Coverage Challenges for Transportation
A spike in blockbuster payouts over the last five years has prompted some of the largest commercial fleet auto insurers to exit the market.
With cell phone use and sleep deprivation on the increase, it’s no surprise that the number of fatalities involving large trucks has climbed by 7.5 percent between 2010 and 2015, according to the U.S. Transportation Department.
In some cases, this has resulted in juries awarding tens or even hundreds of millions of dollars to the families of victims.
Among the most high profile incidents was the Wal-Mart truck that plowed into comedian Tracy Morgan’s limo in New Jersey in 2014, causing a six-vehicle pile-up, killing one person and injuring several others.
Aon has cited at least six cases topping $20 million this year, the most in four years.
Added to that, the industry’s adverse loss reserve development increased by almost $1 billion, from $647 million in 2013 to $1.6 billion in 2015.
Rates, meanwhile, have risen by as much as 30 percent and are expected to climb further next year.
David Perez, executive vice president, national insurance at Liberty Mutual, said that while insurers increased premiums over the last three to four years, their results had continued to deteriorate.
“It’s at a point where insurers can’t get the rate they need to be competitive, so there’s little other option than to cut back,” he said.
As a result, many of the biggest underwriters, including AIG and Zurich, have pulled some of their for-hire fleets coverage.
However, they will still cover trucks directly operated by retailers and manufacturers.
AIG subsidiary Lexington Insurance Co. stopped covering trucking fleets as part of its wider strategy to improve its commercial insurance division profitability; however, other units will continue to provide cover, according to a company statement.
“With all of these big insurers pulling out, it’s going to create a big problem,” said Daniel Bancroft, transportation practice leader, North America, at Willis Towers Watson.
“Whereas three years ago fuel was their major expense, now insurance is their third largest expense behind drivers’ salaries and equipment costs.”
Mark Brockinton, CEO of Aon’s transportation and logistics practice, said that the main reason behind the increase in accidents was the sheer volume of vehicles on the road.
Brockinton said that verdicts and settlements have been trending upwards over the last five years as plaintiffs’ lawyers have targeted employer negligence and hiring, training and safety practices in the trucking industry.
“They have become adept at finding issues such as logging, added to which have been the highly publicized claims such as Tracy Morgan’s, creating new fodder for plaintiff lawyers,” he said.
The cost of coverage, meanwhile, is putting extra pressure on trucking companies, with rates up 15 percent to 20 percent on average, and in some cases by 30 percent, squeezing out the smaller operators.
Federal law requires firms to cover drivers up to $750,000 per accident. Many self-insure up to around $1 million and buy further tiers of insurance to cover additional costs.
Joseph Peiser, executive vice president and head of casualty broking at Willis Towers Watson, said that attachment points for umbrella insurance also increased over the last year, sometimes as high as $15 million.
“Increasingly we are seeing situations where family-owned companies are having to pay claims in excess of the umbrella limits purchased, which is hard to swallow if your margins are only 2 to 5 percent,” he said.
This has resulted in some companies cutting corners on safety in order to save costs.
Steven Gursten, a Michigan attorney specializing in severe trucking accidents, went as far as to say that there had been a “systemic, company-wide disregard of mandatory safety rules” by some firms.
“Too many companies are in a dangerous race to the bottom,” he said.
“Today, we have many unsafe trucking companies that deliberately ignore mandatory safety rules and that, as a result, can undercut good, safe trucking companies on price.”
From December next year, however, 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.
Jenn Guerrini, vice president and executive commercial auto specialist, North America risk engineering services at Chubb, said that collaborative effort is needed between truck manufacturers, regulators and the trucking industry to reduce the number of accidents.
“Road trucking companies need to implement stringent fleet safety programs, reinforce driver training, monitor driving behaviors, educate employees and enforce company policies uniformly throughout the organization,” she said.
Chubb’s 5 Step Guide to Improve Driver Safety
- Reinforce driver training and increase the use of telematics to monitor driving behaviors.
- Buy new vehicles with advanced driver assistance systems fitted as standard.
- Implement a fatigue driving policy and establish a wellness program for drivers.
- Install dash-mounted technologies that can help identify fatigued drivers.
- Install electronic logging devices to monitor drivers’ hours of service.
Repurposing Aging Captives
Many companies could be losing out on thousands or even millions of dollars in tax benefits as well as significant cash flow and cost savings by neglecting or leaving their old captives dormant, according to industry experts.
Captives are effectively insurance subsidiaries used by a parent company to insure against its own and affiliates’ risks.
Such is their popularity, particularly in property and casualty, that it’s estimated that more than 90 percent of Fortune 500 companies now have at least one captive.
However, there are many dating back to the 1970s, domiciled offshore in places like Bermuda or the Cayman Islands, that are no longer used or have been put into runoff.
The risks of having an older captive are numerous — exposure to long-tail claims, the loss of institutional claims knowledge and records, and many are written without an aggregate limit.
