Like all business, insurance is cyclical. Buyers need to understand that the marketplace is going to be much different moving forward than it was at their last renewal.
By Nathan Brainard
The time has come for insurance buyers to put on their helmets and buckle their chin straps as the insurance market has hardened and policy buyers are feeling the change in terms of premiums, market capacity and available options.
What is a “Hard” Insurance Market?
In very simple terms, a hard insurance market occurs when premiums go up and capacity goes down. It is important to realize that the same way your company buys insurance, so too do the insurance carriers. Insurance carriers buy their coverage from the reinsurance market. As you might imagine, there are a finite number of reinsurance markets available for the insurance carriers to work with and these agreements are renewed on an annual basis. Generally, reinsurers are impacted by catastrophic events such as the wildfires in California, flooding in the Central and Southeastern states, hurricanes, etc. As those losses are paid and the overall cost of those claims are calculated, the reinsurers determine how much capacity they are willing to put forward for the coming year and how much they are going to charge for the offered capacity. If they were hammered by losses, they are going to try and make up the deficit by charging a higher rate and offering less coverage to reduce their overall exposure. This causes the market to tighten as the insurance carriers your company works with are now paying a higher premium for their protection. They have less capacity to offer, which drives up the premiums they charge and forces them to be much more selective on where they want to offer terms. This is where the insurance industry is currently positioned.
Auto Insurance
It is no secret to anyone who has been in business for the past 10 years that the market has changed dramatically. During the financial crunch, premiums were relatively stable as everyone was just tying to make it through. When the economy did start chugging again, we began to see slight increases in specific areas—auto insurance being the most notable—and those increases have continued on pretty much uninterrupted.With a more vibrant economy there are more cars on the road with newer and more expensive technology imbedded in them such as sensors, cameras, etc. Further, we saw an increase in the number of Uninsured or Underinsured drivers as well as incidents related to distracted driving. When an Underinsured or Uninsured driver is in an accident, they may not have the coverage limits necessary to make another party whole should they be at fault for an accident. When this happens, the injured party may turn to their own insurance carrier and seek compensation to help get back to normal (presuming they have the necessary endorsements). This all impacts the insurance carrier and can trickle up to their reinsurance partner.
Waste and recycling companies have some additional issues to deal with when it comes to auto insurance. Their trucks are large and generally fall into the Heavy (20,001 pounds to 45,000 pounds) or Extra Heavy (Over 45,000 pounds) categories. When a refuse vehicle hits something, it is generally not on the losing side in terms of damage. In the litigious environment we live in today this makes them easy targets for plaintiff attorneys. Many of the lawsuits filed are looking for a quick settlement. Some people have legitimate claims and are truly injured while others are simply seeking a quick payout. These claims drive the cost of insurance for the industry.
Simply put, carriers have a very hard time making money writing auto insurance for the industry. Items such as a poor DOT/FMCSA rating or a history of serious accidents work against the carrier and their assigned defense counsel as they use this information to show a jury there was indifference to safety, maintenance and the overall well being of the general public. They have also developed a new tactic called the Reptilian Theory that has generated some extremely favorable judgements for their plaintiff client.
The short version of Reptile Theory goes back to the 1960s when an American neuroscientist created the Triune Brain model. It states the human brain has three regions and are organized into a hierarchy. The regions are Reptile (Primal), Paleomammalian (Emotional) and Neomammalian (Rational). The brain is arguably the body’s most complex organ and when prompted, the Reptile Brain can lead to very serious consequences for defense counselors. It is this portion of the brain that is responsible for survival instincts and when survival is perceived to be in jeopardy, the Reptilian Brain takes charge and can and will overpower logic and reason. The Plaintiff’s counsel will often try to invoke the Reptilian Brain by attempting to discredit the driver as a risk to the jury and their families as well as the general public. They then try to persuade the jury that they are the only people with the ability to punish the driver and company before another person is impacted. They use substantial monetary judgements as the penalty. National Interstate Insurance Company had an excellent article about this very situation in their publication Extra Mile, Issue 12. That article was referenced for some of this content and we encourage you to give the article a full read via an Internet search. This tactic is not going to go away anytime soon.
Because of situations like these we have seen an exodus of interested insurance carriers specific to waste and recycling auto coverage. Those who have stayed continue to drive rates and are extremely selective of who they take on as a policy holder. For those who are dealing with severe claims history, there is a secondary market (sometimes referred to as the distressed auto market) who will offer terms, but their premiums are often 50 to 100 percent (or more) higher than the non-distressed market. In speaking with many different carriers both in and outside of the waste and recycling industry there does not appear to be any relief on the horizon for auto premiums.
Property Insurance
Much like auto insurance, property insurance is becoming extremely difficult for the waste and recycling industry, especially if you own or operate a facility such as a material recovery facility, landfill or transfer station. There have been a substantial number of losses at these facilities over the last year or two. Most of the claims are from fires, but there were also some related to flooding and hurricanes.
