Sponsored Content by Travelers

6 Surprising Factors Affecting the Cost of Commercial Auto Insurance

Your commercial auto premiums can increase for unexpected reasons, regardless of your driving habits.
By: | May 2, 2017 • 6 min read


Accidents happen.

And when they do, people expect their auto insurance premiums to rise. That cause and effect relationship is easy to understand.

But even safe drivers are noticing their coverage is becoming more expensive. Owners of large commercial fleets are especially hit hard when rates rise. The truth is that accident history is just a small part of a much bigger picture, created by the confluence of several macro trends.

Here are six unexpected reasons why your commercial auto premiums may be increasing:

1. More Miles Driven

David Nelson, 2nd Vice President of Auto in Commercial Accounts

When the recession hit, companies naturally scaled back. Manufacturers produced less; there were fewer sales calls and deliveries to be made. Drivers were laid off as demand dropped.

Since the economy’s been improving, activity is picking up again.

“The need to receive component parts and deliver goods is back up,” said David Nelson, 2nd Vice President of Auto in Commercial Accounts, Travelers.

But rather than hiring more drivers and buying new vehicles right off the bat, companies are instead relying on their core workforce to pick up more work.

“Trucks are being driven more miles, but there aren’t necessarily more trucks. Owners would rather get the most out of their current vehicles before they start adding more,” Nelson said. “The increased risk of more miles per truck will be compounded as the economy continues to improve and companies eventually do need to add vehicles to keep up with demand.”

2. Inexperienced Drivers

The commercial driver shortage continues to increase risks on the road.

Driving long distances is a hard job, so recruiting has never been easy. Now, many experienced drivers are approaching retirement age.

“The lingering question is, where is the next group of truck drivers going to come from? Will they have the same skills and capacity as the generation that’s retiring?” said Chris Hayes, 2nd Vice President of Transportation Risk Control, Travelers.

New regulations may make recruiting drivers even harder. For example, electronic time logs and tracking sheets will replace paper formats by December, 2017.

“Drivers perceive this change as more oversight, and it also means they may have to be more accurate or inclusive in their reporting. The new system will require a level of electronic engagement not all drivers are comfortable with,” Hayes said.

Stricter safety standards and less independence might turn off potential new drivers. While an improving economy means transportation companies are hiring, it also means the talent pool likely has options in other types of service jobs, like factory or construction work.

Those that do get behind the wheel with less experience present a larger risk.

3. Lower Fuel Prices

Chris Hayes, 2nd Vice President of Transportation Risk Control

“There’s a direct correlation between fuel prices and national accident frequency,” Hayes said.

The number of accidents per year has dropped steadily since the early 2000s.

“According to the Department of Transportation’s Fatality Analysis Reporting System, in 2005, there were roughly 43,000 people killed in motor vehicle accidents. By 2014, it dropped to about 32,000,” Hayes said. Some attribute the decrease to safer cars and more awareness around the dangers of drunk driving. But price at the pump played an even bigger role.

When gas is expensive, people limit their time on the road, which leads to a lower accident frequency.

“We saw the least accidents when gas hit its peak at $4 per gallon, and accidents started increasing when it dropped back to $2 per gallon,” Nelson said.

The relatively stable gas prices may mean more cars on the road both for business and personal use. And more cars equal more accidents.

4. Distracted Driving

Screens are drawing a bigger share of drivers’ attention.

“Driving has always had an element of distraction, with texting being a notable recent example, but now dashboard ‘infotainment’ centers are an increasing concern,” Hayes said. “With their radio, GPS, Bluetooth and internet search functions, these systems require a lot of visual engagement.”

Texting, however, has also become a dangerous distraction for those traveling on foot.

“In some of our delivery zones, we were seeing an increased frequency of pedestrian strikes, and we spent some time investigating what drivers were doing differently,” Nelson said. “We found that the drivers weren’t necessarily doing anything wrong; it was the people around the vehicles who were less attentive.”

Semi-autonomous driving also creates opportunities for drivers’ minds to wander.

“As you move into what’s called ‘level two’ autonomous driving, you have multiple safety systems linked together, and there’s a risk that you’ll pay less attention to your driving because you assume your vehicle will take over those functions for you,” Hayes said.

