Sunday, November 29, 2009

TIME FOR A MORE COST EFFECTIVE TRUCK INSURANCE MODEL

A trucker friend of mine once remarked that prior to deregulation you could make money in the trucking business despite yourself. Back in those “good ole days” government protected routes bequeathed an industry with LTL powerhouses, high paying Teamster jobs, and healthy profit margins. Today the trucking industry operates largely under a free wheeling TL and increasingly intermodal template with nonunion drivers and owner operators. Profit margins if they exist at all generally come down to pennies on the dollar. It goes without saying that only the most productive trucking companies have survived this transformation - painful, but a net plus for consumers.

Now contrast the competitive untidiness in trucking with the inert if not orderly nature of the truck insurance business. Life pretty much continues as it always has: same structure, same production model, same economics. Where convention breeds productivity, it certainly makes sense, but with truck insurance, convention has only meant unnecessarily high premiums.

Broadly speaking the structure of the truck insurance business breaks down into two segments: agents (including brokers) and insurance companies. Agents solicit and service business, while insurance companies underwrite, issue policies and pay claims. Agents make money on commissions. Insurance companies make money on favorable underwriting results and investment income.

Contrary to the perception of truckers, operating profit margins for insurers tend to mirror those of most trucking companies. Where truckers have their operating ratio, insurers have their combined ratio. Both measures quantify operating profit as a percentage of revenue. In good years, both industries typically generate ratios between 90 and 100%, yielding operating profit margins of up to 10%.

By way of comparison, margins for the most successful truck insurance agents run as high as 20 to 40% in good times and bad: a nice return considering agents bare no underwriting risk.

But let’s not judge these economics too hastily. The truck agent has done an exceedingly splendid job of establishing himself as the ultimate purveyor of value for both trucking company and insurance company alike. Here’s the perception. From the insurance company’s viewpoint, the truck insurance agent provides an invaluable service in terms of producing business and servicing clients. Therefore, the insurance company feels quite justified in paying healthy commissions particularly on business that generates a combined ratio of less than 100%. Correspondingly from the trucking company’s angle the agent provides an invaluable service in terms of his knowledge of the insurance market and his ability to match a trucking company’s coverage needs with the most capable and affordable insurer. Why begrudge the man a living? Besides he always picks up the tab for lunch and golf.

However, with advances in technology, more and more only the insurance company matters. The Internet increasingly has relegated the agent to the status of tag along. He no longer serves as the conduit for exchange between trucker and insurer. Rather in an age of instant information, he increasingly gets in the way. Need a quote? Google it. Looking for accident statistics? Log on to Safersys. Curious about some insurance company’s rating? Pull up A.M. Best. Interested in the type of freight a company hauls and the location of its terminals? Check out their website. Concerned about your loss ratio? E-mail the underwriter. Fender bender? Snap a picture from your cell then fire off a text message to the claims department. It's so much more efficient than leaving a voice mail message with an agent.

Just as you no longer need a travel agent to book travel, you no longer need an insurance agent to buy insurance. Strangely, both trucker and truck insurer seem unwilling to acknowledge this fact. To a degree, custom plays a role. Historically, most contracts between agent and insurer specify that the agent owns the customer list. Thus, insurance companies generally remain hesitant to communicate directly with their insured’s. Also truckers are in the habit of dealing with agents not underwriters.

A simple step toward efficiency would have all truckers insisting that neither agent nor insurer can claim ownership of their account. This change in practice would set the stage for direct negotiations between trucker and truck insurer, and by extension pave the way for lower premiums.

Amusingly when it comes to extracting value, grandma who flies once a year on Southwest Airlines drives a tougher bargain than most trucking CEO’s. Grandma told the airlines to unload their travel agents a long time ago. Similarly shippers told truckers to cut the fat back in 1980. Will truckers ever ask the same from their insurers? Don’t look for your friendly truck insurance agent to broach the subject. But on the plus side there’s always lunch and golf.

Thanks for checking in...

Ed, III