The Insurance Cycle

Throughout the years that I have been writing this column, there have been many insurance cycles and trends. Like gas, the price fluctuates – and it may not be as often, but using this as an example, the down side is always higher than the previous low. We have been fortunate that over the past few years premiums have been relatively stagnant. This is largely in part because the insurance industry is no different than any other industry – it is driven by income versus cost versus risk.

Since I started in this business some 30 years ago, there have been many major (and some minor) cycles, yet no cycle was as pronounced as what we have been going through these past three years. We are now coming out of it slower than previous downturns, but, more importantly, it seems that the economy overall is improving. With recovery, the economic cycle, which moves like a pendulum, swings, and companies are starting to recover and make money.

When I write these articles, I look at it from my observation as it affects my clients and business – I’ll call this the practical side of business. Our industry has reams of paper written on trends, future and past, the soft market and the hard market, written by those that make their living doing these kinds of prognostications. My articles are written as I view the business from my desk, sitting here in Modesto, California, not in New York, or any other financial capital. The question I always ask is, “How does the cost of insurance affect the clients (truckers) that I serve?”

The eight hundred pound gorilla in the room right now is the increase in natural disasters on this planet. These disasters will play a future part in the cost of everyone’s insurance. I would guess that in some parts of the nation, you will see the insurance industry pull out or stop writing certain types of risks altogether. We saw the start of this in Florida, where government pools will have to take over or supplement losses due to hurricanes. The loss of the World Trade Center in New York produced government intervention in the form of a mandate that the insurance industry must offer terrorism coverage. The following are some emerging trends I have been seeing as they relate to your trucking insurance coverages.

Liability. For the most part, as a participant in the trucking industry as an owner operator or fleet owner, the cost of your truck liability is a major part of your insurance premium. As the economy grows and more new businesses are formed, the ability for the insurance industry to make money increases. Usually, this signals competition in an industry, forcing prices to go down. At this time, the tide is favoring the insurance industry to make more money, so premiums are taking a turn up. I am seeing liability premiums increase by 10% as an average. Since the argument can be made that the liability part of your insurance contract has the biggest risk, and the largest part of a loss is usually associated with liability, it stands to reason that both your Bodily Injury and Property Damage premiums will also increase. Liability loss is not a fixed amount, and it can run up to the limits of the policy.

Physical Damage. This is not to be confused with Property Damage in the liability part of your coverage. This covers your equipment in the event of a covered loss. There have been some increases in the premiums for this coverage, but since the premium is based on a percentage of the values insured, roughly 2.5% to 5%, even with an increase of 25 to 50 basis points, increases are relatively mild (these rates are based on the driver, as well as the age of the equipment).

Cargo. Rates, for the most part, have been coming down for Cargo coverage. This is the one area that competition has driven the price down. In many instances, underwriters are using lowered cargo premiums to adjust for increases in other areas. Contrary to belief, underwriters want to write business!

General Liability. These days, I am seeing more requests for General Liability coverage. Many shippers are now requiring the coverage. The coverage itself is business-related, and does not cover the activities of the truck itself. General Liability covers you and the actions of your employees, as it relates to your business practices. Premiums have been stable and cheap, ranging from $500 to $1,000 for an owner operator. Larger risks are based on the number of vehicles in the fleet or revenue. Some truck policies can be endorsed for the coverage at a very low cost. Discuss this with your insurance professional, as there are many companies that write this coverage at a low (or modest) rate.

Workers Compensation. Here is some bad news for the small business owners out there. In many instances, the only market available is the California State Insurance Fund. The insurance companies that are aggressively seeking this business are looking for large payrolls with minimum insurance premiums. The smallest payroll that I have been able to place with a workers comp policy, other than with the State Fund, is $100,000. We went through a time, after the industry was deregulated, where workers comp rates were low. That has changed. If your payroll is less than $100,000 you will find rates in the $22 (per hundred dollars of payroll) range. If you are an existing workers comp user, make sure to review your modification factor each year.

Many of you go into business or expand the one you’ve got without taking into consideration all of the financial consequences of running your new (or improved) operation. Running a business without a business plan or a legitimate budget is financial suicide. Knowing these cycles can help you to be better prepared and more informed about your insurance decisions. If you have any questions or comments, I can be contacted through California Plus Insurance Service in Modesto, CA at (800) 699-7101.