The Importance of Trucking Financials For Insurance Underwriting Purposes in the 2009 Economy

Why is it so important for our companies to require us to get financials on well-established, experienced truckers? I think the industry does a very poor job explaining why. Everyone knows truckers have been struggling from a financial viability standpoint and that they are struggling this year as well. Last summer’s diesel price increase put a number of owner-operators out of business. These truckers simply could not afford to fill up their gas tank to run. Either they leased onto other truckers or they went out of business. Some of our insurance companies told us that it was the first time they were losing renewals when it did not involve the competition; the truckers simply choose not to renew.

So if we all know truckers are struggling financially, why do we force our agents to get financial information? Also everyone understands it puts you as a retail agent/ broker in a terrible position to ask for confidential financial information when all you really want to do is get a quote and see if you can win the business. If you have not built a level of trust with your trucking insured, chances are you are not going to get financial information. To add insult to injury, financials are usually required on 10 power unit accounts and higher in this marketplace, and for most agents, not having the financials is a barrier to getting any quote- and most of our companies and most of the companies in the marketplace will not quote without updated financials.

So what can the insurance company hope to glean once they receive the financials? With trucking insurance capacity pervasive in the marketplace, all insurance carriers are trying to out select each other. They look to use financials as a benchmark for risk acceptability and in certain cases use them as a schedule rating tool and apply debits and credits based on quality of the financial situation with the trucker.

It’s not a perfect situation however. Most trucking companies are small businesses and closely held. As such, most trucking owners and principals are not leaving much money in the operation annually and likewise trying to avert taxes. This means less capital available to run operations and less profit. Most trucking financials are unaudited so an underwriter is not able to establish verifiable financial information necessary in underwriting.

So what do they look for in financials? Generally it is 3 things:

1) The Quick Ratio- Current Assets to Current liabilities need to be 1:1. Less than 1:1 indicates cash flow problems, payment of driver issues, maintenance issues, etc..
2) Profit- A company that is figuring out a way to make money and not have to utilize capital to run the com
3) Positive Net Worth- this notes a good capital structure to be able to endure economic bumps in the read

Other companies use a smart GTU partner CAB. CAB stands for the Central Analysis bureau and they have come up with a financial rating program that most truck liability writers and nearly all motor cargo writers utilize. The insurance company’s rationale is that due to the DOT financial responsibility filings that must be made by the insurance company with the DOT, the insurance companies are contractually liable for any vehicle operating on the insureds behalf, whether they get paid premium or not and due to notification issues upon cancellation, there is a 35 day window for cancellation. The motor truck cargo insurance writers know that they might have to reimburse unpaid deductibles ( O S & D’s) which happens on financially strapped truckers. I attach CAB’s information for your interest. An agent will submit an account with financials only to have it turned down for a CAB rating that is unacceptable to company standards. So when you are working on a fleet, if you can get financials early in the game it can save you a lot of time .

You can learn about CAB by going to www.cabfinancial.com. Jean Gardner is a principal in the firm and you will find her to be as knowledgeable about trucking financial matters and industry issues as anyone there is in truck insurance.

At the end of the day, trucking financials are an integral part of the underwriting process. Although unaudited in a great deal of cases, they are a barometer of a trucking companies health. While some companies are going into the politically delicate issue of credit rating based on getting actual receivables/ payment history on truckers, you will find that your better truck insurers are looking at trucking financials- especially on the larger risks. In this economy, a good trucking company can end up having financial problems quickly- and those problems spill over into problems for insurance companies, their general agents, our retail agents, and the trucking company itself