Captives

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.

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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
President
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 Management

The Profession

This senior risk manager values his role in helping Varian Medical Systems support research and technologies in the fight against cancer.
By: | September 12, 2017 • 5 min read

R&I: What was your first job?

When I was 15 years old I had a summer job working for the city of Plentywood, mowing grass in the parks and ballfields, emptying garbage cans, hauling waste to the dump, painting crosswalk lines.  A great job for a teenager but I thought getting a college degree and working in an air-conditioned office would be a good plan long term.

R&I: How did you come to work in risk management?

I was enrolled in the University of Montana as a general business student, and I wanted to declare a more specialized major during my sophomore year. I was working for my dad at his insurance agency over the summer, and taking new agent training coursework on property/casualty risks in my spare time, so I had an appreciation for insurance. My dad suggested I research risk management for a career, and I transferred sight unseen to the University of Georgia to enroll in their risk management program. I did an internship as a senior with the risk management department at Sulzer Medica, and they offered me a full time job.

R&I: What could the risk management community be doing a better job of?

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We need to do a better job of saying yes. We tend to want to say no to many risks, but there are upside benefits to some risks. If we initiate a collaborative exercise with the risk owners — people who may have unique knowledge about that particular risk — and include a cross section of people from other corporate functions, you can do an effective job of taking the risk apart to analyze it, figure out a way to manage that exposure, and then reap the upside benefits while reducing the downside exposure. That can be done with new products and new service offerings, when there isn’t coverage available for a risk. It’s asking, is there anything we can do to reduce the risk without transferring it?

R&I: What emerging commercial risk most concerns you?

Cyber liability. There’s so much at stake and the bad guys are getting more resourceful every day. At Varian, our first approach is to try to make our systems and products more resilient, so we’re trying to direct resources to preventing it from happening in the first place. It’s a huge reputation risk if one of our products or systems were compromised, so we want to avoid that at all costs.

We need to do a better job of saying yes. We tend to want to say no to many risks, but there are upside benefits to some risks.

R&I: What insurance carrier do you have the highest opinion of?

I’ve worked with a number of great ones over the years. We’ve enjoyed a great property insurance relationship with Zurich. Their loss control services are very valuable to us. On the umbrella liability side, it’s been great partnering with companies like Swiss Re and Berkley Life Sciences because they’ve put in the time and effort to understand our unique risk exposures.

R&I: How much business do you do direct versus going through a broker?

One hundred percent through a broker. I view our broker as an extension of our risk management team. We benefit from each team member’s respective area of expertise and experience.

R&I: Is the contingent commission controversy overblown?

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I think so. The brokers were kind of villainized by Spitzer. I think it’s fair for brokers and insurers to make a reasonable profit, and if a portion of their profit came from contingent commissions, I’m fine with that. But I do appreciate the transparency and disclosure that came out as a result of the fiasco.

R&I: Are you optimistic about the US economy or pessimistic and why?

David Collins, Senior Manager, Risk Management, Varian Medical Systems Inc.

While we might be doing fine here in the U.S. from an economic perspective, the Middle East is a mess, and we’re living with nuclear threat from North Korea. But hope springs eternal, so I’m cautiously optimistic. I’m hoping saner minds prevail and our leaders throughout the world work together to make things better.

R&I: Who is your mentor and why?

My Dad got me started down the insurance and risk path. I’ve also been fortunate to work for or with a number of University of Georgia alumni who’ve been mentors for me. I’ve worked side by side with Karen Epermanis, Michael Rousseau, and Elisha Finney. And I’ve worked with Daniel Dean in his capacity as a broker.

R&I: What have you accomplished that you are proudest of?

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Raising my kids. I have a 15-year-old and 12-year-old, and they’re making mom and dad proud of the people they’re turning into.

On a professional level, a recent one would be the creation and implementation of our global travel risk program, which was a combined effort between security, travel and risk functions.

We have a huge team of service personnel around the world, traveling to customer sites to do maintenance and repair. We needed a way to track, monitor and communicate with them. We may need to make security arrangements or vet their lodging in some circumstances.

R&I: What do your friends and family think you do?

My 12-year-old son thought my job responsibilities could be summed up as a “professional worrier.” And that’s not too far off.

R&I: What about this work do you find the most fulfilling or rewarding?

Varian’s mission is to focus energy on saving lives. Proper administration of the risk function puts the company in a better position to financially support research that improves products and capabilities, helps to educate health care providers and support cancer care in general. It means more lives saved from a terrible disease. I’m proud to contribute toward that.

When you meet someone whose cancer has been successfully treated with one of our products, it’s a powerful reward.




Katie Siegel is an associate editor at Risk & Insurance®. She can be reached at [email protected]