Avoid Non-Renewal Notice from Your Insurance Co.
I recently had a phone call from a friend of mine who owns a 25 power unit trucking company. He called me looking for insight on how insurance companies work. His issue was that his current insurance provider has declined to offer him a renewal quote! Yes, Insurance non-renewal! This of course put him under a great deal of stress as it is not easy finding new insurance.
So what happened? Why was this trucking company not being offered insurance renewal? These questions led me to ask my friend for some private and confidential information on his company. Unfortunately, he was unable to give me the information I required which is alarming. Here are the questions I was asking:
My first question was “what have your losses been like over the past three years”? He answered this question in vague terms but added that they were not good. I then asked him “how many losses are you having each year?” and again, he didn’t know the answer!
Dealing with insurance, it is imperative that each trucking company owner knows this information and understands the implications of the answers to these questions. And yet I find most small trucking company owners are not tracking how many collisions they have and how much each of these collisions cost. In insurance terms, this is called frequency and severity. Both of these items need to be tracked on a continual basis. For a fleet of about 25 tractors, I would suggest these numbers be analyzed quarterly. The company’s insurance broker should be able to help each trucking company owner with this task.
In order to avoid Insurance non-renewal, you also need to ask questions to your insurance company such as, how many years does the underwriter use to calculate “severity” and what is the definition of “frequency”? What’s involved and how do they calculate them?
Once you understand the answers to the above questions, then you need to do the calculations. The severity calculation is very easy. In insurance terms severity simply means how much money the insurance company is paying out in claims on your behalf. This calculation needs to be done for the current term, for a three year term and if your insurance company uses five years, also do a five-year term calculation. (Not all insurance companies go back five years.)
The severity calculation is your insurance premiums divided by the total amount of claims. In other words how much money did you pay to the insurance company divided by how much money they paid out on your behalf? (Include in this calculation all the reserves for the term. In the insurance world reserves for claims are similar to money spent.) In order to perform this calculation you will need to ask your insurance broker for your company’s loss history. The loss history needs to go back as far as the amount of time your insurance provider uses to calculate severity. So this calculation should be done and broken up into three steps. First, what is the loss ratio for your current term? What is the loss ratio for a three-year term? Finally what is the loss ratio over the last five years of history? Now you need to analyze this and the first question I would ask is, what is the trend? Are the ratios trending upward or trending down? If they are trending up, it is likely that your insurance rates are going to trend up.
In my friend’s case as it turned out, he had a loss ratio of over 100% in each of the last three years. Insurance companies need loss ratios of about 65%. Most insurers have a 30% overhead and so they budget for a 5% underwriting profit. In my friend’s case you can see that the insurance company was losing a great deal of money over each of the last three years that they provided coverage. As with all businesses, the insurance company wishes to make a profit. This is not a bad word. Each and every company should wake up in the morning wanting and expecting to make a profit. My friend’s insurance company had decided that after the history of losses they would be better off without my friend’s company’s business.
The point to the story I am trying to make is that all trucking companies need to be measuring their performance with their insurance company. Perhaps if my friend was paying more attention to these key performance indicators, he wouldn’t be struggling to find insurance coverage today. At this point he is still operating and he still has a few weeks left to find coverage. I hope the best for him.
For more information on these calculations, I invite you to get in touch with me.