Gregory DL Morris

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at riskletters@lrp.com.

Transportation

Driver Shortage Challenges Truck Lines

Recent accidents highlight risk management challenges of long hours and tough road conditions.
By: | April 8, 2015 • 7 min read
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Not since “Smokey and the Bandit” raced across the nation’s movie screens have truck drivers been so much in the mind of Americans. But the current attention is more like scrutiny than admiration.

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The June 7 crash of a Walmart tractor-trailer on the N.J. Turnpike brought lurid attention to a long-simmering crisis in highway transport: a shortage of experienced and healthy drivers at a time when the demands of high-tech vehicles and tight delivery schedules are increasing. Deteriorating roads and bridges and weather extremes exacerbate the situation.

The risk management dilemma for trucking companies is how they can operate profitably and meet shippers’ demands for service and transparency while meeting increasingly stringent federal and state safety regulations.

The Walmart accident killed comedian James “Jimmy Mack” McNair, and injured comedian Tracy Morgan and others in a six-vehicle crash. The National Transportation Safety Board investigation found the driver was going 65 mph in a 40 mph zone.

VIDEO: MSNBC opinion piece on the Tracy Morgan/Walmart collision.

Fatigue was considered a factor, because the driver was just 30 minutes short of the legal limit of 14 hours in service.

Few in the industry dispute the intention of equipment safety certifications, as well as hours-of-service limits for operators. The challenge is that the demands can often be mutually exclusive in an era when drivers are leaving the business, fewer are entering, and those who remain are getting older and less healthy.

The response from operators; their trade group, the American Trucking Associations (ATA); and regulators has been to gather and analyze ever more performance and safety data. However, industry and regulators differ on what data to gather and how to use it. Congress has weighed in as well.

Most recently, on March 5, the ATA asked regulators to modify its safety and compliance system. Not surprisingly, operators and their advocates in Congress favor self-policing, while federal officials advance government regulation.

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For example, the ATA has asked regulators not to make crash histories and compliance scores public until the government changes its evaluation process.

Also, regulators are reviewing whether they should increase the minimum financial responsibility of motor carriers. A notice of proposed rulemaking was issued late last year, and ATA says it is gathering input from its members.

Driver Shortage

All of these debates center on the core issue of the shortage of drivers overall, and the quality of the ones that remain in the labor force.

In his annual report to the ATA Management Conference last October in San Diego, the organization’s chief economist, Bob Costello stated, “Industry revenue and average revenue per mile are increasing nicely as capacity remains constrained. However, the industry is having a difficult time adding trucks due to the driver shortage.”

Costello added that the driver shortage was “as bad as ever and is expected to get worse in the near term,” as freight volumes continue to grow.

As evidence, Costello reported that turnover, a key indicator, rose 11 percentage points to an annualized rate of 103 percent in the second quarter of 2014. The increase set the rate at its highest point since the third quarter of 2012.

“These turnover rates show that the shortage is acute,” Costello said, “and if the freight economy continues to grow, it will worsen very quickly.”

One reason is that “some new drivers don’t know what they are getting into,” said Jack Scarborough, senior health, safety and environmental consultant at ESIS Inc., the risk management services division of the ACE Group.

“If they last the first few months to a year, they may last a few years, but after that they want to transfer to local work to stay closer to home.”

That drain on the long-distance driver pool adds to the strains of a diminishing overall workforce.

Justin Russo Senior vice president of risk management for Energi

Justin Russo
Senior vice president of risk management for Energi

“Drivers are in very high demand, and not a lot of people are going into the industry; we have got the challenge of an aged workforce,” said Justin Russo, senior vice president of risk management for Energi, a national underwriter specializing in the energy sector.

“Out of necessity, trucking firms have to hire drivers just out of school. Schooling can help prospective drivers pass the test,” said Russo, “but does not necessarily teach them how to drive the truck.

“It takes time to accumulate experience. Our prospects, even our insureds go through strict underwriting that includes their hiring and training practices, as well as operations, maintenance, and regulatory compliance.”

Energi has also taken a direct hand in training. It has a fleet of seven simulators built by L3, the same firm that makes them for military training.

