Lane Shift for Trucking Risk

A shrinking insurance market drives interest in captive solutions for the transportation industry.
By: | March 3, 2017 • 6 min read

Today there are more vehicles on America’s roads than before, driven by a trucking industry that grew exponentially to meet increased consumer demand.

Add in the advanced average age and subsequent deterioration in truckers’ health, the increased use of cell phones and more highway construction projects, and that resulted in a huge increase in accidents in recent years.

The number of crashes involving large trucks alone climbed by 9 percent between 2011 and 2014, according to the U.S. Transportation Department.

As a result, commercial auto insurance rates spiked, some by as much as 30 percent in 2016, and they are expected to climb further this year.


Fitch also reported last year that the commercial auto sector is a “chronically underperforming segment” due to overly aggressive pricing and a steep rise in claims severity, prompting many insurers to pull out of the market.

All of these factors, when added to already tight margins and other economic pressures including driver costs, forced many trucking firms and companies with large vehicle fleets to turn to captives to spread their risks and reduce insurance costs.

Captives also provide access to ancillary lines of coverage and limits, return of underwriting profits, improved risk management practices and the ability to manage marketplace fluctuations.

Collateral Squeeze

Geoff Welsher, managing director at Marsh, who runs two offshore captives, said that the increased interest in captives for commercial auto insurance is driven by a combination of some insurers pulling out of the market and others increasing rates.

Of most interest, he said, were group captives specializing in trucking companies, which provide a greater level of investment in claims management and loss control than traditional insurance coverage achieves.

Gary Osborne
USA Risk Group

Many of these captives also put a larger percentage of their premium toward staff training and employ full-time risk control specialists, he said.

“In a group captive environment, there are all manner of board and safety meetings and benchmarks against which companies can measure themselves,”
he said.

Rob Kibbe, executive director of Aon Risk Solutions’ transportation practice, said that these kinds of captives appeal most to companies seeking a return on their investment in safety technology.

He added that they also allowed owners to control their own rates and achieve greater risk rewards than with traditional coverage.

Todd Reiser, vice president and producer in Lockton’s transportation practice, said that the choice of captive depended on a range of factors including fleet size, ownership and corporate structure, tax considerations, credit capacity, estate planning and the number of owner-operators within the fleet.

“Single-parent captives allow for tax benefits, estate planning solutions, more efficient use of capital and the ability to write certain coverages in the captive independent of insurance market conditions,” he said.

“Risk retention groups and group captives, on the other hand, allow the members to share in certain risks, purchase reinsurance and potentially

limit the collateral obligations of traditional insurance.”

Chad Kunkel, executive vice president of group captives, North America at Artex, which manages more than 20 group captives or program solutions in the U.S., said that group captives are best suited to transportation companies wanting to lower their risk management costs.

“Good prospects for group captives are financially sound companies with above-average loss experience, good risk management practices and premiums beginning at $250,000 for workers’ compensation, general liability and auto lines of coverage,” he said.

“Group captives also offer another benefit — group purchasing power — which helps lower the overall cost of insurance for each member.”

Gary Osborne, president of USA Risk Group, said that RRGs are the most popular forms of captive because they allow owners to write insurance in all 50 states while only having to form in one.

Self-insurance also helps firms to reduce their collateral requirements and thus free up capital to invest in other parts of the business, he said.

Increased Interest

Such is their popularity, Kibbe said, that Aon almost doubled the number of captive formations in 2016 from the previous year and is continuing to see interest.

Most of the companies entering into captives are either smaller middle market trucking firms joining or forming their own group captives in order to take higher retentions, or large firms looking to reserve properly, said Sean Rider, executive vice president and managing director of consulting and development at Willis Towers Watson.

Vermont is one of the most popular states for setting up a captive, with more than one-quarter of active captives domiciled there writing some form of auto liability.

In total, Vermont houses six registered risk retention groups, two industrial insured group captives and four “pure” captives for trucking firms.

David Provost, deputy commissioner at Vermont’s Captive Insurance Division, said these ranged from auto wholesalers to large trucking companies with their own or several captives, as well as group companies that insure either their members or the association, or those operating as commercial trucking insurance companies for their truckers.

“Some of these larger trucking companies have to post multimillion dollar policies and prove that they have the financial assurance to operate a trucking company, so it’s often beneficial for them to do that with a captive,” he said.

Technological Advances

Safety technology also helps businesses to mitigate these risks by monitoring driver speeds, behavior and work practices.

In recent years, telematics has been one of the most effective ways to improve safety and bring down premiums, typically by 5 percent to 15 percent, according to industry estimates.

