Unique Trucking Issues: The Risks and Rewards of Going in for the Long Haul
Greg Fears

Unique Trucking Issues: The Risks and Rewards of Going in for the Long Haul

Greg Fears May 24, 2016 Posted in: Blog Posts, Commercial Lines
I remember cruising down the interstate as a child in the back of my parents’ station wagon. My brothers and I got such a kick out of being able to name all the different models of cars and trucks. The best part of it was getting the semi-truck drivers to honk their horns when we pumped our fists up and down. Nowadays, driving down the interstate means counting the number of different trucking companies with which I am involved in pricing their insurance and reserving for their losses.

The long haul trucking industry is big business. Over 70% of all freight tonnage in the United States is moved on this nation’s highways, and the trucking industry employed roughly 3.4 million drivers in 2014. There is a wide range of both for-hire and private trucking carriers. Among the for-hire carriers are UPS and FedEx, while private carriers include PepsiCo, Sysco and Walmart, among others. For all of their insurance needs, there are several different options: from the traditional market and self-insurance to risk retention groups and captives. 

Commercial auto liability insurance for long haul trucking is no easy business. Many insurance companies have tried to enter the market only to exit it, or, worse yet, become insolvent. Long haul trucking insurance is challenging to both price and reserve. Why? For starters, there is a wide variety of truck classes, ranked 1 through 8 based upon gross vehicle weight:
Class  Gross Vehicle
Weight Rating (in lbs.)
1 0 - 6,000  Light
2 6,000 - 10,000 Light
3 10,000 - 14,000 Light
4 14,000 - 16,000 Medium
5 16,000 - 19,500 Medium
6 19,500 - 26,000 Medium
7 26,000 - 33,000 Heavy
8 33,000+ Heavy

Let’s focus on class 8 trucks, the long haul, semi, tractor-trailer types. Pricing for them is tricky and depends upon the different trailer types and cargos they haul. Listed below are just a few:

TitleBarBlankrrr   Cargo Type 
Trailer Type    Moving/Storage
Tanks   Coiled Steel
Lowboys   Car Haulers
Boxes   Livestock
Reefers   Agriculture
Dumps   Refrigerated
Doubles   Sand/Gravel
    Wide Load

If insurance companies neglect to consider these elements, they could underprice their risks. This could, in turn, lead to under-reserving in immature policy periods because some reserving methods are based upon pricing assumptions. When the volume of claims outpaces the expected losses, the real problems start. To minimize underpricing or under-reserving these risks, insurers should consider using the appropriate benchmarks. They should select benchmark loss ratios, loss costs and development patterns in accordance with the risk they are pricing or reserving.   Some U.S. insurance companies provide commercial auto liability for this industry, and they do it well.  Let’s look at them and their net reported incurred loss & DCC development over time. This data is the basis of almost any actuarial analysis. We develop losses to construct loss ratios, loss costs or to estimate reserves (IBNR). In this case, we identified insurers who focus on trucking risks and pulled their schedule P data to construct net reported incurred loss & DCC triangles to identify any patterns across companies. We settled on roughly 40 insurance groups which focus on trucking risks. You can see below the large spread in losses reported within the first few years of development. This illustrates the differences in the claims handling processes among insurers. 

Table 1: CAL Net Reported Incurred Loss & DCC

Given this large spread, we consolidated the risks into three buckets based upon their rate of loss development:  slow, medium and fast. In so doing, we are able to properly develop an insureds losses based on his or her insurer. This next chart illustrates these consolidated patterns.

Table 2: CAL Net Reported Incurred Loss & DCC: Slow, Medium, Fast

We at Pinnacle use this method specifically for the trucking industry because it more accurately projects ultimate losses, which are used to calculate loss ratios, loss costs and reserves.  For more detail on this analysis, please visit the Knowledge Center for Pinnacle’s February 2013 APEX webinar, “Case Studies Using Publicly Available Data,” by Erich Brandt and Greg Fears, or read, “Mining the Store,” by Erich Brandt, published in Best’s Review’s August 2014 issue.   The long haul trucking industry is large and carries a very unique exposure base. There is a market for accurately-priced long haul trucking insurance. The more data that becomes available, the more accurately we can price these risks.

Greg Fears is a Consulting Actuary with Pinnacle Actuarial Resources, Inc. in the Bloomington, Illinois, office and has over 15 years of experience in the property/casualty industry. He has considerable experience in assignments involving loss reserving, funding studies, loss cost projections, captive feasibility studies, risk margin calculations, simulation methods, deductible analysis, cost allocation mechanisms, financial analysis of insurance companies, commercial lines ratemaking and competitive analysis. Greg is an Associate of the Casualty Actuarial Society, a Member of the American Academy of Actuaries and an Associate in Risk Management.
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