“We bring the simulator to the insured’s site,” Russo said, “and based on their loss history, we build driving scenarios around the situations their drivers are most likely to face.”

Technological Changes

Russo detailed other technology, including cab-mounted cameras that look outward, “to help determine liability in case of accidents,” as well as more prosaic tools, such as devices to block cell-phone calls.

“Technology in the cab can certainly help, but it can hurt if it leads to distracted driving,” he said.

The best support for safe operations and high standards for drivers is often underwriting. “Clean operators with few incidents and all their paperwork in order are likely to pay less for insurance than ones with more losses,” said Russo.

Steven Rodriguez, president of third-party P&C claims for York Risk Services, an underwriter, reinsurer, and claims administrator, has more than two decades of experience in trucking.

“Truck technology is great these days; the transponders report location, speed, route, but at the end of the day what matters is the driver,” said Rodriguez.

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“The better companies are thinking ahead on training, records, medical screening. They have a discipline around hiring. But the million-dollar question is that if you have to get a piece of business out the door, what do you do?”

He stressed the risk management aspects of driver quality and availability.

“In the claims we are seeing, the planning is just not there. Good companies and good drivers are in sync with the road, with each other, with the dispatchers on route and road conditions and weather. That is important because even good drivers can be put in bad situations.”

Rodriguez noted that technical data, planning, and driver performance will be used one way or another. It can be used for advance planning, risk management and training, or even in litigation.

“It starts with hiring and keeping the best people,” said Rodriguez, “but if you can’t find enough of them, what do you do? At the very least, you have to have the basic tools of business practice. Not just mission statements and standards, but working business practices.

“I know small operators who use very granular details from their trucks’ transponders to plan their operations and as the basis of retraining on the basics for drivers.”

The segment of the trucking industry that handles energy, chemicals and hazardous materials is already subject to much more stringent regulation than other segments. In general, it is able to charge higher rates because drivers must be highly trained in materials handling and emergency procedures.

Given the specialization of the energy and chemicals sector, opportunities for transfer of best practices to the broader general-freight operations are limited, but do exist.

An April 2014 report by Jeff Melo and Mike Billingsley, risk managers on the group’s health, safety, and environmental team at ESIS, addressed the entire energy sector, from large complex drilling equipment being moved over the road, to local and long-haul transport of oil, chemicals, and wastewater.

It noted that the energy sector is more dependent on trucking than might be commonly understood, given the prevalence of pipelines, railcars and tankers.

“Oil and gas operations continue to grow across the lower 48 states, but that growth could not occur without the fleets of trucks that carry the drilling machinery and other needed equipment and resources,” according to the report.

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That reliance on trucking means that “energy companies and their affiliates confront many exposures related to this high-risk activity, due to driver demand and an inexperienced driver pool across the U.S., increased state and federal regulatory burden and oversight, and drivers operating in unfamiliar rural and urban locations.”

“Through a robust and proactive risk management strategy that integrates health, safety and environmental components, risk reduction is possible.”

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at riskletters@lrp.com.
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Construction Industry

Hot Targets: Upscale Urban Projects

The use of wood framing in mid-size residential construction raises concerns
By: | November 3, 2014 • 6 min read
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Earlier this year, a pair of spectacular fires just weeks apart, the first in San Francisco and the second two weeks later in Houston, highlighted the perils of a new trend in residential construction: the mid-rise luxury apartment complex.

In both cases, dramatic aerial images showed roiling flames and a thick column of black smoke towering over each city’s downtown as the fires completely destroyed the projects that were still under construction.

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What the images did not show were many streams of water directed on the fire. That omission was not for lack of capability.

San Francisco authorities said half of the city’s firefighters on duty were at the scene on March 11, while the Houston Fire Department has a national reputation for aggressive attacks and fast stops.

Video: A wood-frame fire roared in San Francisco in March

But in both cases, there was no life or personal property at stake, and the uncompleted multi-story timber construction gave the fire a head start, lots of fuel, and few impediments to growth.

In such situations, crews often target their efforts at protecting nearby structures, according to loss-control experts and firefighting sources.

