On the road again: as truck traffic increases, inland marine insurers who cover truck cargo stand to gain more premiums and higher profits.

Key Points

* Tractor-trailer underwriters base their policies and premiums on a number of factors, including how many miles a trucker drives in a year. The more miles and cargo, the greater the exposure. More exposure means more premium.

* The increased demand for "just-in-time" deliveries has helped reduce cargo theft, the single biggest risk for truck cargo writers.

* The number of inland marine insurers writing coverage for tractor-trailers has dropped from 80 to 20.

In a nation of consumers, tractor-trailers are the lifeblood fueling the economy. In 2003, trucks carried 60% of the 13.2 billion tons of freight that was moved within the United States. That includes consumer goods, produce and food, vehicles, clothes, fuel and just about every commodity ever sold or bought.

The trucking insurance market, like nearly all insurance markets, has consolidated in recent years, dropping from 80 carriers to about 20. Within the larger market of inland marine insurance, tractor-trailer insurance is a profitable niche market that is growing, both in premium dollar and profitability.

More Exposure, More Revenue

More trucks are on the road today, carrying heavier loads and driving more miles than in the past. In 2002 large trucks carrying 10,000 pounds or more traveled 214.5 million vehicle miles, up 60% from 153.4 million vehicle miles in 1992, according to the Federal Highway Administration. Meanwhile, the number of registered large trucks has grown 31% to 7.9 million in 2002 up from 6 million in 1992.

"They're putting more stuff in the trucks. They are more efficient in how they load, and the amount of goods they put in," said Ron Thornton, president of the Inland Marine Underwriting Association, a trade group representing inland marine writers. "This is increasing underwriters' exposure."

It's also increasing premiums. Underwriters base their policies and premiums on a number of factors, including how many miles a trucker drives in a year. The more miles and cargo, the greater the exposure. Of course, more exposure means more premium.

Nashville, Tenn.-based Greenwich Transportation Underwriters, a managing general agent specializing in trucking insurance, said not long ago, an average casualty underwriter handling all lines in the trucking niche was looking after a $10 million book of business. Today, that book has grown to $20 million to $40 million, not counting the $10 million to $15 million of new business they may be quoting on top of renewals.

Underwriting Concerns

The industry's biggest single loss risk is theft.

Bands of thieves will target entire tractor-trailer loads, said Pat Stoik, vice president, Chubb Commercial Insurance, and global commercial inland-marine manager for Chubb Marine Underwriters, both business units of Chubb Group. In addition to taking televisions, computers and designer clothes, unusual goods also can be targets.

For instance, Stoik said truckloads of "high-end" razors retailing for $10 a package have been stolen, and end up for sale on the street, in small stores and in flea markets. A truck can be carrying $1 million or more in easy-to-move inventory for would-be thieves, he said.

Cargo theft is a $1 billion industry, said Ben Armistead, chairman, Greenwich Transportation Underwriters, who noted that it is of interest to organized crime because it involves far less civil and criminal penalties than drug dealing. "There is some legislative momentum both at the state and the federal levels for harsher penalties, but the government is far behind on dealing with cargo theft. With the growing interest in homeland security, this will hopefully change as there are certainly direct ties between cargo theft and potential terrorism."

High-value cargoes known in the industry as "target commodities" due to the high propensity of theft, such as truckloads of computers, may need to run without stopping at all. With two drivers on board, one can be sleeping while the other drives, said Armistead.

Another type of theft occurs when drivers store their loaded trailers over a weekend awaiting a Monday delivery, only to find the entire trailer is gone when they return, Stoik said.

"When we underwrite a trucking company, we want to know what type of procedures are in place so those types of situations are mitigated," Stoik said. "If anyone wants it, there's only so much you can do. If we are insuring a shipment of Degas paintings, we will require specific security precautions so an armed robbery can't happen, or is extremely unlikely."

Additional pressures on the trucking industry--such as higher gas prices and a shortage of qualified drivers--have forced insurers to be more careful when underwriting, Stoik said.

