The transportation sector is crucial for the economy as it connects over 7.6 million business establishments with customers, suppliers, and workers.
The transportation sector is crucial for the economy as it connects over 7.6 million business establishments with customers, suppliers, and workers. Running a business that involves using any type of transportation can have a lot of financial uncertainty for business. From the unpredictability of oil prices to extreme weather conditions—businesses have to deal with various problems.
Safety is also another concern, according to the 2018 US Department of Transportation statistics annual report, transportation-related accidents claimed 39,032 lives in 2017, and 37,133 of those deaths were due to highway crashes. In addition, 2017 experienced a 16 percent increase in deaths among occupants of large trucks.
A big issue for businesses that rely on using transportation for their goods is the cost of their insurance. Different factors play in the decision of insurance premium prices but currently, the transportation sector is seeing a significant increase in their premium costs.
Lance McNeel, vice president of business development, Capstone Associated, explains that the transportation sector has experienced “sharply increasing rates over the last several years and an ongoing exodus of insurers from the marketplace”.
The type of problems facing the transportation sector “are the result of several high-profile losses that have occurred in recent years”, according to McNeel.
He says: “Even though insurers have increased rates over the last decade, the overall experience of trucking risks has not been profitable.”
Steering into the direction of captives
Captive insurance has come into the spotlight as an answer to deal with the challenges that the regular insurance create.
Norman Ogali, account manager, Atlas Insurance Management, explains that captives are a useful tool for the transportation sector because they “help control overpricing of insurance”.
Ogali states: “Premiums are set based on the individual member’s loss experience or loss picks. There’s predictable pricing whereas traditional insurance is prone to cyclical pricing due to increased frequency and severity of losses.”
He explains that those using a captive in the transportation sector “also manage to keep costs down through shared risk management programmes and best practices”.
“A unified approach to claims management can also be achieved through the use of specialist third-party claim administrators. It also offers the participants the benefit of sharing in the underwriting profit and investment income during profitable underwriting years through dividend distributions”, he says.
Also weighing in and agreeing with Ogali, McNeel states that “captive insurance can provide the much-needed capacity that is being drained from the market as well as a viable alternative to the commercial market”.
Using a trucking company as an example, McNeel suggests that it “implemented serious loss control procedures and is comfortable with its loss projections, using a captive as the first line of defence for its risk management programme.”
Make and model
Although captive insurance acts as a viable alternative to commercial insurance, not all are suitable to the transportation sector, however, McNeel suggests that there is a wide range of group and agency captive in the market.
McNeel explains that a “single-owner captive can be ideal for the larger transportation companies. A single-owner captive is owned by an affiliated person or company for the purpose of insuring those affiliates, while an agency captive is owned by an insurance brokerage firm or agency for the purpose of participating in the insurance coverage of its clients”.
He states: “The coverage can be provided by a large deductible programme with a commercial insurer, whereby the captive issues coverage for deductible reimbursement while the commercial insurer provides coverage above the deductible. As an alternative, a commercial insurer can issue the coverage from the ground up and then reinsure a portion with the captive insurer.”
Ogali notes that at Atlas Insurance Management, group captives are mainly homogeneous group captives. He says: “This is where truck operators join resources and form a group captive to provide insurance coverage to their business.”
Atlas also offers agency captives, which Ogali explains “controls a large book of business with historically lower loss ratio can form a captive and have the captive provide reinsurance to the fronting carrier”.
He explains that the agent, in this case, will retain the benefits of lower loss ratios through sharing of underwriting profits and investment income.
John Talley, captive programme manager of the Missouri Department of Commerce and Insurance, reveals he is currently seeing the formation of pure captives but there is “the potential of forming group and cell captives in this industry”.
When looking at the existing captive coverage of the transportation sector, McNeel suggests that there is a wide range of coverage that captive insurers can underwrite but the problem areas for truckers include automobile liability; inland marine; cargo; physical damage; general liability; property; and occupational accident or workers’ compensation.
McNeel adds: “These are the transportation risks that have been the source of the poor claims results over the years, especially with automobile liability where fatal collisions have resulted in multi-million-dollar claims.”
He explains that in the commercial market, cargo coverages carry exclusions such as jewellery, money, and live animals. When addressing the exclusions, he believes they “could be addressed using tailored coverages written through a captive insurance company, after an in-depth feasibility study is conducted determining if these risks exist inside a business.”
Captive planning will “make it easier for transportation coverages to obtain coverage when they are unavailable or too expensive in the commercial marketplace”, McNeel adds.
Stop, look and listen
For the transportation sector, Ogali suggested that some of the key factors when looking into captive insurance include, loss experience, operational costs, reinsurance costs, service providers, commitment to safety programmes, and regulatory environment.
Talley adds that there are a wide range of considerations to look at when forming a captive, such as suitability and feasibility of a captive for the company and the total upfront expenditure.
He states that “the feasibility study will necessarily include a review of the company’s long-term financial strength and stability; the management teams committed to safety, with solid risk management programmes in place; and a business loss history is better than average for the industry.”
“Lastly, but possibly the most important factor is management’s long-term commitment to self-insurance or self-financing of their risk”, Talley adds.
It’s very important for trucking businesses to have strong confidence in its loss control programme and the resulting manageable claims experience before considering captive insurance, according to McNeel.
He suggests that the costs of a captive programme that includes management fees, consulting fees, and other overlooked management and “this should be compared with the reductions of the overall premium and “greater control over the risk management function that a captive may provide”.
Another important point McNeel suggests is the vetting and analysis that needs to be done on the captive management company that will be overseeing the planning.
He highlights that a multidisciplinary team is needed to “support the insurance, tax, legal, and actuarial work that’s needed to ensure that the captive remains compliant with tax and regulatory authorities”.
Time to accelerate
As the commercial insurance market continues to fluctuate and possibly harden in the near future, Talley expects “to see the trucking industry, as well as other industries, look to alternative methods of financing their risk, including captive insurance companies either single-parent, pure captives or homogeneous group captives”.
Meanwhile, Ogali suggests as more firms and individuals become aware of the benefits of a captive solution, the numbers will continue to increase. He says: “The captives provide a flexible option for the industry to mitigate the cyclical premium pricing trends in the traditional market while also improving on their respective risk and safety programmes and sharing of best practices.”
The factors causing the shortage of capacity and the associated increase in premiums, according to McNeel “will continue to plague the transportation industry, which will force transportation firms to seek alternatives to the commercial market”.
He expects that all forms of captive insurance will continue to be “a viable option” to meet the needs of the transportation sector.
McNeel notes that advancements in technology will have a part to play in the future as well. He states: “The fact that new technologies such as advanced in-cab camera systems, electronic logging devices and collision mitigation technology will lower the incidence in serious claims and greatly assist in defending truckers after the collision makes captive insurance more attractive over the next several years.”
He concludes: “As loss experience continues to improve from these technology aids, the commercial insurance industry will be slow to respond since rates and underwriting guidelines are derived from past experience.
Captive insurers covering affiliated truckers or trucking clients can respond much more quickly to the introduction of new technology.”
