Performance-Based Insurance: Loss Control and Commercial Auto

January 11, 2022

A couple of years ago, a Texas company providing services to support the drilling and production of oil and gas wells had a problem. Its driver-safety record had become so troublesome that the state Department of Transportation had slapped it with the DOT’s poorest rating, and the company’s Commercial Auto claim history was so bad that it was on the verge of becoming uninsurable.

When it comes to securing cost-effective Commercial Auto Insurance coverage, the problem facing too many business leaders is that they’re either overwhelmed by the day-to-day challenges of managing operations amid a pandemic and worker shortage or they’re under-informed about the solutions available to them. Wisely, the Texas company recognized the importance of risk management and loss prevention, and embraced its insurance agent’s recommended program of policy overhaul, safety training and documentation. Within 14 months, it went from being among the worst of the worst in the state DOT ratings to the best of the best, a turnaround that resulted in savings of $600,000 on Commercial Auto Insurance costs.

Factors determining insurance availability and costs vary according to factors including organization size, industry, location and claim history, but the lesson of the Texas company should be clear: Working with a knowledgeable, experienced insurance professional and adopting a rigorous risk management program are cost-effective practices.

Market Conditions and Outlook for 2022

By now, most organizations are more than familiar with the challenges posed by Commercial Auto and other forms of property and casualty (P&C) insurance. A market that had begun hardening before the onset of COVID-19 due largely to a surge in catastrophic events and exorbitant court decisions — including “nuclear” verdicts in cases involving commercial auto liability – hardened further amid the pandemic.

As explained in Alera Group’s Property and Casualty 2022 Market Outlook whitepaper, “Social inflation is driving up liability and commercial auto rates. Social inflation refers to the rising costs of insurance claims resulting from increasing litigation, broader definitions of liability, more plaintiff-friendly legal decisions and larger compensatory jury awards. Social inflation isn’t new, but data from the Insurance Information Institute indicates that it’s trending in an alarming direction:

  • “In four years, U.S. plaintiff awards have almost doubled in total dollar amounts, with a few exceeding $1 billion.

  • “There’s been a staggering rise in class action suits. A 2020 survey by the national law firm Carlton Fields shows that class action defense now accounts for 11.6% of U.S. litigation spending.

  • “Litigation funding is growing in the U.S. Third-party funders assume all or part of litigation costs for an agreed-upon percentage of any settlement or judgment. This can allow plaintiffs to employ experts, investigators and witnesses to develop effective strategies — options once only available to corporate defendants.”

The pandemic initially had a positive effect on the Commercial Auto market, as COVID-19 restrictions greatly reduced driving, commercial auto accidents and fatalities, but claim severity continued to worsen, as did another ongoing problem: labor shortages. With COVID concerns leading many in an aging workforce to hasten retirement and pushing younger drivers into other lines of work.  

The federal government is taking steps to help, with the White House announcing in December 2021 a program to expand paid driver internships, train military veterans and require “that all new commercial driver license (CDL) applicants be trained in a registered facility using a standard curriculum,” as the Washington Post reported. Such training is certain to be viewed favorably by insurance underwriters, but there’s no substitute for experience, and underwriters recognize that, as well.

Combined, these factors inspired this Alera Group Market Outlook forecast for 2022:

  • Underwriters will continue to sort this sector’s risks into two groups: “the best” and “all other.” While the market will continue to offer sufficient capacity, coverage, terms and pricing will depend on the quality of the risk.

  • Pricing will remain near double-digits—ranging from 5% to 20% but averaging about 9.5%, depending on the risk. Risks with skilled drivers, good maintenance programs, a formal, functioning risk management program and favorable loss histories will be afforded the most favorable terms and capacity. Risks with a history of losses, inattention to maintenance, insufficient loss control and poor risk management will be subject to greater scrutiny and less favorable terms.

  • Primary and umbrella limits for most small to medium-sized fleets will generally see capacity in the standard markets limited to $5 million. Excess limits can be secured in the non-standard market. Even “best in class” risks will often find it necessary to stack layers using multiple insurers to achieve the needed limits.

  • Underwriters will closely scrutinize each risk. New account submissions and most renewal accounts will likely be required to provide fully completed applications as well as supplemental questionnaires and driver records. Extra time will be required to accommodate company underwriters’ requests for both primary and excess coverages.

  • Stringent underwriting and pricing increases will continue to result from several factors. Contributing factors are a shortage of skilled drivers, poor highway conditions, the high cost of vehicle repairs and increased frequency and severity of losses.

What You Can Do

If you want to be judged differently, do things differently. If you want your Commercial Auto Insurance to be priced differently, work with your agent or broker to demonstrate that you’re different from your peers. In the current market, the way to do that is to implement a rigorous loss-control program, document your results and make a convincing case to your underwriter during the renewal process. While your competitors are being non-renewed due to an elevated DOT score, you’ll be able to maintain — and possibly improve — your current program.

To learn more about P&C market conditions and how to navigate them, read Alera Group’s Property and Casualty 2022 Market Outlook. To obtain the whitepaper, click on the link below.


About the Author

Brenton Kidd, CIC

Sales Manager/Agent

West Texas Insurance Exchange, An Alera Group Company

Brenton Kidd specializes in commercial insurance solutions, with a focus on businesses in and related to the oil and gas industry. Licensed to sell property and casualty insurance, he achieved Certified Insurance Counselor (CIC) designation through the National Alliance for Insurance Education and Research.

Contact Information: