Auto Insurance Premiums Are Going Through the Roof! What Can You Do About It?

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by Jeff Cavignac, CPCU, RPLU, ARM, MLIS

If you pay your company’s auto insurance premiums, you already know this—­auto premiums are going through the roof!  It is not uncommon for commercial insurers to increase renewal pricing 15-25%, and in some cases, even more!  Why are rates skyrocketing?  What has caused this dramatic increase in loss ratios over the past eight years?

Insurance Company Economics

Insurance companies make money two ways: underwriting and investments.  Investment income is pretty self-explanatory.  The industry invests their reserves or surplus and the money they earn is investment income.  Underwriting income is also fairly straightforward.  You divide losses plus overhead by premiums to calculate a Combined ratio.  If your combined ratio is under 100%, you make money, if it is over 100%, you lose money.

Most insurance companies are seeking a combined ratio of 90-92%.  The 8-10 points of profit, coupled with investment income will provide the return on equity that their shareholders demand.  Unfortunately, this hasn’t been the case for Commercial Auto Insurance in any of the last 10 years.  The best combined ratio was 96.6% in 2008 and it topped out in 2016 at 110.4%   This is the sixth year in a row underwriters have lost money on auto insurance and 2017 will be the seventh.   It is predicted that once figures are tallied for 2017, they will be even higher than 2016.  Needless to say, the 500,000 cars totaled in the Houston floods didn’t help.  Clearly the industry needs rate increases!

What happened?  Why has experience deteriorated?

There are several reasons.  The obvious one is distracted driving.  How often do you pull up next to someone or behind someone who is stopped at a green light because they are checking their phone?  How often have you swerved lanes because you were checking yours or were distracted in some other way?  This has caused accident frequency to jump up dramatically.

At the same time, there are more drivers on the road driving more miles mainly attributable to a positive economy.  Bodily injury costs have escalated due to increased medical costs.  Physical damage costs have increased because it is much more expensive to replace a sensor and camera laden bumper than it was 10 years ago when that technology didn’t exist.

For all of these reasons, commercial auto insurers are carefully underwriting their existing accounts and are scrutinizing any new business opportunities.

 The Key to Managing Your Auto Insurance Costs

While there is no one right way to manage this exposure, the first step is a well-written Fleet Safety Program.  This program would encompass the following steps:

  1. Develop and implement a written fleet management program that includes:
    • Driver selection
    • Vehicle use policy
    • Vehicle inspection and preventive maintenance
    • Vehicle accident procedures
    • Accident investigation
  2. Implement an effective Driver Training Program. This would include:
    1. Classroom – This is the most effective form of training as it allows for instructor and student interaction and discussion of the subject matter. Employers have a lot of flexibility as the material can be customized to their particular risk and exposure.
    2. Online – For those short on time or with no place to conduct classroom training, online training can be adequately formatted and controlled with quizzes and progress checks that prohibit the student from simply clicking rapidly through the material.
    3. Third-Party Training – Many local law enforcement agencies, such as the California Highway Patrol, have Public Information Officers available that provide effective, useful, and true-to-life training on distracted driving, DUI, etc.
    4. Behind the Wheel Training and Evaluation – For problem drivers or those who need remedial training, behind-the-wheel training is an excellent way for employers to adequately judge an employee’s driving skills and attitude and provide real time coaching and feedback that can be impactful and effective in improving the driver’s skill level.
  3. Review the list of authorized drivers for accuracy and run current MVRs on all approved drivers.
  4. Consider the use of a telematics system that tracks driver performance such as hard starts, stops, lane changes, etc.
  5. Utilize the state provided Employer Pull Notice Program that, for a small fee, automatically provides updates on driver citations and accidents.
  6. Review, update and implement the company’s Emergency Response Procedure (what to do in the event of a vehicle accident).
  7. Develop and implement Claims Management Best Practices
    • Incident Reporting
    • Incident Investigations
    • Root Cause Analysis
    • Corrective Action
    • Lessons Learned
  8. Review all auto and fleet policies and procedures on an annual basis.

Effective implementation of the Fleet Safety Program is best achieved by first distributing a copy of the program to affected employees, then conducting in-person training that allows management the opportunity to explain the program, and also allows employees the opportunity to ask questions about the program.

Remedial or follow up training is also recommended for employees that show signs that they either don’t understand the program, or demonstrate poor driving habits.

Final Comments

The only way to lower your insurance costs is to lower the frequency and severity of the claims that drive those costs.  Fortunately, auto exposures lend themselves to being managed, but the required safe driver training, technology, and post-accident response procedures need to be thoughtful and disciplined.