While the cost of fuel is not directly related to insurance, the trucking industry normally runs on thin margins and any increase in its costs makes margins thinner and the business more volatile, Stoik said. For instance, trucking companies pinched by rising fuel costs may cut back on routine maintenance to save money, which could result in more accidents.

Part of the challenge is also covering the shipment of many different types of commodities.

"Each insured is relatively unique. That's the beauty of inland marine," Stoik said. "Even if the company is shipping all the same type of commodities, they could be shipping more or less of it, using different trucks. Because of the uniqueness of each risk, each is underwritten individually."

Stoik said the line has shown "solid double digit growth" for Chubb. "It's profitable for us. But this type of coverage is relatively volatile. It's one that needs constant attention and modifications to keep it profitable."

Improving Losses

One of the biggest changes to trucking insurance in recent years--and a possible reason that loss ratios are improving--is an increase in the demand for just-in-time shipping, several industry experts said.

Just-in-time shipping has grown as manufacturers move away from the expense of maintaining large warehouses filled with parts to be assembled, and instead rely on more frequent truck shipments.

"Cargo at rest is cargo at risk," said Thornton. "Just-in-time delivery has done away with a lot of storage and transportation. People are moving stuff in a more expeditious matter, and cargo isn't sitting around as much."

New regulations also have forced trucking companies to become more effective at loading and unloading trucks, Thornton said.

Earlier this year, the Federal Motor Carrier Safety Administration introduced new rules on how long drivers can be behind the wheel. The new rules permit drivers to drive 11 hours after 10 consecutive hours off-duty. By increasing the amount of rest time, the amount of time a driver can work in a week has been decreased.

"Drivers spend a lot of time idling at warehouses or ports, which is all counted in the amount of time they are working," Thornton said. "As drivers' hours of service changed, it forced people in distribution to be more effective in loading and unloading trucks. That's improved the distribution, which could result in fewer thefts."

Terrorism Insurance 

Trucking companies haven't been very interested in buying terrorism coverage for their cargo insurance program. One side effect of law enforcement's interest in preventing terrorism acts, however, is an increased interest in the theft of cargo trucks. "The country's great concern with terrorism will ultimately lead to more of a concern for cargo theft said Steve Silverman, assistant vice president and product line manager of Inland MaPle Specialty Property for Lexington Insurance Co., a subsidiary of American International Group.

"We are obligated to offer terrorism coverage under the Terrorism Risk Insurance Act. But our take-up rate is very low for cargo insurance," Silverman said.

While insurers are offering legal liability coverage for cargo, Silverman believes truckers might not be concerned if a terrorist act damages the cargo. "They may not be held legally liable if there's a terrorist act. And the limits tend to be fairly small, certainly not the same levels as fixed location insureds such as real estate in major metropolitan areas," Silverman said.

What's Ahead

Lexington, which also covers the physical damage to trucks and warehouse legal coverage, said a new area of growth in the trucking industry is third-party logistics, or 3PL.

3PL means hiring shipping firms to take care of all distribution needs; primarily, warehousing, trucking, repackaging and accepting returns and repacking them, Silverman said.

"The trucking industry has gone through a resurgence in growth and importance to the economy. There's not just a great demand for the 3PL component, but all facets of transportation based on the improvement in the economy and the increased trade throughout the world. That's why we are so interested in being heavily involved with the transportation industry for all classes of insurance," Silverman said.

Silverman said the loss experience in the trucking industry, particularly in regards to cargo, has improved in part because there are more larger firms that have the interest and the money to work harder and smarter to control losses. "We have to give a lot of credit to the trucking industry. They have taken dramatic steps to improve their safety. They are much better run, with more professional risk management," he said.

As an example, he said some companies are offering incentive packages for truckers not related to miles or delivery, but to safety. "They are doing a better job of maintaining their equipment, making sure their brakes and other safety devices are properly and regularly maintained. They are much more cognizant of the loss's impact on their reputation, management time, resources, and of course, the bottom line," Silverman said.

He noted larger firms are taking larger deductibles. "That tells us they are really committed to loss control," Silverman said.