While take-up is relatively tepid largely due to budget constraints, with only 30 percent to 40 percent of all commercial and government vehicles fitted with the devices, the fuel, labor and maintenance costs savings can be substantial.

What’s more, from December this year, most trucks will be required by federal law to carry electronic monitoring devices to ensure truckers don’t exceed limits on time spent behind the wheel.

“The most significant development in the transportation sector has been cameras and monitoring of vehicles’ activity,” said Daniel Bancroft, transportation practice leader at Willis Towers Watson.

“Studies we have conducted have proven that they can reduce frequency of accidents by up to 50 percent.”

Osborne of USA Risk Group said that this was borne out by the National Independent Truckers Insurance Co., which consistently achieved a below 50 percent loss ratio for the last 10 years as a result of using cameras in all of its vehicles.

“The adoption of technology allied to greater control over the claims process through the use of captives has enabled companies to determine which claims to settle quickly and which ones to contest,” he said.

Aon’s Kibbe said that training has also played a part.

“Clients have been investing heavily in those aspects as well as dealing with driver fatigue, which has helped massively,” he said.

Willis Towers Watson’s Rider added that middle market trucking firms entering a group captive also had access to more sophisticated loss control safety, engineering and behavioral analysis and services than they would necessarily on their own.

Because a captive’s insureds put more resources into loss control and safety, they have had a bigger impact on reducing frequency, leading to better underwriting results, said Lockton’s Reiser.

“Technology plays a large part in safety and loss control for commercial fleets and is becoming more of a factor in the underwriting process,” he said. &

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]

More from Risk & Insurance

More from Risk & Insurance

Risk Focus: Cyber

Expanding Cyber BI

Cyber business interruption insurance is a thriving market, but growth carries the threat of a mega-loss. 
By: | March 5, 2018 • 7 min read

Lingering hopes that large-scale cyber attack might be a once-in-a-lifetime event were dashed last year. The four-day WannaCry ransomware strike in May across 150 countries targeted more than 300,000 computers running Microsoft Windows. A month later, NotPetya hit multinationals ranging from Danish shipping firm Maersk to pharmaceutical giant Merck.


Maersk’s chairman, Jim Hagemann Snabe, revealed at this year’s Davos summit that NotPetya shut down most of the group’s network. While it was replacing 45,000 PCs and 4,000 servers, freight transactions had to be completed manually. The combined cost of business interruption and rebuilding the system was up to $300 million.

Merck’s CFO Robert Davis told investors that its NotPetya bill included $135 million in lost sales plus $175 million in additional costs. Fellow victims FedEx and French construction group Saint Gobain reported similar financial hits from lost business and clean-up costs.

The fast-expanding world of cryptocurrencies is also increasingly targeted. Echoes of the 2014 hack that triggered the collapse of Bitcoin exchange Mt. Gox emerged this January when Japanese cryptocurrency exchange Coincheck pledged to repay customers $500 million stolen by hackers in a cyber heist.

The size and scope of last summer’s attacks accelerated discussions on both sides of the Atlantic, between risk managers and brokers seeking more comprehensive cyber business interruption insurance products.

It also recently persuaded Pool Re, the UK’s terrorism reinsurance pool set up 25 years ago after bomb attacks in London’s financial quarter, to announce that from April its cover will extend to include material damage and direct BI resulting from acts of terrorism using a cyber trigger.

“The threat from a cyber attack is evident, and businesses have become increasingly concerned about the extensive repercussions these types of attacks could have on them,” said Pool Re’s chief, Julian Enoizi. “This was a clear gap in our coverage which left businesses potentially exposed.”

Shifting Focus

Development of cyber BI insurance to date reveals something of a transatlantic divide, said Hans Allnutt, head of cyber and data risk at international law firm DAC Beachcroft. The first U.S. mainstream cyber insurance products were a response to California’s data security and breach notification legislation in 2003.

Jimaan Sané, technology underwriter, Beazley

Of more recent vintage, Europe’s first cyber policies’ wordings initially reflected U.S. wordings, with the focus on data breaches. “So underwriters had to innovate and push hard on other areas of cyber cover, particularly BI and cyber crimes such as ransomware demands and distributed denial of service attacks,” said Allnut.

“Europe now has regulation coming up this May in the form of the General Data Protection Regulation across the EU, so the focus has essentially come full circle.”

Cyber insurance policies also provide a degree of cover for BI resulting from one of three main triggers, said Jimaan Sané, technology underwriter for specialist insurer Beazley. “First is the malicious-type trigger, where the system goes down or an outage results directly from a hack.

