ESTIMATING CARGO INSURANCE COSTS IMPACTED BY RE-ENGINEERING
By Lisa R. Paul, CPCU
Paul Hanson Partners Specialty Insurance Solutions
IMTMC has met several times recently with Industry work groups and the following seems to be a consensus regarding the changes in valuation and carrier liability:
“All shipments will move at full replacement valuation at $3.50 times the net weight of the shipment up to $63,000 per shipment. Claims must be settled direct with the carrier and must be filed within nine months or the member’s coverage will be reduced to $1.25 depreciated value.”
To illustrate the effects of this increased valuation let’s use the following real case study, an illustration:
ABC Moving is an intrastate and interstate military hauler with $4,500,000 in annual hauling revenue. Currently ABC insures their carrier liability (cargo insurance) with a limit of $100,000 any one truck and a $1,000 deductible. Current cost of the cargo insurance is $10,000. Last year the company had 235 claims and the average value of settled claims was $498. and no claims over $1,000 were submitted to the insurer. The total amount of claim payments under the deductible and paid directly by ABC Moving was $117,000 at $1.25 valuation. The total cost of claims under the deductible cost of insurance is 2.8% of annual revenue.
What effect will re-engineering have on this company’s line item expense of claims and cargo insurance?
First the increased valuation immediately makes the insurance coverage of $100,000 per truck inadequate. It could be very possible that there could be three shipments valued at $63,000 on one truck, therefore the insurance limit should be raised from $100,000 to $200,000. All things being equal this would raise the insurance premium from $10,000 to approximately $16,000. However, unfortunately not all else is equal.
In addition to increased insurance costs for higher per truck insurance limits the average settled claim for ABC Moving is now $1,394.40 up from the previous average of $498. Now the total claims paid by ABC Moving under their insurance deductible is $327,684 up from $117,000, Assuming ABC can talk their insurer into continuing to offer the $1,000 deductible the claims that the insurer will pay will be $92,599 (remember claims excess of the $1,000 deductible will be submitted to the insurer). In addition to the premium increase the insurer just charged for increasing the limit of $100,000 to $200,000 per truck, now premiums will have to increase in subsequent years to cover the $92,599 losses paid by the insurer. New insurance cost estimate once insurer goes through one year of increased valuation paying this higher amount; $142,000 annual premiums for $200,000 per truck with $1,000 deductible for ABC Moving (this is up from $10,000 annual premium).
Assuming ABC elects to not transfer the increased risk to their insurer and continues coverage with now a $1,500–$2,000 deductible in lieu of the $1,000 deductible total insurance and claims cost would be $343,684 ($327,684 for claim payments + $16,000 insurance cost) and now claims and insurance costs represent a line item expense of 7.6% of revenue.
In order for ABC Moving to achieve the same “pre re-engineering” 2.8% line item expense of claims and insurance, revenue will have to increase from $4,500,000 to $12,274,000!!
Some thoughts for the industry trade groups to reduce the cost to the moving industry while providing legitimate increased valuation for members would be to consider the following:
At a $3.50 valuation members would be able to essentially replace depreciated household goods at replace cost and there is a tremendous incentive to replace the old television or sofa with a new item. The concept that a person be in a betterment position post accident is contrary to all insurance logic and common sense. To provide for increased valuation while reducing this “post accident betterment incentive” consider the member being responsible for a $100 or $200 deductible per loss. Average payments per loss would be reduced and incentive to file claims for betterment post accident would be more controlled, while still providing increased valuation protection for the member.
Also, insurers must charge military haulers (compared to commercial haulers) more premium because of the unlimited amount of time a member has to file a claim. Although there is a consensus to reduce valuation of $1.25 depreciated if a claim is not filed within 9 months this is the valuation the insurers have currently beyond nine months! Insurer’s concerns are that they can underwrite current financial statements of movers annually and with reasonable prediction conclude their insured is not in danger of filing bankruptcy. Beyond one or two year predictions, insurers are at a loss to make these judgments. Therefore, those haulers that go bankrupt and no longer pay their claims under their insured deductible become the responsibility of the insurer for the full value of the claim. Clearly the insurer for ABC Moving would be in an extreme adverse profit position if they collected $16,000 of premium anticipating paying claims excess of a $1,500 deductible and then later come to realize that they would become responsible for the $327,684 that is due members below the insured deductible.
Insurers would reduce the cost of insurance for military haulers if claims were limited to a nine month filing time that was the same as for commercial standards. Insurers will argue that in the new re-engineering environment if rates don’t increase to cover increased costs they can reasonably expect more bankruptcies and will have to increase base rates for the continued long unlimited tail of claims of military members beyond the nine month commercial standard. Clearly if claims and insurance now compose 7.6% in lieu of 2.8% of revenue, many carriers operating at a current 95% net operating ratio would lose money in the post re-engineering environment.
While developing rates for pilots and test we encourage you to use this illustration to estimate your future costs. We also want to point out that this illustration reviews carrier liability and does not consider the corresponding cost on goods in storage and warehouse legal liability claims and insurance costs.
For more information on methods to estimate your insurance and claims cost Lisa Paul can be reached at Paul Hanson Partners Insurance Specialty Solutions at (800) 852-1968. Paul Hanson Partners is an insurance consulting and risk management consulting firm specializing in the moving and storage and forward industries.
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