Top financial news headlines these days have analysts wondering if the U.S. economy is in recession, what will happen next with the stock market and, whether or not the Federal Reserve will raise interest rates. How does this evolving economic climate affect the insurance industry, particularly for small and midsize motorcoach company operators for whom both risk management and costs are primary concerns?
Although the country’s larger economic picture inevitably has an effect on financial products like insurance, Michelle Silvestro, assistant vice president and national marketing manager at National Interstate Insurance Co., attributes the hard and soft insurance market cycle to another factor.
“Right now we’re on a downswing and over the next year to year-and-a-half, we will be going back up on an upswing because the losses catch up,” she says. “Since the losses that happen today don’t get paid today, the premiums start going up to catch up with the loss experience.”
Characteristics of the current soft insurance market include lower premiums and a higher-than-usual number of players in the market, says Silvestro. “Right now we’re in a soft insurance market, where capacity is high and rates are low, and everybody knows it. Everybody calls and wants to know where their discount is.”
However, the more established insurance companies are still going to underwrite risks based on the merit of that risk, she points out. “If I get an account in and it has bad loss history or doesn’t have a favorable record, then I’m certainly not going to price that lower because the market is lower,” she says. “I’m going to be responsible and price that risk for what I think it needs based on their historical information.”
Navigating the process
In addition to having a history in the industry, operators should look for insurance companies that specialize in transportation and have experience in handling claims for motorcoach fleets, says Randy O’Neill, senior vice president at Lancer Insurance Co.
Insurers that specialize in writing policies and settling claims for motorcoach companies help operators maintain a reputation of safety and reliability in the region they serve, he explains. “They’re the types of claims — the most severe ones — that are going to be on the front page of the local paper,” says O’Neill. “It needs to be handled very professionally, or it could be the beginning of the end for the involved company.”
An insurer without experience in handling motorcoach claims might end up costing more, or not know the ins and outs of handling claims. “You’re buying a $5 million policy in most cases, so you need to know that you’re getting the value for your dollar by working with a company that understands your business,” says O’Neill.
Bus company owners should look for an A-rated insurance company that specializes in transportation, and that is a stable, long-term player in the market, says Silvestro. She points out that most of the companies that write motorcoach insurance policies work with insurance agents or brokers, who work as professional advisors in selecting an insurer.
Not only can agents help operators pick an insurer, they also help operators during the application process. “The better operators go the extra mile with driver training, equipment, scheduling, and other positive things that they need to communicate to their insurance companies,” says O’Neill. “All of those good things need to be communicated to their insurance broker, who in turn needs to send that all along with the application to the insurance company so it’s recognized in the underwriting process.”
New technologies being built into vehicles increasingly factor into the underwriting process, according to O’Neill. “We are very bullish on supporting these new technologies, whether they are DriveCam on-board cameras or fire-suppression systems, because that has a direct impact on insurance costs,” he explains. “As these new technologies are coming online and they’re building safer buses, that’s going to have a positive impact on claims and, ultimately, a positive impact on premiums for operators who equip their coaches with these modern devices.”
Other resources are also available for operators to find reputable insurers. For example, after registering online, users can search A.M. Best Company’s ratings and reports on the insurance industry. Associations serving the motorcoach industry can also provide key services for operators in search of an insurer. Not only are Lancer and National Interstate members of both UMA and ABA, but Silvestro serves as a board member for UMA and is its risk management committee chair.
Having been in the insurance business for about 24 years, 17 of which she has spent at National Interstate, Silvestro is often called upon to lend her expertise to association members looking for guidance. As chair of the risk management committee, she also has a direct impact on the programs and resources offered to UMA members in order to identify, address and manage risk in their individual businesses.
O’Neill recommends that operators get involved with their local state motorcoach associations. “Tapping into that resource generally will open the door to all the vendors they would need to be familiar with, including insurance,” he says.
Most insurance agents, or brokers, also belong to the bus associations, Silvestro points out. “The national organizations or even on a state level would be very helpful in leading them to the agents that write that kind of business that can help them to address their needs,” she says. According to Silvestro, operators don’t end up using the Internet as a research tool as often as in some other businesses — word-of-mouth and relationships built face-to-face within associations tend to take precedence.
According to a report covering 1969 through 2002 by insurance ratings agency A.M. Best, the rate of insurance companies experiencing financial “impairments” — or facing insolvency — reached a record high in 1991. The industry saw another spike in 2000 and 2002, but the report shows that impairments remain relatively rare. About one in every 200 insurance companies report impairments in more stable times and one in 50 during more difficult periods, the analysis shows.
