Strong Underwriting Needed To Weather Truck Market Storms

By contrast, states in a third fast-growth group–Oregon, Utah, Michigan, Virginia and North Carolina–were as a group appreciably below the national average loss ratio.

Given the trucking industrys volatility, it may be tempting to view these disturbances in the underwriting results as simply unpredictable, albeit devastating, events not unlike weather-induced natural disasters. After all, who can be expected to correctly predict when and where a squall line of thunderstorms will hit?

In our earlier article, however, we argued that the state-to-state volatility in commercial trucking actually is predictable–and that it can be predicted sufficiently in advance to make those all-critical underwriting adjustments that can enable a carrier to successfully motor through a patch of severe weather.

In the current installment, weve promised to turn up the power of MarketStances "Doppler Radar" to peer through commercial autos storm clouds to assess why some states underwriting results have responded so negatively to commercial truckings rapid growth, while other states have been remarkably little fazed by it.

Chart 2 shows just how volatile the commercial trucking climate was during the 1990s.

One group of "heavy weather" states–Nebraska, Arkansas, Mississippi, Oklahoma and West Virginia–experienced extremely rapid growth in the first half of the decade, averaging almost 5 percent employment growth per year. However, expansion in these states commercial trucking plummeted in the second half of the decade to just 0.5 percent per year.

Another group of states with poor underwriting experience–Ohio, Nevada, Louisiana, New York and Missouri–averaged almost 5.0 percent annual growth in the second half of the 90s, but had fairly minimal–that is, less than 1.5 percent annual rate–growth in the first half.

In contrast, yet another group of states–Oregon, Utah, Michigan, Virginia and North Carolina–also had very strong commercial trucking growth in the second half of the decade, but have continued to record favorable underwriting experience.

And by itself, the state of California experienced commercial trucking growth over 6 percent in the second half of the decade, but the 2001 pure loss ratio of 66.4 was among the best in the nation.

At this point, the astute climatologist might be tempted to conclude that rapid commercial trucking growth has had no more impact on commercial auto loss experience than its had upon, well, the weather.

Not so fast.

Just as in predicting where the next hurricane will strike, its important to recognize that rapid trucking growth may indeed be an important catalyst, but that a number of other factors must be in alignment before such rapid growth inexporably leads to storm-tossed loss ratios.

Among the most important of these facilitating factors are commercial truck drivers employee characteristics and work patterns.

As shown in Chart 3, job turnover and overtime hours for all commercial truckers in the United States have fluctuated markedly with the past decades business cycle. Moreover, it doesnt take a big leap of faith in weather forecasting to see why a storm front of frequent job changes, inexperienced drivers and overtime hours can stir up the frequency of commercial vehicle accidents, causing a storm surge in commercial auto loss ratios.

Just as with the weather, its the state-level fluctuations in conditionsbut in this instance, fluctuations in truckers working conditionsthat directly contribute to state-specific loss experience.

In the high loss ratio states of Nebraska, Arkansas, Mississippi, Oklahoma and West Virginia, for example, the percent of truck drivers working 50-plus hours per week rose sharply over the 1992-99 period (Chart 4).

This occurred, in part, because these states commercial trucking employers decided to boost deliveries through increased overtime rather than adding more drivers. Indeed, the percentage of truckers working extensive overtime hours in 2000-01–at 41 percent–remained well above the national average of 34 percent.

In another high loss ratio group of states–the one consisting of Ohio, Nevada, Louisiana, New York and Missouriin contrast, the incidence of extensive overtime hours declined appreciably during the second half of the 1990s. In these states, commercial trucking companies expanded employment rapidly rather than increasing the hours drivers were asked to work.

In yet a third group of states–this one with better than average recent loss experience–overtime hours followed the national average, albeit with somewhat greater volatility in the second half of the decade.

So far, our Doppler radar is showing some interesting instances of increased trucking activity leading to accident-inducing changes in employee characteristics and working conditions, yet the weather pattern on the radar screen remains a far cry from a clear-cut storm front.

To complete this weather story, we must re-focus our radar to look at the structure of commercial trucking in more detail, paying particular attention to the share of commercial trucking accounted for by long-haul trucking.

As shown in Chart 5, long-haul trucking comprises an exceptionally large part of total commercial trucking in our first group of high loss ratio states-Nebraska, Arkansas, Mississippi, Oklahoma and West Virginia. Indeed, long-hauls 70 percent share in these states is slightly more than half again the national average of 46 percent share. Moreover, commercial trucking accounts for a very high 7.7 percent of total commercial vehicles in these states, more than 35 percent above commercial truckings share nationally.

In contrast, long-haul trucking accounts for only a slightly below average, 39 percent, share of commercial trucking in Ohio, Nevada, Louisiana, New York and Missouri–our second group of high loss ratio states. This moderate share notwithstanding, this group of states is characterized by a much heavier than typical concentration of its commercial trucking in the owner-operator and small firm size categories–an important indicator of above-average loss potential.

Interestingly, the states in the third group with strong commercial trucking growth–Oregon, Utah, Michigan, Virginia, and North Carolina–have very average scores on the long-haul share and commercial trucking share of all commercial vehicles, yet have maintained below-average loss experience. This superior underwriting experience is in part attributable to the importance of very large firms in these states commercial trucking industries. Put differently, all 5 states have well below average incidence of owner-operators and small commercial trucking firms.

Although its received little mention, California is another interesting fast-growth state–one that by itself accounts for about 11 percent of the commercial vehicles in the United States.

As shown above, long-haul trucking–and indeed, commercial trucking in general–account for only modest shares of this states commercial auto exposures. In addition, the state registers a very low percentage of its commercial truck drivers working more than 50 hours per week.

It does, however, have a high proportion of youthful drivers–those less than 30 years old–in commercial trucking as well as an above-average proportion of drivers without high school diplomas. Those are two driver characteristics which can signal above-average loss potential.

Long-haul truckings share, excessive overtime, employee turnover, incidence of large fleet operators–these are just some of the factors shaping commercial auto loss experience across the 50 states. This onslaught of factors is more than enough to make the weather forecasters head spin when trying to forecast the next storm front.

Moreover, the poor actuary has it even tougher since so few of the above-mentioned loss factors are incorporated in commercial autos conventional rating methodology.

As a result of this limited rating structure, much of the responsibility for turning around commercial auto underwriting results in these problem states falls to the underwriting side of the shop. While even a large, data-savvy carrier may not be able to price adequately for certain risks, it can underwrite to avoid accounts with high risk factors such as excessive overtime.

As with any line of coverage, it pays to have a strong underwriting umbrella in place before the weather turns nasty.

One piece of advice: Make sure your umbrella is always pointed into the next storm front, not into the last one.

Frederick Yohn is the developer of "MarketStance," a market analysis tool for U.S. commercial property-casualty insurers and a registered trademark of IntelliStance, LLC, in Middletown, Conn.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 13, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.