Opinion: Insurance Costs: Controlling the Uncontrollable

By Ron Cooperman, Kaytes Cooperman

For the past four years, my colleagues and I have watched the “good times roll,” both for large and small trucking companies: a booming economy, low insurance premiums, low interest rates, low fuel prices, reduced workers’ compensation costs — and until about a year and a half ago, minimal problems attracting quality drivers.

Based on what business trends we in the insurance industry are seeing and what we’re hearing from our clients, the good times are about to come to a crashing halt. For example, major carriers such as USF&G, Reliance Insurance Co., Crum & Forster, Fireman’s Fund, St. Paul, and Employers Mutual have exited or are exiting the trucking business. The ones still writing trucking business are predicting major price increases.

Trucking insurance specialists should see it coming. For years, we’ve watched insurance companies drift from true underwriting to a cash-flow mentality, grossly under-pricing premiums to generate revenue that they would invest in the bull market in hopes of making up the difference in the true cost. We believed this practice was going to catch up with them sooner or later. Well, later is now, and we see insurance carriers scrambling to restore profitability. Instead of gradually raising premium rates over recent years, the underwriters may snap back with sudden, large increases. Insurance agents like myself believe the trucking industry is in for substantial price increases for the first time in many years.

Combine this scenario with fuel hikes escalating as much as 30% in some areas and labor costs and truck prices going up, and we’re expecting the entire industry to be in turmoil by the end of next year, especially the smaller companies, which will be hard-pressed to pass on the added expenses to their customers.

We work closely with nearly 200 client companies in six states that have fleets of 10 to 600 trucks, and the concerns we’re hearing come from owners and senior managers of firms of all sizes. No matter how big or small, owners do not like paying higher premiums for insurance. With labor, fuel and insurance being the three greatest expenses, respectively, for the transportation industry, we are recommending that our clients look for creative ways to reduce costs, thereby maintaining profitability.

For example, trucking companies should consider different approaches to their insurance coverage, such as the use of deductibles and aggregate deductibles. They should opt for liability deductibles and larger physical damage deductibles. They should be take calculated risks that they can afford. We recommend innovation combined with wisdom. Owners need to know what risks they can handle and what might put them out of business. They need to understand loss control; and if they don’t, they need to seek advice from loss-control experts.

They need to address hiring and safety practices to prevent these hot spots from slipping through the cracks. They need to explore ways to control fuel costs.

Some of our clients are opting to “shrink” their businesses. They’re purposely getting smaller. They’re finding that they cannot control certain variable costs like fuel, labor, and insurance, but they can control the business they accept, and in doing so, control profitability. A trucking company has 10% of its fleet sitting idle because it can’t find drivers? Why pay insurance for what is not being used? We’re watching clients take a long, hard look at the business that makes them money and shedding unprofitable business. They feel they are operating more efficiently — in a sense controlling the uncontrollable, such as premium hikes. We are also watching companies blossom that have added warehouses and brokerages. Companies that offer trucking by itself appear to be finding things more difficult.

Looking for alternative means to solve insurance problems and remain solvent is almost mandatory today. To stay on top of the situation, trucking companies need to assess their operations, explore opportunities and deductible options, and then make their objectives clear to their agents. If their agents don’t appreciate their concerns, they need to find another agent. The year 2000 doesn’t have to be a crisis year for company owners.