Commercial Lines Auto: A Sleeping Giant Awakens

By | February 10, 2003

The commercial lines auto market used to be a steady line of business, stirred up occasionally by a Department of Transportation regulatory change or fallout from personal auto regulatory issues. Like other lines, it was sensitive to litigation expenses, although the problem never reached the magnitude of product liability or medical malpractice. Pricing was predictable; coverage was readily available.

Things started to change in 1999, when pricing for virtually all lines of coverage, including commercial auto, gradually began to rise as the insurance market turned. The market hardened further in 2000, and by mid-2001 commercial auto consumers were seeing average rate increases of 10 to 20 percent. And then came Sept. 11.

The terrorism threat
For too long, the United States perceived terrorism as a “foreign” concern, relegated to the Middle East, or perhaps Northern Ireland. The terrorist attack on the World Trade Center brought the terrorism menace to our door and forever changed us as a nation and an industry. Not the least of those changes relates to how insurance responds to the increased exposure to terrorism. The concern is especially intense for commercial auto. Not too long ago, the primarily criminal concern of commercial fleet operators was the occasional holdup or hijacking of costly cargo. This changed after 9/11.

After all, terrorists used hijacked commercial airplanes to destroy the World Trade Center; why couldn’t terrorists or suicide bombers do the same using buses and trucks as potential vehicles of terrorism? In fact, the terrorism risk is probably even higher for trucks than for a commercial airplane. It’s a lot easier for a terrorist to hijack a truck or to steal cargo like gasoline, chemicals, gases, powders, fertilizers or pesticides to turn into a weapon or sell on the black market for use as a weapon.

All of this translates to a huge increase in responsibility and potential tort exposure—for fleet owners. Owners must be careful to scrutinize everything in the process, from type of cargo to who is handling it, minimizing the risk as much as possible since no amount of security measures will have been enough if an incident actually occurs. And the risk goes beyond physical security: fleet owners must train drivers and other employees to be aware of the increased terrorism risk, and closely reevaluate their company’s security practices in general.

Loss Ratios and Combined Ratios by Line and by State
2001
All P.P. Auto
Commercial Auto Liability
(including No-Fault)
L/R
L/R Rank
C/R
C/R Rank
L/R
L/R Rank
C/R
C/R Rank
Alaska
81.1
5
117.0
5
49.1
50
92.6
49
Arizona
69.9
27
104.4
30
74.7
27
123.6
13
California
70.5
22
108.0
20
72.8
31
114.1
29
Colorado
79.0
8
112.9
11
73.6
29
111.5
31
Hawaii
54.8
52
90.5
52
43.8
51
82.0
51
Idaho
65.8
43
101.3
42
70.6
35
109.8
33
Montana
70.9
21
105.9
27
79.4
20
121.5
15
Nevada
64.0
49
100.5
44
90.3
6
134.6
5
NewMexico
63.6
51
99.0
50
62.2
46
102.7
42
Oregonk
66.7
40
100.3
46
68.0
38
107.3
36
Utah
92.8
2
128.3
2
56.0
39
93.4
48
Washington
68.6
32
103.3
36
68.5
37
106.1
39
Wyoming
69.7
30
104.2
31
78.1
42
116.3
25

Countrywide

73.0%
108.9%
80.0%
120.9%
Note:
Loss ratios exclude loss adjustement expenses (LAE) and are adjusted by dividends to policyholders. Combined ratios sum the loss ratio, LAE ratio and underwriting expense ratio. Allocated loss adjustment expenses are state-specific; unallocated loss adjustment expenses reflect countrywide data. Underwriting expenses include state-specific commission and brokerage expenses, and taxes, licenses and fees, and countrywide other acquisition and general expenses. Loss and LAE ratios are based on direct premiums earned, while underwriting expenses ratios are based on direct premiums written. Countrywide data includes: District of Columbia and Puerto Rico.

Source: National Association of Independent Insurers, based on data compiled by Thomson Financial (NAIC)

The impact on insurance
Insurers covering commercial auto risks, and the agents who represent them, face the same challenge as their customers. In spite of federal terrorism reinsurance, terrorism coverage pricing is in flux as all concerned struggle to determine appropriate prices for exposures. Although insurance pricing in general has been increasing since 1999, terrorism threats, coupled with reinsurance unknowns, demands for underwriting profits by shareholders, and a glut of lawsuits, have combined to hit commercial auto rates especially hard.

By necessity this has resulted in toughened standards for underwriting. Since 9/11, insurers have carefully scrutinized potential exposures, and now expect their clients to disclose more operational information to prove that the company is taking every precaution to prevent exposures.

Fleet owners seeking commercial auto renewals should expect a stringent line of questioning focused on terrorism exposure prevention, especially for long-haul fleets, whether owned or motor carrier.

