Dan Morton, an executive with the Hobbs Group, an insurance broker serving medium to large trucking companies, recently suggested that current market conditions require motor carrier managers to become much more astute in selecting and evaluating insurance coverage. With this in mind, I asked him to provide some insurance advice for fleets.
According to Morton, the first thing you should do is answer two basic questions: What should you choose as an upper policy limit and how large a deductible do you want?
Your upper policy limit is a function of your equity, DOT requirements, legal jurisdiction and, of course, price.
The appropriate deductible, on the other hand, should reflect an analysis of your previous five-year loss history. That analysis should serve as a predictor of your loss costs over the next 12, 24, or 36 months. In insurance lingo, future loss costs are referred to as “loss picks.”
A loss pick, says Morton, is simply the amount of claims dollars expected at a certain deductible level. He emphasizes that you can't properly evaluate an insurance quote if you don't know the loss pick.
Morton points out that some trucking companies have elected to raise their deductibles as a way to keep a lid on premiums. However, many of those fleets discovered that runaway claims costs nearly resulted in financial disaster.
How do you go about calculating a loss pick? According to Morton, a fairly simple approach may be most helpful in understanding insurance quotes. Here's a summary of his six-step method:
Step 1. Cap all your claims for the previous five years at the deductible level you are considering. For example, if you're considering a $100,000 deductible, you should not include any claim amount above $100,000.
Step 2. Total all capped losses by year.
Step 3. Compute a loss ratio by dividing each year's capped loss total by exposure (miles traveled or freight revenue) for that year. Most fleets prefer vehicle miles traveled, since it is a more accurate reflection of business conditions, which cause claims/losses to occur.
Step 4. Multiply each year's loss ratio by a loss development factor. It's no surprise that losses for an individual claim develop (insurance speak for “increase”) over time. This development can be attributed to conditions such as unanticipated settlement awards, inappropriate starting reserves and economic inflation. A good insurance broker should be able to provide guidance in this area. One rule of thumb is to compare the current value of “three-year's prior” losses with their original value. Look at how much the cost of the losses has increased in three years. That “increase factor” is the loss development ratio.
Step 5. Average those amounts for the previous five years.
Step 6. Compute your anticipated loss pick by multiplying the amount calculated in Step 5 by your expected exposure for the coming year.
Keep in mind that this is a very simplistic method. Your agent and/or insurer will no doubt have their own methods; you should compare them to yours. The keys to determining good loss picks are recent loss runs and accurate exposures — taking into account short and long policy periods.
Once you have a loss ratio, you can evaluate all the components in the insurer's quote. And you now have some idea of how much you have to “bank” for the losses in the coming year.
But there's more to an insurance quote than premiums, collateral, and deductibles. You should expect some additional services for your business, such as loss prevention and claims handling.
Morton seems to confirm that the primary factor in determining an insurance premium is prior-year crash costs. The best way to control these costs is to set up an effective safety management program, including driver training and at-risk behavior identification. It will give you a safer fleet and help reduce insurance costs.
Jim York is the manager of Zurich North America's Risk Engineering Team, based in Schaumburg, IL.