Auto Insurance Increases: The Perfect Storm

perfect storm: a particularly violent storm arising from a rare combination of factors

The current state of auto insurance in the United States is set for a perfect storm. Insurance companies that offer auto insurance have realized unfavorable losses throughout the past few years. When auto insurance is not profitable for insurance companies, it negatively impacts anyone who purchases auto coverage. In the past, prices for auto insurance remained stable due to competition between insurance companies. This means they did not have to increase prices without losing business. However, given the combination of factors in the market, companies cannot continue to pay losses in excess of the premiums they collect.

Insurers that specialize in trucking see very little profit from any coverage other than auto insurance, unlike other companies who can lean on other types of coverage to offset losses. Several insurance companies discontinued offering auto insurance for truckers because of this. As insurers leave the trucking auto insurance market, there are fewer options for truckers. This allows the remaining insurance companies to increase prices.

What are the factors impacting auto insurance prices?

  • Distracted Driving – When a driver takes their eyes off the road, hands off the wheel on concentration off of driving, they are a distracted driver. The Federal Highway Administration estimates that 1,161 injuries occur daily due to distracted driving. They also state that an average of 3,477 deaths occurred due to distracted driving in 2015. The distractions include using cell phones, eating and drinking, vehicle electronics, passengers, smoking, grooming, dealing with children, among others. Studies have also shown that a driver is four times more likely to be in an auto accident when talking on the phone while driving and up to 32 times more likely to be in an accident if texting. National Safety Council polls show that a large number of drivers are dismissive of the risks posed by distracted driving. That means that distracted driving will continue to cause accidents and thereby affect insurance prices.
  • Safer Vehicles with Better Technology – Vehicles today are equipped with technology intended to save lives. They have “crumple zones” designed to absorb the impact of a collision, which also reduces the impact to the driver and passengers. When it comes to safety, this is a great thing. However, it makes the vehicle sustain much more damage as a result. It also costs more to repair these newer vehicles. Because more people are surviving motor vehicle accidents, insurance companies are sometimes required to pay for expensive medical costs and lost of income to those injured. Saving lives is amazing, but it does come with a higher cost in the form of insurance claims. These newer vehicles have high-tech computerized operating systems with fragile sensors that are easily damaged. This adds to the cost of repairing a vehicle after an accident.
  • Increasing Medical Costs – It is no secret that the cost of health care has been increasing. In fact, the Centers for Medicare & Medicaid Services states that health insurance premiums have increased 131% since 1999. Despite government efforts it appears that this trend will continue into the foreseeable future. There are many causes for this situation, but the fact is that medical costs constitute the largest portion of auto insurance claims. This will continue to have a negative impact on auto insurance prices.
  • Lawsuit Funding & Lawsuit Loans – Following a serious motor vehicle accident, an injured person may be unable to work. As a result, lawsuits that follow often stretch out over a significant period of time. Historically, because of the need for the injured person to pay for living expenses, insurance companies convinced them to settle quickly and for a lower amount of money. Recently lawyers, investors, and financing companies have developed the concept of lawsuit funding & lawsuit loans. Lawsuit loans are merely loans provided to the injured person collateralized by the value of the lawsuit. This allows the plaintiff to pay their bills while the lawsuit continues, and inevitably receive a higher settlement than if they were forced to accept a lower amount due to their financial needs. Lawsuit funding involves investors that pay the injured person a lump sum amount up front that is normally higher than what the insurance company would offer. The injured party is required to continue with the lawsuit until a verdict is reached. The investors then pocket the difference between the amount of money awarded in lawsuit and what was paid to the injured person. The insurance claims are substantially higher when lawsuit funding and lawsuit loans are utilized.
  • More Traffic & Disintegrating Infrastructure – A U.S. Department of Transportation study shows that in 2015 drivers traveled 145,000,000,000 more miles than any previous year. There are more cars on the road and they are being driven more often. This leads to more accidents and more insurance claims resulting in higher costs to insurance companies. Combine this with the fact that the roadways and bridges in the United States are in poor condition and the accidents and costs are bound to increase. The ASCE assigns a “D+” to the United States infrastructure.

If that weren’t enough, there are insurance company evaluation parameters. 
The price paid for auto insurance is established by each insurance company’s filed rates, which are then adjusted by underwriting staff employed by the company. The underwriter can affect the price significantly based upon their opinion of a company’s practices, documented violations, accidents, and claims.