Agencies at the state level regulate and monitor the insurance industry, conducting audits, licensing insurers in their respective states and compiling data and informational guides for consumers. “We have a bureau that handles servicing claims and those policies of any companies that do end up being liquidated,” says Lawrence Wertel, supervising examiner for the Automobile Unit Property Bureau at New York’s State Department of Insurance.
The state maintains security funds for general property and casualty insurance, so that if any company goes under, the claims will be paid off and all the policies would be cancelled immediately, Wertel explains. However, only insurance companies licensed in New York State are covered by these security funds. Private auto insurance must be obtained from an insurance company licensed in the state, but commercial policies can be obtained from non-admitted companies operating offshore. “In the event that they go under, there is no protection from the department, so we always recommend that you try to get a policy through a licensed company,” he says.
Although fewer companies are facing insolvency at present, insurers must continually take measures to protect their assets and prevent bankruptcy. “Every single account requires a $5 million limit, and most of us re-insure part of that,” Silvestro says. “I’ll write a policy for $5 million, and I’ll transfer a lot of that risk to another insurance company, so I am reinsuring myself, basically.”
The New York Department of Insurance also compiles an Annual Availability Survey of insurers who provide various types of insurance in the state, says Wertel. “They have to submit to us what types of business they write, whether they are active players or selective players, and provide some contact information,” he says. Operators can contact the department to request the survey information specific to charter and tour buses, and to receive the list of insurers that are in the market for this type of insurance and their contacts. “Many years ago, back in the mid-1980s, we had a liability crisis here in New York, and we got a lot of calls,” Wertel says. “That spurred on the initiative to come up with this availability survey.”
State insurance departments typically offer resources online for consumers. “New York has a very comprehensive Website, which includes various consumer guides, such as for automotive, homeowners and insurance for small businesses that may be helpful resources in shopping for such necessary insurance,” he says.
Insurance companies specializing in transportation often work to develop products that serve the needs of this segment of their clientele. For example, some contracts require that motorcoach operators have policies that go beyond the traditional $5 million limit, says Silvestro. To address this situation, National Interstate came out with an excess liability program for smaller operators who may not be able to afford the higher minimum premiums. “This program allows them to avoid the minimum premiums and still be able to buy that coverage from a respectable, A-rated carrier,” she explains. “Then [they] can get that contract because now they’ll have access to the coverage that’s required.”
National Interstate also offers captive programs, which today comprise almost half of the company’s business, Silvestro says. Each of the three programs is geared to motorcoach companies of different sizes. “We have one program that can accommodate operators that are paying $100,000 or more for their insurance,” she says. “The next tier up is for operators paying $150,000 or more, and then we have another program for people paying $250,000 or more.”
These captive programs form a group of preferred operators, or accounts that the insurance provider has deemed to be better than average and that take a hands-on approach in regard to loss control.
Captive programs have an element of risk-sharing, Silvestro says. For example, if an operator is assessed at a risk level of $150,000, they’re on the first $50,000 of any loss, she explains. The insurance company puts part of the client’s money aside to pay for any claims. As the policy year goes on, if the operator doesn’t end up using all the money to pay for their claims, they get that money back with interest.
“The most important part of the program is that they know what their costs are up front every year,” says Silvestro. “There’s a best-case scenario and a worst-case scenario. If they don’t have any loss and they don’t share any risk, they could get 40% of their premium back. If their losses are worse than expected, they could pay an additional 28%. They take that gamble based on how focused they are on their loss experience. It makes you focus on being a safer operator and managing your risk.”
Captive programs have been around 30 or 40 years, says Silvestro, but because her company specializes in transportation, the programs are specifically defined for that type of client and, she says, are the only homogenous captive programs on the market. “These three programs we have are specific to passenger transportation operators, so you don’t have any other kind of business in there,” she says.
Members of a program decide how it is going to be tailored, then meet twice a year to discuss any changes they want to make in their coverage and what makes sense for them as a group. “We start with a template, then they add things,” Silvestro says. “For example, we had one group that wanted to add an additional coverage that all of them were having a problem getting, so we tailored that additional coverage for the program.”
Silvestro says the captive programs have been growing in popularity each year in the 12 years since National Interstate introduced them. The top-tier program for larger operators was the first captive the company debuted. “Once we got that up and running, we realized that the middle-sized account market really wasn’t being served. So we opened up a program for them about seven years ago.” The company introduced a similar program for smaller operators, the third tier option, about two years ago, says Silvestro. “If they focus on controlling their losses, then they can see dividends come back to them for doing that,” she says.