While most operators believe the increase in fires is related to lithium ion batteries, the data from the insurance carriers points to equipment issues, specifically shears and grinders. Generally speaking, the premiums collected for a facility on property insurance are relatively low compared to the limits of coverage being offered. For example, you might be paying $40,000 annually to cover your building, contents, fixed equipment and processed inventory. Should your facility burn to the ground, the value of the loss is going to be well over 1 million dollars. With 300+ facility fires in 2018, it is easy to see how carriers were upside down on offering property coverage to the industry. The result is a massive withdrawal from the sector by insurance carriers. Last year around this same time there were in excess of 20 viable players to offer coverage to the industry. Now, we are down to a small handful of 10 or less. Even Lloyd’s of London has pulled way back and many syndicates have withdrawn all together from offering terms in the U.S. In speaking with a few of their underwriters, they are still offering coverage in other countries and have indicated the housekeeping measures we use in the U.S. are less robust than our counterparts in other countries.
As discussed earlier, less competition and higher reinsurance costs are causing property premiums to rise. Couple this with dwindling capacity and we are entering a hard market for property insurance.
Umbrella Insurance
An umbrella policy is purchased to provide additional limits of coverage over underlying polices such as Auto, General Liability and Worker’s Compensation. Limits of coverage on this policy line generally start at 1 million and go up from there. Typically, the larger the exposure, the higher the limit of coverage purchased.
The Umbrella (or Excess Liability) market has gotten very hard very quickly. We are seeing premiums increase between 50 and 100 percent over last year’s pricing. Here again, reinsurance and capacity are the drivers. If you have a large auto fleet you can expect a sizeable increase in your premiums. Further, if you are purchasing a high limit of insurance you may have to layer it at the next renewal. Layering is the act of involving multiple carriers to achieve the desired coverage amount. In the past, a single carrier may have offered you an Umbrella limit of $10 million dollars, but what we are seeing now is this same carrier may only be willing or able to offer you $5 million. Should you desire to have the $10 million you are accustomed to carrying, it will require the addition of another carrier or possibly two to secure the remaining limits.
By now you are probably thinking, “Is there any good news?” The short answer is—sort of. While Auto, Property and Umbrella premiums are going up at a rapid rate, we are still seeing stability for both General Liability and Worker’s Compensation coverage.
For a majority of the waste and recycling industry, the General Liability premium is very low as the real exposure is captured in your auto policy. Those operating facilities such as material recovery facilities, transfer stations or landfills will have a higher General Liability premium than a company who is strictly collecting material and disposing of it. This is because they have a fixed site where operations are being commenced whereas their counterpart without the facility really only has the auto exposure.
As for Worker’s Compensation, we are not anticipating seeing any real rate hikes until 2021 or possibly 2022. Most states have seen rate decreases the past few years due to legislation aimed at the legal fees being charged by attorneys. Some states have been successful in keeping the legislation on the books while others have had to take a few steps back. The real impact of those changes will be better known towards the end of 2020 based on how entities such as NCCI conduct their calculations.
What Can We Do?
Unfortunately, there is no magic bullet to combat the current turmoil in the insurance market. As with all things, the best defense is a good offense. Focus in on vehicle maintenance as the cab reports are the first place an underwriter is going to look to gauge your company. While loss runs show your past history, they view this as forward-looking optics to see where your future claims might come from. If your company is well above the industry average for Out of Service (OOS) violations, as an example, the number of carriers you will have interested in participating on your renewal will be reduced. If your OOS violations are really bad, you are almost guaranteed to end up in the secondary/distress auto market.
Consider taking a deductible or Self-Insured Retention. This shows the carrier you are willing to bet on yourself as you are putting more skin in the game. It is important to note, when we talk about taking on a deductible or Self-Insured Retention, we do not mean $2,500. In order for there to be any real impact you need to have something in the $25,000 or more range. This is certainly not for the faint of heart or for those who cannot support the financial implications. However, if you do have the financial capabilities, it can help keep possible premium increases in check.
Work with your agent to detail out improvements you have made internally in areas such as training, on boarding procedures, acceptable driver criteria etc. Your goal is to show the underwriting community that you are in the “best of the best” conversation as those companies will have the most options available to them.
There is no question that the turn in the insurance market is going to push some companies to close their doors as they simply cannot afford, or, in some cases, cannot obtain insurance coverage. It would not be surprising to see an increase in acquisitions of smaller haulers by the larger companies in the industry as a result either. Strange as it may sound, insurance premiums tend to be one of the top three or four expenses for a company behind payroll, vehicle maintenance and fuel.
Eventually the market will find a stable foot hold and more capacity will be available, which will result in a leveling off and potentially a reduction in premiums. Like all business, insurance is cyclical. However, until this starts to happen, buyers need to understand the marketplace is going to be much different moving forward than it was at their last renewal. | WA
Nathan Brainard, AAI, is Vice President of the Environmental Division at Insurance Office of America (IOA) (Longwood, FL) and is the endorsed insurance partner of the NWRA. Nathan has been with IOA for 15 years and specializes in Environmental Insurance with an emphasis on insurance for the Waste, Recycling, Remediation and Demolition industries. He can be reached at (407) 998-5287 or via e-mail at [email protected].
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