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By CYRIL TUOHY, managing editor of Risk & Insurance®

Apart from the ugly spike in gasoline prices last year, you can't really feel too sorry for the long-haul trucking industry and the prices they've been paying for property/casualty coverage.

Other freight companies, looking to further improve their safety records, have instituted wellness programs for their drivers to make sure they take breaks and relieve their sore muscles after hours on the road.

The efforts have paid off. There were 144,171 fatal and nonfatal accidents involving large trucks in 2007, down from 146,931 accidents in 2006, and 147,133 accidents in 2005, according to Federal Motor Carrier Safety Administration statistics.

All of which is to say that insuring trucking companies has remained a fairly safe risk for many an underwriter.

As trucking companies improved their safety records, insurance carriers took notice and figured it was worth their while to underwrite long-haul trucking risks on the grounds that they would be able to collect more from trucking companies in premiums than they, the carriers, would be paying out in claims.

With new insurance underwriters roaring into the market hauling truckloads of capacity in tow--by one broker's estimate, there were five times as many insurance companies underwriting trucking risk in 2008 than there were in 2003--and with accident frequency on the decline, prices over the past three years have had only one road to follow: down.

"I've been here five years, and I've beaten rates down every year," says Doug Chamnes, risk manager for Greenbush Logistics Inc., an Abbeville, Ala.-based flatbed company with an inventory of about 200 trucks operating in the Southeast. "It's been a soft market for a long time. We were due to go up."

... at least that's what he thought. So when last October rolled around, and Chamnes geared up for renewal negotiations, he expected to hear from his agent about the increase barreling his way.

The news was not what he expected, and there was no rate increase in sight. "My rates on renewal held or went down a shade--but I have a pretty clean risk," he says.

In the midst of the government bailout of AIG, Chamnes last fall locked in a two-year contract with his underwriter with a slight decrease to boot. So he now won't have to worry about price renewals until the fall of 2010.

While risk managers, brokers and carriers alike are all talking about a price increase this year, the way Chamnes sees it, insurance carriers are going to have a tough time raising rates too much, all of which augurs well for buyers.

Too high a hike could drive a trucking company out of business, particularly companies that have suffered with a decline in freight transporting due to the recession. Saddled with fixed costs and already operating on thin margins, trucking risk managers are not going to take kindly to big price increases in coverage, particularly not if they have been able to cut their accident rates and have proven to carriers they are a safer risk.

On the other side of the coin, insurance carriers that don't raise rates high enough will not be able to spread the risk when it comes time to pay their claims. As a result, commercial insurance buyers in the trucking sector can expect slight rate increases this year.

Rates are drifting up, but they're not as high as they need to be because of the weak economy and some insurance carriers--that have taken a hit in their ratings--are themselves part of the problem, says Chamnes.

This much is certain: Carriers are not going to be able to sustain the price cuts of the past two or three years and agents, and brokers are being told to hold the line on rates by large carriers like Liberty Mutual, which underwrite "gobs and gobs" of trucking risks nationwide.

This much is also certain: Trucking companies rolling along on weak balance sheets or carting truckloads of claims are going to run into price hikes.

Jon Donovan Tanner, president and CEO of J.D. Tanner & Associates Insurance Services, with offices in Illinois, Oklahoma and Texas, says rates are going to have to go up because carriers are losing money on underwriting and their investment portfolios last year did not perform very well.

Tanner's agency represents some of the largest carriers in the country, including CNA, National American Ins. Co. and Zurich.

He admits that trucking clients these days can find coverage "dirt cheap," if they want it, but not from the major underwriters, which have instructed brokers to hold the line on pricing.

In an ordinary economic cycle, trucking underwriters would be expected to raise rates to cover the claims costs and help recoup losses in the investment markets, say brokers and ratings analysts.

This is no ordinary recession, however, and plenty of trucking companies are suffering, which makes renewal pricing in 2009 a particularly tricky proposition. Reinsurers as well are expected to raise rates charged to primary insurers, and the primary insurers are likely to pass on those costs to clients.

"We're seeing some of the direct writers tightening up on rates and underwriting requirements," says Sean Rivera, vice president of marketing for Insurer's Unlimited Inc., a specialist transportation broker with offices in Florida, Texas and Colorado.

"Some are still writing below market. But for the most part we anticipate that rates will be coming up to a level to make an underwriting profit. For many years, they've been going below that level."

The influx of opportunistic underwriters has helped drive down prices over the past two years. Tanner refers to this as "gutting the rates," and says those underwriters will likely continue underpricing coverage for as long as they can.

A stampede of players with short-term horizons isn't in itself unusual, brokers and risk managers note.

But buyers, many of whom are desperate to preserve as much cash as possible due to the recession, are going to be especially tempted to sign deals at the lowest possible price.

Therein lies the trap, warns Tanner, and buyers should stay away if they want to avoid a price spike and if they want to be sure their carriers are going to be around in a year or two to pay a claim.

"With the recession, every client is cash sensitive," Tanner says. "The guys hurting now are the haulers of dried goods, electronics, garments, and things dependent on consumer spending. If stores are going out of business like Circuit City, and there's not as much building going on, the flatbed carriers are hurting. The food commodities haulers are doing OK."

Buyers who accept cheap deals this year and forsake locking in a slightly higher rate may be in for a nasty surprise next year when underwriters are forced to raise rates by a much larger percentage, says Tanner, who has placed the risks of some clients in a captive insurance vehicle to avoid a sudden price spike.

It all depends on how much volatility buyers are comfortable with, Tanner says. "Do you really want to ride that deal or lock it in and budget your cost in for the next three years?"

May 1, 2009

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