“These sites are very tight,” said Ryan Scheinfeld, president of national construction at Technical Risk Underwriters (TRU), part of Ryan Specialty Group, based in Chicago.

“These are more dense than the garden apartments of recent decades, and there is pressure to build quickly. Most of the contractors are experienced and careful, but by their nature these [wood-frame] projects are just more volatile than other modes of construction.

“And because of the higher combustible load, incidents go from incipient to catastrophic in very short order.”

Such construction projects are usually worth much more than the single-family homes or low-rise garden apartments that they replace, and are often on an expedited construction schedule.

Due to the increase in the use of wood framing in such projects, the National Fire Protection Association (NFPA) and other industry groups are reviewing risk mitigation standards and best practices. Many underwriters are doing the same.

Urban Trends

Converging economic and demographic trends known as the new urbanism are combining to increase the size and number of such mid-rise high-end projects, according to underwriters.

“We average 500 to 600 projects a year,” Scheinfeld said.

“The boom in downtown luxury housing includes mixed-use neighborhoods with upscale supermarkets, megaplex cinemas, retailers, and health centers,” he said.

“We write builders risk for large, wood-frame multi-family projects all across the country.”

“If people did what they know they are supposed to do we would not have these problems.” — Rich Luongo, executive property specialist, Chubb

With such developments “going up everywhere,” Scheinfeld said, “the law of numbers says the losses will be where there is activity.”

Not only are these projects more volatile, they are more valuable.

“Developers are moving from the spread, garden-style to a podium style. We call this urban infill. It varies greatly from city to city based on zoning and existing density, but the pronounced trend is to high luxury in wood frame,” he said.

Based on industry estimates, a city-block-sized garden apartment development can have 30 to 60 units and be worth $20 to $35 million. A townhouse development on the same parcel can go up four or more stories plus basement, have hundreds of units, and be worth $100 million.

Loss Prevention

Rich Luongo, executive property specialist at Chubb, is encouraged that fire-protection groups are reviewing their standards and recommendations, but said that best practices are still care and diligence.

“This is basic blocking and tackling,” he said. “If people did what they know they are supposed to do we would not have these problems. As the senior person in loss-control for Chubb, I walk the buildings we write all the time. We work both top down and bottom up. If we see problems, we make critical recommendations.”

A complicating factor in supervision is that there are multiple operators on any site, Luongo said.

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“There is the general contractor, the project manager, the subcontractors, and often subs can get lost in the shuffle.

“The No. 1 thing is a regulation hot-work program, a fire watch and a three-hour post-work monitoring,” Luongo said. “No hot-work late in the day, especially on Fridays, or on windy days. Quick debris removal and housekeeping. No smoking on the job site — absolutely, positively, never. But go to any job site and you will find butts on the ground.”

On a positive note, he said that “industry and standards groups are aware there is a trend in this construction, and are starting to respond.” The NFPA recently issued a new standard targeted at fire protection during welding, cutting and other hot work.

A Collaborative Effort

The key for insurers when it comes to risk-transfer implications on wood-frame projects is to eradicate hazards and minimize exposures through a loss prevention approach with clients from the outset, said Sam Whitnell, construction and engineering underwriter with Canopius Managing Agents Ltd. in London.

“As insurers, we try to remove what we can by way of risk, but also control those risks which we cannot remove through loss prevention programs such as material handling, housekeeping on site, fire protections and security outside of normal working hours to prevent incidents such as arson.

“This is achieved through site inspections once framing begins, but there has to be a willingness on the contractors’ part to work with insurers and safeguard against any possible threats. This ultimately ensures successful completion of a project, which is the common goal for all parties involved, including financiers.”

Starting early in the process is important, said Gary Keith, vice president of engineering standards at FM Global.

Gary Keith, vice president of  engineering standards, FM Global

Gary Keith, vice president of engineering standards, FM Global

“Construction is a very vulnerable phase. We work very closely with insureds to ensure that protection systems keep pace with construction.

“Fire protection systems can be installed piece by piece or section by section; they do not have to be installed all at once late in the project. Fire protection has to be managed with the construction schedule regardless of the construction materials or methods,” he said.

FM Global also urges insureds to collaborate with local responders on pre-incident planning.