But increasingly now instead of putting the captive into runoff or a solvency scheme, risk managers are starting to use them as part of a broader risk management strategy to deal with their legacy and emerging liabilities.
As a spin-off, this enables companies to potentially derive an accelerated tax benefit if the captive is properly structured, increase their cash flow, use their capital more efficiently and see significant cost savings.
“It’s fundamentally about using the captive to provide a dedicated funding source to meet legacy liability claims in a tax-efficient manner,” said Daniel Chefitz, partner at Morgan Lewis & Bockius.
Michael Serricchio, senior vice president of Marsh Captive Solutions’ captive advisory group, said that the main reason for a captive becoming dormant is a company not realizing its intended purpose or value.
“Maybe there’s been a change of risk manager or the management team and whoever set up the captive is no longer there and the captive is sitting there doing nothing because there’s no perceived value or it’s not properly understood,” he said.
“But even if the captive is just sitting there dormant or it is in runoff, you are still incurring running costs and claims, not to mention the capital that’s tied up in it.”
Chefitz said that among the main risks associated with a dormant captive are obligations to meet new legacy claims, a lack of control over the flow and handling of claims following a merger or acquisition, and exposure to liability from released trapped equity.
Sean Rider, executive vice president and managing director of consulting and development at Willis Towers Watson, said that the biggest risks of having a dormant or older captive were adverse claims development and investment outcomes.
“The main risk is leaving it dormant for too long. Then it’s ultimately harder to get it started up again and ready for when you really need the coverage.” — Gloria Brosius, corporate risk manager, Pinnacle Agriculture Holdings
Gloria Brosius, corporate risk manager at Pinnacle Agriculture Holdings and a RIMS board member, said that the longer a captive is left dormant, the harder it is to get it up and running again.
“The main risk is leaving it dormant for too long,” she said. “Then it’s ultimately harder to get it started up again and ready for when you really need the coverage.”
Call to Action
Chefitz said that dormant captives are often revived because of a need for additional insurance to cover legacy liabilities such as asbestos, product liability, toxic tort and environmental claims.
“Typically this arises when a company has a large reserve on its books, and a need for additional risk transfer,” he said.
But oftentimes risk managers and companies will be prompted into action when a loss occurs, said Jason Flaxbeard, executive managing director of Beecher Carlson.
“What will usually happen is that something bad occurs,” he said. “Companies will then start to question why they have that captive and that’s when decisions need to be made. But a well-managed captive shouldn’t have that issue.”
In this situation, Serricchio said that it was essential to undertake a thorough strategic review of the captive.
“The first question you need to ask is, ‘Does it make sense to keep the captive or even have it in the first place?’ ” he said.
Rider said that risk managers need to decide whether these older or dormant captives can be used as an execution tool within the company’s risk financing strategy.
“It’s really about understanding the captive’s role in facilitating an evolving risk financing strategy and how it can be used going forward,” he said.
Managing Legacy and Emerging Liabilities
The main advantage of resurrecting a dormant captive is for a company to deal with its legacy liabilities by fully insuring against any outstanding or future claims, said Chefitz.
This can be achieved by using the captive to establish a dedicated funding source to supplement the existing insurance coverage or to fill in any gaps in a tax-efficient manner, he said.
It also enables the company to maximize the value of its historical insurance coverage by smoothing the cash flow, he added.
“If a company has legacy liabilities, rather than trying to avoid or defer it, a sensible approach is to use the situation to your advantage by fully funding the legacy liability. This will then enable you as a risk manager to focus on your emerging and ongoing liabilities instead.”
Serricchio said that a dormant captive could also be used for writing emerging and non-traditional risks such as employee benefits, supply chain, cyber security, medical stop-loss and environmental risks.
Flaxbeard added that the current soft market allowed risk managers to be more creative with their captives through the sale of add-on products.
“Many companies are going into ancillary products that they can sell to their clients alongside their core products, such as extended warranties,” he said.
Tax Benefits and Issues
If qualified as an insurance company for tax purposes, captives can also provide a host of other benefits, said Chefitz.
By insuring these existing reserves on a company’s balance sheet with a captive, they are then effectively moved from the parent to the captive’s balance sheet, he said.
He added that the loss reserves from a captive were immediately deductible, thus accelerating the tax deduction within the parent’s consolidated group and monetizing the associated deferred tax asset.
Furthermore, the premium paid to a captive is also tax deductible if certain tests are met, he said.
“The increased cash flow as a result of the accelerated tax deduction can be invested in a tax-efficient manner and used to support the treasury goals of the organization,” he said.
When added up, all of these deductibles could potentially provide companies with thousands or even millions in tax benefits.
Meanwhile, another advantage has been provided under the recent 831(b) tax code change, with the annual limit at which captives and insurers can elect not to be taxed on their premium income being increased from $1.2 million to $2.2 million, effective from 2017, said Gary Osborne, president of USA Risk Group.