  • Claims & Losses – The more money paid on your behalf by the insurance company, the higher your insurance costs. If a company sees losses that exceed 60% of total premiums paid, they are considered “unprofitable” from an insurance company’s standpoint. And, in most cases, frequent claims are viewed as worse than one large loss.
  • Motor Vehicle Report & Pre-Employment Screening Process – These reports display the violations that are earned by a particular driver. These reports are considered an important indicator of potential claims and losses by insurance companies. The drivers employed by a company are absolutely key to keeping claims low and minimizing insurance premiums.
  • Mileage & Number of Trucks – The more trucks dispatched, the more miles that are traveled. The more miles a driver logs, the higher the probability of being in an accident. Insurance underwriters normally consider 100,000 miles per truck per year and above to be above average usage and will apply higher rates.
  • Radius of Operation – The statistics show that, on average, the longer a driver travels in one direction, the higher the probability of having a accident. However, if a fleet is driving in metropolitan areas, this general rule does not apply. Therefore, insurers also consider where your drivers are traveling.
  • Cargo Hauled – Flat bed and milk haulers come to mind when considering how cargo affects the potential for accidents. Milk haulers need to contend with having no baffles in their tanks causing weight shifts thereby increasing the potential for roll overs and other accidents. Flat bed haulers contend with cargo falling off of the trailer and causing accidents and potentially uneven loads cause instability. A normal underwriting question is if you are hauling doubles, triples, or oversized loads. These types of equipment can impact rates.
  • SAFER/BASIC Scores and Central Analysis Bureau Reports – These two sources of information detail the violations incurred by drivers and physical deficiencies regarding trucks and equipment. The insurance company uses the information to see the types of violations and to determine the potential for future accidents based upon those violations. Most of the information contained in the CAB report is derived from the SAFER database but in a more condensed form. Both SAFER and CAB provide a scoring system that, if negative, alerts the state troopers that inspections are warranted. The scores are also used by insurance companies to determine if a trucking company should be accepted or declined and factors into policy pricing.
  • Hiring Practices and Safety Program – Because hiring safe and competent drivers is paramount to keeping accidents low, the insurers want to know what screening is performed prior to putting a driver behind the wheel of a company’s trucks. Things like documented driving tests, checking MVR/PSP, background checks, and medical exams are such practices that are required to provide underwriters with a comfort level that a company is doing their due diligence when hiring drivers. Having a safety program with regular safety meetings is another way to minimize accidents and keep premiums low. Having a dedicated individual assigned to safety and compliance is a plus. Owner and upper management “buy in” and visible support for the safety program is key. Identifying underperforming drivers and counseling them or removing them from a company’s fleet will definitely improve losses and violations.

How can a company minimize their premiums? 

  • Hire and Retain the Best Drivers – The absolute best way to keep losses and violations to a minimum.
  • Ongoing Safety Training – It’s valuable for a company to show they are dedicated to safety and keeping their drivers’ safety a priority. It is necessary to provide training and continue to remind the drivers of safety initiatives. Written fleet safety programs are a great tool to aid in conforming to DOT regulations, advising the drivers of their duties and obligations when driving a company’s vehicles, and minimizing the impact of a lawsuit. In addition to establishing the expectations of drivers, it is important to enforce the rules and establish accountability.
  • Regularly Monitor Driver Performance – Checking MVRs and PSPs on a regular basis is a good practice. This allows companies to identify underperforming drivers and encourage good drivers. Checking SAFER scores is also something that will help companies get an idea of how well their drivers are performing as a whole.
  • Telematics and Technology – Managing a fleet of drivers can be like “herding cats” due to the fact that they are not located in one physical location. The advent of on board computer systems allow companies to track the performance of drivers without having them directly in their presence. The systems can determine where they are at any point in time, if they are speeding or hard breaking often. The systems also provide better communications between the company and the driver or dispatch and the driver. Dash cams have been used with great success in avoiding expensive lawsuits or minimizing payouts in lawsuits. At least one insurer is now requiring dash cams in all vehicles.
  • Regular and Effective Vehicle Maintenance – Companies must emphasize to their drivers the importance of a thorough pre and post trip inspection. They must also stress the need to report when the vehicle is deficient in any manner. Avoiding roadside inspections avoids violations.
  • Captive Insurance Programs – Captive insurance means that premiums are impacted directly by a particular company’s loss history, not the industry. If a company has great drivers and low losses, captive insurance companies reward them for controlling accidents and claims through dividends.
Tod Bergen, CPCU, CIC, CRM

Author Tod Bergen, CPCU, CIC, CRM

Business Insurance Executive
tbergen@ekmcconkey.com
717-505-3165

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