Alternative Market Opportunities for the Commercial Auto Industry
Legaré Gresham

Alternative Market Opportunities for the Commercial Auto Industry

Legaré Gresham May 10, 2017 Posted in: Blog Posts, Alternative Markets, Captives

Recent years have been difficult for the commercial automobile insurance industry. Both frequency and severity have been increasing while rate increases have not been sufficient to keep up. Some large carriers have pulled out of certain segments of the market as well. This has affected long-haul trucking and passenger transport in particular. On April 20, 2017, Rob Walling and I co-presented a webinar, “Captives & Transportation: When the Going Gets Tough, the Tough Use Captives.” We explored the recent trends seen in the industry as well as the contributors to these trends. 

For companies which are interested in taking an active role in the risk management of their operations, there are a number of opportunities in the alternative market. We presented several case studies that represent ideas based on companies we have seen utilize the alternative market to better manage their programs. These include:

  1. Single Parent Captive – This is ideal for a large company with relatively stable and predictable experience whose loss ratios have been historically low. In particular, this company would have the ability to actively manage the program and take advantage of market dynamics. As the market hardens or softens, the captive can take on more or less risk and transfer the rest to the commercial market.
  2. Fronted Agency Captive – An agent may control a large book of well-underwritten owner-operators who have produced historically low loss ratios. The agent has the ability to aggregate the portfolio of risks to get consideration from a commercial carrier. Both the owner-operators and the agent would have the opportunity to earn dividends if the program continues to have good loss experience.
  3. Fronted Group Captive – This can work well for groups with some commonality which are not commonly owned but also not individually large enough to form a single parent captive, e.g., a group of franchisees. As with the fronted agency captive, the aggregate portfolio of risks would get greater consideration from a fronting carrier and the members would have the opportunity to retain underwriting profits.
  4. Risk Retention Group – This is ideal for a large group of entities that writes liability exposures and is interested in direct issuance of polices. Within the transportation industry, taxicabs often use this structure. All insureds are considered owners and rate regulation can be greatly simplified. However, the group must ensure it complies with all regulatory filings.
  5. Association Captive Insurance Company – This is most frequently used by a close knit association in a difficult, rural area where the insureds feel they are being overpriced by the industry. Often, the characteristics of the members are a little different from the general population and the hazards may be slightly different. For example, the trucks may be older or larger than usual, or the road conditions may be below average. There is flexibility of ownership where this could be a partnership between the association, its members and possibly a common agent or group of agents who service the industry.
  6. Admitted Stock Insurance Company – Once an entity has set up a single parent captive and has developed its pricing, loss control and industry best practices, it may consider taking the next step of unbundling its services to sell to third parties and make the insurance operations a profit center.

The alternative market is not a “one-size-fits-all” opportunity within the transportation industry. It has the flexibility to adapt to the particulars of an individual company. For organizations that are committed to risk management and loss control, there are a number of opportunities to better manage commercial market volatility similar to what we have seen in recent years.

Legaré Gresham, FCAS, MAAA, is a Consulting Actuary with Pinnacle Actuarial Resources, Inc. and has over ten years of experience in the property/casualty industry. She has worked extensively with traditional insurers, captive insurers and self-insureds, including public entities. Her expertise includes loss reserving, pricing and product management, Proforma financial modeling and regulatory support. Legaré is a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries.


«July 2019»