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From inflated fuel costs to rising insurance premiums, today’s economic challenges present a fertile environment for developing creative strategies that more effectively address conventional problems. In this scenario, independent trucking firms having good loss performance and possessing an appetite to bear some risk have successfully employed captive insurance to self-insure their physical damage coverage.
Forming a captive insurance company has helped haulers improve their profit picture while addressing the challenges of rising costs of insurance or of certain coverages being unavailable through standard markets. To determine whether a captive insurance model might fit your risk management strategy, let’s start by reviewing what a captive insurance company is and why truckers, in particular, are finding it attractive.
A single parent captive is an insurance company established primarily to insure the risks of an operating company with which it shares common ownership. For our purposes, it would be a separate insurance company set up by the trucking company’s owners to insure their own physical damage risks.
Such a company is funded through the capital it receives from its owners and by the premium paid in from the company’s insured(s). Importantly, because the risk pool is restricted to the company’s own insureds, such premium is directly related to the company’s own loss performance.
A second benefit, and one that should not be discounted in one’s risk management assessment, is that the captive structure allows the company’s owners to participate in the underwriting profit. This profit would otherwise accrue to the benefit of the carrier in a conventional market scenario.
Before considering whether a captive might be a viable solution, we first need to take a closer look at the problems truckers have been experiencing in the traditional physical damage insurance market. Chief among these the phenomenon of rising rates, even with good performance.
While part of this rise is due to an increase in claims cost, one also must consider the history of physical damage. For a long time, this category of costs was undervalued, running at a loss for independent truckers. So, an increase in claims cost reflects an expected and necessary rate adjustment for the insurance industry.
But obviously, that’s a partial answer. More recently, the cost of repairing a tractor has soared, seemingly along with everything else. This is caused both by a shortage of vehicles and rapidly rising costs in the market for used trucks. Additionally, repair costs are affected by those technologies that have been introduced into tractors in recent years, which further exacerbate the increasing cost of servicing these units. These two factors, in combination, help to explain why a trucking company finds itself paying higher premiums to cover the increasing cost of physical damage losses.
But even that’s not a complete picture. There are also coverages that are becoming difficult to find in the conventional market at any price. Truckers are experiencing limits on occurrence as well as an inability to find coverage for rental reimbursement if a tractor is down for an extended period. In addition, towing coverage can be limited or non-existent. Coverages will also be worded to pay the lesser of stated value or actual cash value, which can be a significant difference when the actual cost of a new tractor is much more expensive than stated value.
That’s a brief summary of several factors that can make physical damage problematic for trucking companies to insure in the commercial market. Provided the owners have an appetite for risk, self-insuring physical damage through a captive can be an effective risk management strategy.
Because the owners are insuring their own risks, a captive can offer bespoke coverages that are either too expensive or unavailable in the conventional insurance market. Examples include rental reimbursement or physical damage coverage for a tractor rented by one of the insureds. Another may be catastrophic coverage which can occur when a tornado or tropical storm damages tractors sitting on an open lot.
Self-insuring has other benefits. Captives renew on an annual basis and consider only the captive’s results and exposures, rather than those of the industry at large. This results in a smoother underwriting cycle and better ability to predict the cost of funding expected losses.
Premiums based on one’s own data and insuring only one’s own risks, captives can also reduce the total cost of risk by providing opportunities to earn underwriting profit based on performance. Loss performance has a direct effect on risk management; the better the performance, the more underwriting profit builds up. Not to mention the fact that captive owners receive evidence of the benefits of their risk management practices in action as profit builds. What had been a sunk cost in the conventional market now becomes a profit center, with owners participating in the profit.
Good loss performance should be rewarded. For truckers willing to combine such performance with a healthy appetite for risk, self-insuring physical damage through a captive insurance company can be a game changer. One that makes it possible for truckers to profit personally from performance.
You can’t stop rates and repair costs from rising. But with a captive, you can build a risk management plan that helps to build profit from the rise. For a confidential discussion of self-insuring physical damage, Atlas Captive Insurance, a Division of Risk Strategies, is here to help.
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