State of Transportation Insurance- October 2009

from American Agent and Broker

Double-digit rate decreases are nearing the end in transportation insurance, after a long stretch of declines. The market appears to be in a transitional phase as established transportation underwriters attempt to hold the line on rates for key business. While it is too early to tell, this may be encouraging news for commercial insurance agents and brokers nationwide because the transportation insurance market tends to act as a leading indicator of the direction of rates in the general commercial insurance market.
The recently published results of NIP Group’s Transportation Insurance Pricing Survey (TIPS) provide statistics to support this theory. The survey (available at http://www.nipgroup.com/SurveyResults.aspx) benchmarks changes in rates and availability in the transportation insurance market. Every quarter, TIPS questions the nation’s leading transportation insurance brokers, wholesalers and underwriters representing thousands of accounts. Respondents provide detailed information about trends they see with the rates on their accounts based on size, transportation industry segment and coverage type.

TIPS results from the second quarter of 2009 indicate that rate decreases are starting to level off, with rates down on average between 1 and 10 percent. In addition, more participants have reported modest rate increases across several segments, account sizes and lines of coverage during the second quarter. New insurance carrier entrants also are gaining market share as established transportation underwriters try to hold the line on rates and are less likely to lower rates significantly below expiring levels.

The majority of respondents believe rates in the transportation insurance market are beginning to moderate as observed by the slight firming of auto liability and motor truck cargo rates.



The driving forces

There are a number of factors that have joined together and contributed to the persistent downward pressure on both transportation rates and premiums during the past few years. Competition for premium dollars, the economic crisis, even advances in safety technology all have helped drive rates down. Though individual clients will be affected by different issues, one thing remains constant: The competition and mixed signals on rates raise uncertainty for brokers, adding to their anxiety.



Intense competition

The main factor that has driven rates to possibly unprofitable levels has been competition among insurance carriers.Transportation insurance is more widely available today as more insurers have entered the market than have exited it over the past 2 years.

In addition to contending with more entrants in the space, there is fierce competition among the key players for premium and accounts, with insurers and brokers focused on keeping their business. To make matters worse, several TIPS survey respondents indicated that in some cases underwriting standards are being compromised. One respondent reported seeing pricing wars among trucking markets, and that “underwriting seems to have taken a back seat in the fight for market share.”

Another survey participant’s comments clearly communicate frustration with the current situation: “More companies are writing the class but less are underwriting the class. That’s one of the problems in today’s market. If more insurers were underwriting and pricing based on the true potential profitability of the account, we would be able to get increased pricing on accounts that deserve to pay more.”

From an underwriter’s perspective, this continues to be a very challenging environment in which to underwrite and price business. Rates are low, competition is fierce for almost every account, the number of clients and their exposures are shrinking and claim costs continue to rise. They are feeling the pressure.



Economic pressure

Due to the recession, many transportation companies, especially truckers, have been forced to downsize their operations because of decreased demand for their services. There are fewer trucks and employees to insure, resulting in less demand for insurance capacity, which has kept renewal premiums down, even in cases where carriers have been successful in increasing rates. As one TIPS respondent noted, “Premiums are continuing to drop, but mainly because of decreases in exposures. Rates are actually flat to small increases, so the premium drops are usually based on the exposures decreasing drastically.”

Today, trucking companies have thinner margins and many are having more difficulty managing their cash flow. Last year, they first struggled with soaring fuel prices, which seriously damaged profits, and then had to deal with the effects of the worsening recession. According to the American Transportation Research Institute’s “Analysis of the Operational Costs of Trucking,” fuel costs make up nearly 40 percent of the total operational costs of trucking. When oil prices spiked to record highs of more than $140 per barrel in July 2008, it put tremendous pressure on the entire transportation industry, with trucking companies feeling it worst of all.

By the end of the year, fuel prices had come down substantially, but the nation was well into the worst recession in decades. Retailers are experiencing sluggish sales, a problem that may continue for a while. Low retail sales mean fewer items to ship which translates into fewer trips on the road, especially for long-haul truckers.

If there is a silver lining for transportation insurance brokers in this cloudy market, it is that the competitive market enables them to help clients lower their costs so they can survive this extremely difficult point in the business cycle.



New technology

In recent years, there have been many technological advances in equipment that trucking companies can use for safety and logistical purposes. The improvements in safety technology have had a direct impact on insurance rates for a number of reasons.

Frequency of claims continues to decrease as more and more trucks are equipped with the latest safety devices. Systems such as Drivecam (on-board recording of driver behavior) keep drivers in check, encouraging them to operate more safely when on the road. Also, enhanced braking technologies enable trucks to stop faster and handle better, which has helped reduce accidents and save lives. These types of improvements lower rates for insureds in the long run.

Carriers also are offering upfront rate discounts for fleets for investing in these types of safety advances.

In these uncertain times, the general consensus among experts is that no one knows for sure what will happen with rates in the commercial insurance market. However, as demonstrated by TIPS, many market participants believe that rates in the transportation corner of the market are starting to level off, so there is hope in the industry that this is the beginning of general upward trend.