are called “nuclear verdicts” resulting in damage awards in the tens or hundreds of millions.
Meanwhile, vehicles cost more because of sophisticated technology that’s more expensive to repair. And a shortage of qualified drivers may lead some companies to use less capable or higher risk drivers in a pinch.
Then there is distracted driving, with onboard screens and personal electronic devices always tempting drivers to take their eyes off the road. Too many drivers are looking down at phones and not paying attention.
“You have to be careful,” Wiltgen said. “We know there’s a driver shortage, but you really need to think if you want that person behind the wheel because it’s your liability.
“You’re transporting bodies and millions of lives are in your hands every day,” she added. “So it behooves you to make sure the people you have as insurance brokers know what you do for a living and understand what business you’re in because they’re the ones handling claims.”
She also advised knowing the difference between a broker and an agent, which relates to whom they represent. An agent represents one or more insurance companies, and acts as an extension of the insurer. A broker, on the other hand, represents the insurance buyer.
“Do you know who the insurance company is?” Wiltgen asked. “Do you talk to them? Do you have access to them? Do you challenge the decisions? Are you willing to do that? It’s O.K. to ask questions. I would venture insurance is probably one of your top three expenses. So just like you ask your accountant questions, and you ask your bus and limo sales [reps] questions about the finances, you should be asking about your insurance.”
Wiltgen estimates the market has about 3,000 insurance companies, and advised operators to look for ones with A-ratings, such as A+, A-, etc. “There are all kinds of ratings, so have your broker talk to you about that.” Some airports require for-hire commercial passenger carriers to have A-rated insurance.
Mushorn and Wiltgen underscored how insurers thoroughly check out their clients’ businesses, such as reviewing their websites, all public records and information, five years of historical information, finances, maintenance, fuel usage, and even what surrounds a business (on Google Earth).
“Put your best foot forward, make sure the information you submit us is accurate, and tell us your story right,” Wiltgen said. “The more you can tell us, the more comfortable we are with the information. Be realistic.”
“You are selling yourself to us, so you have to give us reasons why we want to write your business,” Mushorn said. “What sets you apart from the rest of your peers? What do you do better? What are you doing on the safety side? What technology are you using and how are you managing it?”
They emphasized the need for an operation to have a thorough, consistent, and vetted safety program. Simply not having accidents is not good enough because eventually everyone’s luck runs out.
Mushorn advised operators to know which companies they are farming out business to. “Make sure you’ve been to the operation, you know the owners, and how they conduct their business because you’re passing your customers on to them. Make sure you not only have the certificate of insurance, but also the endorsement to the policy naming you as an additional insurer. This way, you get notified if and when there’s a cancellation on that policy. Have a contract with them. Don’t let them farm your business out. Insurance will follow the vehicle, but you’ll be involved, you’ll be sued, and your policy will be in access play.”
Mushorn and Wilten advised operations to consider taking on more risk at a reasonable level if it helps save money. Insurers can work with a fleet business to balance the anticipated level of risk and claims against the right deductibles and premiums. If a company sustains the same level of accidents and costs, then in some cases it’s better to pay it dollar for dollar below the designated deductible amount.
“We as a company look at deductible layers and see where it makes sense,” Mushorn said. “We’ll do a premium reduction commensurate with the client’s assumed risk. For example, depending on the size of the account, an operator who assumes a $10,000 deductible, may get up to a $30,000 reduction in premium by taking on $20,000 in expected losses on an annual basis. If you have a bad year, there will more than likely be an aggregate stop loss in place to protect you. If you have a good year with minimal or no losses within the deductible layer, you would benefit from the reduction in premium.”
Wiltgen also highlighted captive insurance program options for operators with good records.
“A deductible is where you get some savings up front for taking on the risk,” she said. “You take on the risk if you have an accident, you pay the first whatever of that claim, and then the policy kicks in after that. Captives are kind of doing the same thing, but on the backend. So you pay in your premium, we set money aside to pay for your claims, and if you don’t use it all, you can get that money back with the investment income that it generates. Or if you have more claims than we thought for that layer of risk that you’re taking, you can pay more. But again, there’s a stop loss that’s built-in. We realize you want to have a light at the end of the tunnel as well.”
Group captives are programs where operators band together, she said. “You have to be better than average, and must have a great loss experience, and really good risk management practices. If your broker thinks you have potential, they will help you learn about those different programs.”
The costs are generally lower because better operators buy the insurance, she said. “We look for preferred operators who’ve been in business at least five years. We will ask for your financials, so we will make sure you can take on risk.”
Related LCT article: How To Reduce Your Party Bus Insurance Costs
• Look at your renewal information at least 90 days out.
• Look at your loss experience at least on a quarterly basis.
• Get a copy of what your accountant submits to the government on your behalf, and review the information so you know how you are being represented to the insurance company.
• Keep your website updated, especially the locations you serve or don’t serve anymore.
• Report claims immediately. They get more expensive the longer you wait.
• Alert your carrier if you are making major changes such as buying buses, moving into interstate service, or merging with or acquiring a company.
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