“The fire inspector is not going to be the one arriving at 3 a.m. on a Sunday,” said Keith. “The local fire commander should know where the job site and building access points are, especially as they change through the project. They have to know where the water supply is.”

At the research level, “we are heavily involved in field operations,” said Keith. “We are comparing existing engineering standards and best practices to what we are finding in the field for all types of projects.

“We understand that clients may want to take advantage of new techniques or trends in construction. We can deal with them directly on a project-by-project basis. But then we work back through our system and check our processes as necessary. We want to take into account model codes and real life.”

That work has led to improved protection systems, and modular approaches to fire protections for projects through all stages of construction.

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“There are some major research projects under way right now, in research and testing, and we hope to see some findings and results soon,” said Keith.

“But the most important thing is for protection to maintain pace with the project.”
Scheinfeld noted that TRU gets involved in projects even before construction starts, and is “very active in loss control. We are on each site multiple times to be sure that NFPA standards are enforced.”

In a small irony, Scheinfeld said that aside from catastrophic loss from fire, the second most common loss for these types of projects is from water.

“They often happen late in the project. The first model units are finished, and there is a leak in the line to the dishwasher. A quarter-inch line can leak a lot of water over a weekend.”

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at riskletters@lrp.com.
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Local Supply Initiatives

Risk Management Mentors

National grocery chains are creatively supporting small produce growers and packers.
By: | October 1, 2014 • 7 min read
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Small is beautiful in terms of locally produced food. It is also big business, and grocery-store chains are making their supply chain and risk management process more flexible and innovative as they compete against street-corner markets and local retailers.

A report from the Food Marketing Institute indicates that between 2012 and 2013, three-quarters (76 percent) of all supermarkets added more locally supplied items. Interestingly, for independent grocers an even greater percentage, 92 percent, said they did so.

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It was several years ago, said Rod Parker, general manager for E.A. Parker & Sons in Oak Grove, Va., that big grocery chains began “the push” to have local produce in their stores. Parker Farms processes, inspects and ships fresh-grown produce to major retail and wholesale outlets.

At that time, he said, “there was a big question about who would be able to play and who would not among growers. We decided early that we wanted to play, so we did what we had to [related to insurance and risk management programs]. It was expensive and difficult, but we did it.

“Our liability insurance has gone up from $2 million to $5 million to $10 million,” he said, noting that the organization did not need much help in attaining the insurance it needed.

“Grocery stores and the big-box retailers, especially those with a house brand, want to push the recall exposure down as far as possible.” — Florian Beerli, senior vice president of product recall, ACE Westchester

Citing competitive reasons, Safeway — widely considered a pioneer in this area — declined to talk about its local supply initiatives or the risk management programs behind them.

So, too, have other large grocery companies.

Industry experts said that Publix and Kroger have also made strides in this area, but both companies did not respond to inquiries. Whole Foods, another heavy promoter of local supply, has a policy of not talking to the trade press.

Walmart, in contrast, is considered a laggard in local-supplier outreach. That company made reference to an in-store merchandise-tracking device, but refused to discuss its supply or risk management.

The irony of the official reticence is that supply-chain and risk managers at several of those chains are reportedly exceedingly proud of how their companies have retooled after their initial efforts met mixed results.

“When we and other groups first wanted to stock local products, the supply-chain methodology at the time led us to say ‘no’ a lot,” said a food industry risk manager who asked to remain anonymous.

“Now, our methodology and those of a few others is to find a way to say ‘yes.’ ”

Formalizing Procedures

Sam Lefore Fruit Farms, a family owned farm in Milton-Freewater, Oregon, has been supplying tree fruit to Safeway grocery stores for more than half a century.

10012014_12_supply_chain_chart_1“We also work with some independent buyers, but mostly Safeway,” says farm owner Sam Lefore. “We have always had a very low rejection rate, and we carry all the levels of insurance that they prefer.”

Over the past few years, Safeway has formalized its insurance and safety practice requirements, he said. “They got very serious and very organized. We pay for the auditors that they send, and meet with them annually and go over the score sheet.”

Safeway’s website provides some details about its local produce initiative as well as some supplier profiles.