“In other words, the safety benefits of these systems may be somewhat offset by the false sense of security that they provide and less driver attention.”

5. Aggressive Attorneys

In the past, larger claims for amounts of $100,000 or more would have an attorney involved roughly 70 percent of the time. “Now, we are seeing attorneys getting involved in claims as small as $25,000,” Nelson said.

One theory behind the shift is that many law school graduates entering the workforce during the recession had to forge their own paths while firms weren’t hiring, so they went after smaller claims aggressively to generate revenue from an untapped source.

“Some attorneys are specializing in leveraging all of the information available about drivers or operations of a vehicle to prove negligence on the part of the transportation company, often with a good deal of success,” Nelson said.

“The Federal Motor Carrier Safety Administration’s Safety and Fitness Electronic Records System, also known as SAFER, includes number of accidents for a given company, frequency of inspections and violations as a result of those inspections,” Hayes said. “The publicly available data was originally intended for state troopers, federal motor carrier enforcement officers and other people involved in trucking safety to better engage with trucking companies.”

The data was originally meant to improve safety by informing drivers and transportation companies of what they were doing wrong, assuming that if they can measure their performance, they can improve it.

Attorneys now are latching onto that data as evidence that if a particular company or driver has more accidents than the national average, they are more likely to be the negligent party.

“It’s definitely something that can be used to try to influence a jury,” Nelson said.

6. Increasing Medical Costs

An increase in the frequency and cost of soft tissue surgical procedures is another factor making auto claims more expensive.

“There’s a broad cost to deliver care in America. That trend isn’t going away any time soon, and the auto insurance market is impacted by that,” Nelson said. Injuries from auto accidents can run the gamut in terms of severity, but soft tissue injuries in the form of strains and sprains are prevalent. Injuries involving surgery often take longer to heal and require follow-up treatments as well.

All of these factors can drive up the cost of claims, which in turn can lead to higher premiums for insureds. Owners of large commercial fleets have the most exposure, but any company utilizing vehicles for business purposes – even if those vehicles are employees’ personal cars – can feel the impact of rising auto insurance premiums. Keeping an eye on these larger market and economic trends can help insureds not only understand their premium costs, but also anticipate what’s to come.

To learn more, visit https://www.travelers.com/business-insurance/commercial-auto.

SponsoredContent

BrandStudioLogo

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Travelers. The editorial staff of Risk & Insurance had no role in its preparation.




The Travelers Companies, Inc. (NYSE: TRV) is a leading provider of property casualty insurance for auto, home and business. A component of the Dow Jones Industrial Average, Travelers has approximately 30,000 employees and generated revenues of approximately $28 billion in 2016. For more information, visit www.travelers.com.

Cyber Liability

Fresh Worries for Boards of Directors

New cyber security regulations increase exposure for directors and officers at financial institutions.
By: | June 1, 2017 • 6 min read

Boards of directors could face a fresh wave of directors and officers (D&O) claims following the introduction of tough new cybersecurity rules for financial institutions by The New York State Department of Financial Services (DFS).

Advertisement




Prompted by recent high profile cyber attacks on JPMorgan Chase, Sony, Target, and others, the state regulations are the first of their kind and went into effect on March 1.

The new rules require banks, insurers and other financial institutions to establish an enterprise-wide cybersecurity program and adopt a written policy that must be reviewed by the board and approved by a senior officer annually.

The regulation also requires the more than 3,000 financial services firms operating in the state to appoint a chief information security officer to oversee the program, to report possible breaches within 72 hours, and to ensure that third-party vendors meet the new standards.

Companies will have until September 1 to comply with most of the new requirements, and beginning February 15, 2018, they will have to submit an annual certification of compliance.

The responsibility for cybersecurity will now fall squarely on the board and senior management actively overseeing the entity’s overall program. Some experts fear that the D&O insurance market is far from prepared to absorb this risk.

“The new rules could raise compliance risks for financial institutions and, in turn, premiums and loss potential for D&O insurance underwriters,” warned Fitch Ratings in a statement. “If management and directors of financial institutions that experience future cyber incidents are subsequently found to be noncompliant with the New York regulations, then they will be more exposed to litigation that would be covered under professional liability policies.”