“This is a real opportunity for companies to put some good risks into their captive and to derive the tax efficiencies,” he said.
Another key consideration for companies looking to redomicile their captive is the self-procurement tax under the Nonadmitted and Reinsurance Reform Act for surplus and excess lines, said Flaxbeard.
“This is a problem for many companies who may look to redomesticate to their home state,” he said.
“Some have got around this by setting up a branch to write direct policies to the parent company incurring captive premium tax rather than a self-procurement tax.”
Among the other factors when considering a domicile are the captive’s legal, management and operational structure, as well as its capital use, said Chefitz.
Ultimately though, Rider said, companies need to consider whether it’s worth changing the captive’s structure or moving it at all.
“You need to consider whether the original domicile is still the best domicile and whether the original structure is still the best structure for you, or should you abandon the captive altogether and transfer the liabilities to a new one,” he said. &
Bird’s Eye View of Hurricane Damage
Hurricane Matthew, which battered the East Coast and the Caribbean in October, was the first major U.S. event where insurers used drones to inspect damage and help process claims.
With estimated losses from the Category 4 storm expected to reach $4 billion to $8 billion, according to industry sources, the need for the quick processing and settlement of claims has never been greater.
Already more than 90,000 claims totaling almost $550 million have been filed in Florida, according to the state’s Office of Insurance Regulation, while in North Carolina that figure stands at $1.5 billion.
Allstate’s communications manager, Justin Herndon, said the use of drones had the potential to double the amount of properties a claims adjuster could look at in one day.
Just weeks before Hurricane Matthew struck, the Federal Aviation Administration (FAA) introduced new regulations governing the use of commercial drones that made it easier for insurers to use them to inspect and assess property damage after a disaster.
As a result, insurance companies were able to enlist drones for the first time to speed up the claims process and improve safety for their staff after the storm blew back out to sea.
“Drones are absolutely speeding up the process,” Herndon said. “Where an adjuster now might be able to take measurements and photos and look at individual damage in a couple of hours, a simple 15-minute drone flight can capture everything that’s needed and immediately upload it to the cloud for our review.
“Where an adjuster and a ladder might be able to look at three to four homes in a day, an adjuster with a drone could potentially inspect six to eight homes in a day, if not more.”
So far, more than a dozen insurance companies have received approval to operate drones in the U.S., including Travelers.
Jim Wucherpfennig, vice president of claim property at Travelers, said that a team of 20 claims professionals trained to pilot drones were deployed to assess residential and commercial property damage in the five states primarily hit by the hurricane.
So far, he said, more than 125 drone inspections were carried out at affected sites, taking “days” out of the claims process.
“It definitely speeds up the processing of claims,” he said. “With the use of a drone we’re able to do everything in one visit; analyze the damage, get all the measurements down, write the property estimate and give the customer payment for covered losses.
“The anecdotal feedback we get is this is cutting down the time to payment and/or claim rejection.” — John Geisen, senior vice president, aviation practice, Aon
“That enables the repairs process to begin much more quickly.
“It definitely takes days out of the process in terms of eliminating multiple site visits and the scheduling of contractors, and helps the customer get back on their feet more quickly.”
The company launched its training program last Spring in anticipation of the FAA rules and to date it has 60 FAA-certified professionals, with hundreds more being trained in the next several months.
Herndon of Allstate said that the drones assisted in the inspection of around 25 homes, opening the door to more wide-scale use of the technology in the future.
Allstate had previously tested the drones, which can capture 4K-resolution images, enabling adjusters to zoom in with much greater detail, in Texas after a hailstorm.
“To be able to use drones with our customers who have actual storm damage is a big step forward,” said Allstate’s chief claims officer Glenn Shapiro.
Lockton doubled its use of drones during Hurricane Matthew from previous smaller events, said Sheri Wilson, senior vice president and national property claims director.
“My sense is that Matthew was still more of a test op for many insurers than widespread deployment, but it clearly is trending to greater use,” said John Geisen, senior vice president with Aon’s aviation practice.
“The anecdotal feedback we get is this is cutting down the time to payment and/or claim rejection. If faced with a large count of claims, you might not have the time to scrutinize each as deeply so the ability to quickly assess for damage and focus attention, has value.”
Josh Spencer, in catastrophe operations for Zurich North America said that the company used imagery from the National Oceanic and Atmospheric Association as well as data from its call centers and its staff on the ground to assess damage.
The use of drones had also improved the safety of claims professionals by removing the need to climb ladders to inspect roofs and other structures, Wucherpfennig said.
Herndon said: “Safety is a major concern for any adjuster getting on a roof today. There can be steep inclines, slippery/wet surfaces or weak areas from damage where a tree fell, for example.
“A drone evaluation takes all of those concerns away and so we see the future use of drones as a great way to improve safety for our claims professionals.”