Exposure questions for fleet owners and individual drivers include: Who sees bills of lading and other cargo information? How much information do loaders acquire? Where and when do drivers stop to rest? When are shipments timed? Will drivers use CBs and cell phones? Does the company have driver instructions in place in case the receiver cannot accept shipment when the driver arrives at the destination?

Rather than simply screening the driver, fleet companies should run a security screening on all employees, including shippers, receivers, agents, freight forward and consolidators. Anyone with knowledge of individual shipments is a potential security threat. Information that was once commonly shared must now be treated as confidential and protected.

The regulatory role
Even in this security-conscious environ-ment, the business of trucking regulation continues. At FMCSA, hours-of-service will likely come up again for consideration in 2003 in the form of a rule proposal. This promises to be controversial and politically driven because it involves the very core of transportation cost and pricing in the United States.

The change in hours of service could mean a major change in how fleet drivers are paid per mile now, perhaps per hour, per mile with additions for non-driving duty time, or some other method, after regulations change.

NAFTA, an issue frequently in the headlines, would allow Mexican truckers to bring their rigs into the United States. American opponents of the measure, including the Teamsters union, have voiced concerns over truck safety and pollution exposures. The implementation of the NAFTA agreement is currently held up because of a U.S. Appeals Court decision in a lawsuit instigated by unions and environmental activists requiring a full environmental impact study of cross-border trucking.

Although President Bush has vowed to open the borders, and the Mexican government is displeased with the ongoing delays, serious security concerns linger and add to the confusion. The insurance marketplace for this developing business is small and undetermined. So far only 200 or so motor carriers have applied to cross the borders beyond commercial trade zones, only a few insurers have shown an interest in this business, and it is likely to remain a specialty market for some time.

Distracted drivers don’t help
Technology has also had an impact on commercial auto, at least peripherally. The increasing use of cell phones has lengthened the list of many driver distractions that can result in accidents. Although cell phones only account for a small percentage of accidents overall, this is a high visibility risk that is completely preventable by the driver simply not using the phone while the vehicle is in motion.

Cell phone-related accidents are hitting commercial auto customers because of several high-profile lawsuits last year involving on-the-job auto accidents. These include a $21 million Florida verdict against a company whose employee was using a cell phone when the accident occurred; and a $30 million Virginia lawsuit against the employer of an attorney who was involved in an accident while talking on her cell phone.

As in almost all liability lines, more large verdicts are anticipated against commercial auto employers in similar circumstances, such as employees involved in accidents while on a cell phone, either in their own vehicles on company business, or in company vehicles at any time. The theory that employers are responsible when their employees get behind the wheel is not a new concept, but cell phones bring a new twist and easily lose any juror sympathy that might otherwise exist.

The need for tort reform
Like other areas of litigation, commercial auto is in desperate need of tort reform. Dollar-hungry trial attorneys seeking to burrow into the commercial auto industry’s deep pockets are targeting everyone involved in the trucking process, including shippers, receivers, and freight agents.

According to a recent ATA insurance survey, members recognizing the direct relationship between lawsuits and the cost of liability insurance voiced the need for nationwide tort reform to alleviate the problems of increasing premiums and a shortage of coverage.

Tort reform may be more achievable in 2003 due to the increased focus on doctors and medical malpractice tort reform, recently highlighted by President Bush. Like medical malpractice, commercial auto insurance needs tort reforms too, meaningful legislation that would include a noneconomic cap on damages, limits on “venue shopping” by trial attorneys for a more sympathetic court, limits to joint and several liability, and the establishment of an attorney fee schedule which would decrease as the size of the award increases.

A solid template for such reform is evident in the California MICRA law of 1975, which established such limits on the state’s medical malpractice market. The result has been a rare, predictable med mal market and much better results than other liability lines coverage in California. Commercial auto is no longer the “second-thought” line of coverage. Challenges abound in this complex business, including terrorism, new regulations, distracted drivers and a runaway civil justice system. But within this atmosphere of turmoil and change exists opportunities to develop new products, innovative customer service, and new standards of performance that ambitious companies and agents can capitalize upon. Cross-border trucking—which will create a new insurance marketplace over time —and the increased threat of terrorism offer our industry a chance to work with customers on loss control issues relating to terrorism, a service that can help insurers develop strong customer loyalty with their clients.

A significant opportunity for meaningful tort reform awaits if insurers, truckers, manufacturers, retailers, wholesalers, the medical community and others can present a united front. Tort litigation costs our economy $180 billion annually, with little to show for it. Other business sectors are ready to act and insurers must support them.

Dave Golden is director of Commercial Lines for the National Association of Independent Insurers. Prior to joining NAII, he had nearly 20 years’ experience in commercial lines underwriting, marketing and management.

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