“Second is any incident involving negligence — the so-called ‘fat finger’ — where human or operational error causes a loss or there has been failure to upgrade or maintain the system. Third is any broader unplanned outage that hits either the company or anyone on which it relies, such as a service provider.”

The importance of cyber BI covering negligent acts in addition to phishing and social engineering attacks was underlined by last May’s IT meltdown suffered by airline BA.

This was triggered by a technician who switched off and then reconnected the power supply to BA’s data center, physically damaging servers and distribution panels.

Compensating delayed passengers cost the company around $80 million, although the bill fell short of the $461 million operational error loss suffered by Knight Capital in 2012, which pushed it close to bankruptcy and decimated its share price.

Mistaken Assumption

Awareness of potentially huge BI losses resulting from cyber attack was heightened by well-publicized hacks suffered by retailers such as Target and Home Depot in late 2013 and 2014, said Matt Kletzli, SVP and head of management liability at Victor O. Schinnerer & Company.


However, the incidents didn’t initially alarm smaller, less high-profile businesses, which assumed they wouldn’t be similarly targeted.

“But perpetrators employing bots and ransomware set out to expose any firms with weaknesses in their system,” he added.

“Suddenly, smaller firms found that even when they weren’t themselves targeted, many of those around them had fallen victim to attacks. Awareness started to lift, as the focus moved from large, headline-grabbing attacks to more everyday incidents.”

Publications such as the Director’s Handbook of Cyber-Risk Oversight, issued by the National Association of Corporate Directors and the Internet Security Alliance fixed the issue firmly on boardroom agendas.

“What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.” — Jimaan Sané, technology underwriter, Beazley

Reformed ex-hackers were recruited to offer board members their insights into the most vulnerable points across the company’s systems — in much the same way as forger-turned-security-expert Frank Abagnale Jr., subject of the Spielberg biopic “Catch Me If You Can.”

There also has been an increasing focus on systemic risk related to cyber attacks. Allnutt cites “Business Blackout,” a July 2015 study by Lloyd’s of London and the Cambridge University’s Centre for Risk Studies.

This detailed analysis of what could result from a major cyber attack on America’s power grid predicted a cost to the U.S. economy of hundreds of billions and claims to the insurance industry totalling upwards of $21.4 billion.

Lloyd’s described the scenario as both “technologically possible” and “improbable.” Three years on, however, it appears less fanciful.

In January, the head of the UK’s National Cyber Security Centre, Ciaran Martin, said the UK had been fortunate in so far averting a ‘category one’ attack. A C1 would shut down the financial services sector on which the country relies heavily and other vital infrastructure. It was a case of “when, not if” such an assault would be launched, he warned.

AI: Friend or Foe?

Despite daunting potential financial losses, pioneers of cyber BI insurance such as Beazley, Zurich, AIG and Chubb now see new competitors in the market. Capacity is growing steadily, said Allnutt.

“Not only is cyber insurance a new product, it also offers a new source of premium revenue so there is considerable appetite for taking it on,” he added. “However, whilst most insurers are comfortable with the liability aspects of cyber risk; not all insurers are covering loss of income.”

Matt Kletzli, SVP and head of management liability, Victor O. Schinnerer & Company

Kletzli added that available products include several well-written, broad cyber coverages that take into account all types of potential cyber attack and don’t attempt to limit cover by applying a narrow definition of BI loss.

“It’s a rapidly-evolving coverage — and needs to be — in order to keep up with changing circumstances,” he said.

The good news, according to a Fitch report, is that the cyber loss ratio has been reduced to 45 percent as more companies buy cover and the market continues to expand, bringing down the size of the average loss.

“The bad news is that at cyber events, talk is regularly turning to ‘what will be the Hurricane Katrina-type event’ for the cyber market?” said Kletzli.

“What’s worse is that with hurricane losses, underwriters know which regions are most at risk, whereas cyber is a global risk and insurers potentially face huge aggregation.”


Nor is the advent of robotics and artificial intelligence (AI) necessarily cause for optimism. As Allnutt noted, while AI can potentially be used to decode malware, by the same token sophisticated criminals can employ it to develop new malware and escalate the ‘computer versus computer’ battle.

“The trend towards greater automation of business means that we can expect more incidents involving loss of income,” said Sané. “What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.

“We’re likely to see a growing number of attacks where the aim is to cause disruption, rather than demand a ransom.

“The paradox of cyber BI is that the more sophisticated your organization and the more it embraces automation, the bigger the potential impact when an outage does occur. Those old-fashioned businesses still reliant on traditional processes generally aren’t affected as much and incur smaller losses.” &

Graham Buck is editor of He can be reached at