D&O Challenge

Judy Selby, managing director in BDO Consulting’s technology advisory services practice, said that while many directors and officers rely on a CISO to deal with cybersecurity, under the new rules the buck stops with the board.

“The common refrain I hear from directors and officers is ‘we have a great IT guy or CIO,’ and while it’s important to have them in place, as the board, they are ultimately responsible for cybersecurity oversight,” she said.

William Kelly, senior vice president, underwriting, Argo Pro

William Kelly, senior vice president, underwriting at Argo Pro, said that unknown cyber threats, untested policy language and developing case laws would all make it more difficult for the D&O market to respond accurately to any such new claims.

“Insurers will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure,” he said.

Going forward, said Larry Hamilton, partner at Mayer Brown, D&O underwriters also need to scrutinize a company’s compliance with the regulations.

“To the extent that this risk was not adequately taken into account in the first place in the underwriting of in-force D&O policies, there could be unanticipated additional exposure for the D&O insurers,” he said.

Michelle Lopilato, Hub International’s director of cyber and technology solutions, added that some carriers may offer more coverage, while others may pull back.

“How the markets react will evolve as we see how involved the department becomes in investigating and fining financial institutions for noncompliance and its result on the balance sheet and dividends,” she said.

Christopher Keegan, senior managing director at Beecher Carlson, said that by setting a benchmark, the new rules would make it easier for claimants to make a case that the company had been negligent.

“If stock prices drop, then this makes it easier for class action lawyers to make their cases in D&O situations,” he said. “As a result, D&O carriers may see an uptick in cases against their insureds and an easier path for plaintiffs to show that the company did not meet its duty of care.”

Advertisement




One area that regulators and plaintiffs might seize upon is the certification compliance requirement, according to Rob Yellen, executive vice president, D&O and fiduciary liability product leader, FINEX at Willis Towers Watson.

“A mere inaccuracy in a certification could result in criminal enforcement, in which case it would then become a boardroom issue,” he said.

A big grey area, however, said Shiraz Saeed, national practice leader for cyber risk at Starr Companies, is determining if a violation is a cyber or management liability issue in the first place.

“The complication arises when a company only has D&O coverage, but it doesn’t have a cyber policy and then they have to try and push all the claims down the D&O route, irrespective of their nature,” he said.

“Insurers, on their part, will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure.” — William Kelly, senior vice president, underwriting, Argo Pro

Jim McCue, managing director at Aon’s financial services group, said many small and mid-size businesses may struggle to comply with the new rules in time.

“It’s going to be a steep learning curve and a lot of work in terms of preparedness and the implementation of a highly detailed cyber security program, risk assessment and response plan, all by September 2017,” he said.

The new regulation also has the potential to impact third parties including accounting, law, IT and even maintenance and repair firms who have access to a company’s information systems and personal data, said Keegan.

“That can include everyone from IT vendors to the people who maintain the building’s air conditioning,” he said.

New Models

Others have followed New York’s lead, with similar regulations being considered across federal, state and non-governmental regulators.

The National Association of Insurance Commissioners’ Cyber-security Taskforce has proposed an insurance data security model law that establishes exclusive standards for data security and investigation, and notification of a breach of data security for insurance providers.

Once enacted, each state would be free to adopt the new law, however, “our main concern is if regulators in different states start to adopt different standards from each other,” said Alex Hageli, director, personal lines policy at the Property Casualty Insurers Association of America.

“It would only serve to make compliance harder, increase the cost of burden on companies, and at the end of the day it doesn’t really help anybody.”

Advertisement




Richard Morris, partner at law firm Herrick, Feinstein LLP, said companies need to review their current cybersecurity program with their chief technology officer or IT provider.

“Companies should assess whether their current technology budget is adequate and consider what investments will be required in 2017 to keep up with regulatory and market expectations,” he said. “They should also review and assess the adequacy of insurance policies with respect to coverages, deductibles and other limitations.”

Adam Hamm, former NAIC chair and MD of Protiviti’s risk and compliance practice, added: “With New York’s new cyber regulation, this is a sea change from where we were a couple of years ago and it’s soon going to become the new norm for regulating cyber security.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]