In April, the company released its “Supplier Sustainability Guidelines and Expectations For Safeway Consumer Branded Items.” Those guidelines require, in part, that suppliers will:

• Favor domestic/local production where feasible;

• Implement measures to secure the supply chain;

• Comply with all applicable environmental regulations and laws in the areas they operate;

• Practice humane treatment of animals;

• Strive for “grass-fed,” “cage-free,” “no antibiotics administered,” certifications; and

• Focus on environmental health and safety internally and externally.

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Initially, experts said, most big chains demanded the same high levels of insurance coverage and third-party auditing that they did for their major suppliers. Few local suppliers had the time, money, or staff to comply, and were shut out.

At the other extreme, some chains took local suppliers at face value, and accepted any liability as their own.

Neither situation made anyone happy, so a new collaborative approach evolved.

“Some products are inherently safer than others,” said the risk manager. “Salsa is one thing, spinach is entirely another. We first determine what is the inherent risk, then see what insurance and risk management the supplier already has. Sometimes, they are good and sometimes they are short.

“Next, we see what would it take to bring the supplier up to the proper levels, and if it is worth our while to work for that. If so, we consult on their processes, and may even recommend them to a broker to place additional coverage. It’s all very individualized,” the risk manager said.

Product Recall

Florian Beerli, senior vice president of product recall, ACE Westchester

Florian Beerli, senior vice president of product recall, ACE Westchester

“We are starting to see more of a thought-out approval process that includes insurance minimums, in which we have been helping the suppliers or co-packers,” said Florian Beerli, senior vice president of product recall at ACE Westchester, the company’s U.S.-based wholesale business.

While he couldn’t discuss specific grocery-chain referrals of suppliers, he said that product recall was a big emphasis and that “business in the recall market [is] being more and more contractually driven.”

“Grocery stores and the big-box retailers, especially those with a house brand, want to push the recall exposure down as far as possible,” but he noted there are practical limits to such an approach.

“There are various solutions. The most common recall limit is $5 million, although some stores do require $10 million regardless of the size of the supply contract. Some of the well-known brands buy their own coverage and require their co-packers to buy coverage to the self-insured retention (SIR).

“Others buy coverage on behalf of the co-packers, then have them cover the SIR. And recently, some big brands are trying to put together group coverage for their suppliers,” he said.10012014_12_supply_chain_chart_2

For its own part, ACE focuses on the first-time buyers, so it is at a good vantage point to see the quick evolution of this sector.

“We have adopted a tailor-made approach in which we have base wording in the contract, and then everything else is added by endorsement,” Beerli said.

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That puts the onus on the carrier’s underwriters, but “holding hands with the first-time buyers” is what Beerli said his firm does.

It also enables the company to conduct the education that he believes is also necessary.

“There is still work to do about recall protection,” he said.

Reputational Risk

Balance is the word used most often by Thomas Pegg, deputy director of casualty risk control at the Willis Group.

“Grocery stores are attempting to work more closely with local suppliers,” he said.

“They have found they need a bit more flexibility on contractual risk transfer, but that is very product specific.”

The need for balance in risk management is not just external, based on what is feasible with small suppliers, it is also an internal challenge, he said.

“I know of no other area of concern to these companies above brand protection from reputational risk,” Pegg said. “They have very high standards.”

10012014_12_supply_chain_chart_3That mandate could be most easily met with heavily processed, hermetically sealed products from other large corporations.

But consumer buying habits prove that they want knobby heirloom tomatoes and corn with clods of dirt still on the stalks.

More to the point, they are willing to pay more for local produce. Hence, the need for a nuanced approach.

Pegg said that some grocery-store clients have supported their local suppliers in Pennsylvania to achieve the food-handling certifications offered by the state department of agriculture for workers and suppliers.

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He also noted two other factors that play into the local produce trend: “Some of this is being driven, literally, by transportation costs.” Less expensive logistics are important to businesses with razor-thin margins.

At the other end, more customer loyalty programs make it easier to track purchases, which greatly aids in recalls or at least tracing and isolating problems.

“That is a very important development,” said Pegg, “and a critical piece of the supply chain.”

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at riskletters@lrp.com.
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