"Inland marine tends to be a relatively small part of the insurance industry," Silverman said. "But it's usually highly profitable. [Trucking] is very important to the economy, and we look forward to the trucking industry to continue to strengthen and continue to improve its loss experience."

Trucking Expenses

In 2002, trucking companies spent 3.2% of their operating expenses on insurance. By federal law, all trucks bringing cargo across state lines must purchase liability and cargo insurance.

Salaries, Wages and Fringes     53%
Equip. Rentals & Purch.       22.9%
Miscellaneous                    9%
Deprec. & Amort.               4.9%
Operating Supplies & Exp.      3.3%
Insurance                      3.2%
Oper. Tax and Licenses         2.6%
Comm. & Utilities              1.1%

Note: Table made from pie chart.

Source: American Trucking Associations Inc.

More Trucks

The number of large trucks weighing 10,000 pounds or more has grown 31% from 1992 to 2002. More trucks on the road has meant a bigger market for inland marine insurers covering the trucking industry.

[GRAPHIC OMITTED]

More Miles

Tractor-trailers are logging more miles, and have increased the miles they drive annually by 40% from 1992 to 2002. Inland marine underwriters base their premiums in part on how many miles a truck will log, so more miles could mean more premium.

[GRAPHIC OMITTED]

Hauling Assets

In 2003, 9.1 billion tons of freight were transported by intercity and local trucks, representing nearly 70% of total domestic tonnage shipped.

Truck              69%
Rail               13%
Pipeline            9%
Water               8%
Rail Intermodal     1%
Air               0.1%

Note: Table made from pie chart.

Source: American Trucking Associations Inc.

Learn More

Chubb Group of Insurance Cos.

A.M. Best Company # 00012

Distribution: Independent agents and brokers

Lexington Insurance Co. (A member of American International Group)

A.M. Best Company # 02350

Distribution: Independent agents and brokers

For ratings and other financial strength information about these companies, visit www.ambest.com.

RELATED ARTICLE: A typical trucking policy.

Trucking transportation cargo insurance is divided into three basic categories: cargo-owners covers an owner's goods on the owner's trucks; carrier's liability covers the carriers' liability for the cargo of others that they are shipping on their trucks, and transportation covers the owner for its goods when they are shipped on someone else's trucks.

Cargo-owners is the smallest line of the three, having about $40 million in premiums in 2003. The line may be small, but has always been profitable for insurers, said Ron Thornton, president of the Inland Marine Underwriting Association. "If you own the goods, and ship the goods, you might be more careful with them. We tend to have loss ratios in the mid 40s. I'd do that any day of the week and on Sunday; that's making money," Thornton said.

Carrier's liability is the largest of the three classes, and had about $150 million in premiums in 2003, Thornton said. He said the class typically had a loss ratio in the 80s, but had dropped to the mid 50s for the past two years.

"Some of that is underwriting and pricing, improvement in the transportation chain," Thornton said. "There's no one thing you can point to."

Transportation insurance had about $120 million in premiums in 2003, and with the exception of a spike in 2001, the class's loss costs run in the mid 30s.

"Despite increased written premiums, we're seeing an improvement in the loss ratio," Thornton said.

Insurers writing cargo-related coverage also provide auto liability insurance, physical damage and general liability for tractor-trailers. A few carriers also cover workers' compensation for drivers, said Ben Armistead, chairman, Greenwich Transportation Underwriters.

The cost of insurance represents about 3.2% of a motor carrier's annual budget, according to the American Trucking Associations, a trade group.

That can be a large burden for trucking companies, which tend to run on a small profit margin,Armistead said.

By federal law, motor vehicles carrying goods over state lines are required to carry $750,000 in liability limits plus $5,000 to cover the cargo.

A trucking company that may generate annual revenue of $100,000 to $130,000 might pay $4,000 to $6,000 a year just for auto liability insurance. Physical damage insurance would run from 3% to 4% of the tractor-trailer's total value, or $2,000 for the tractor and $500 to $800 for the trailer. The cargo would be insured for $'750 to $1,000 in annual premium per truck. For larger accounts with more than one truck, the premiums could De discounted based on loss history. Also, workers' compensation would cost $3,500 to $5,500 per driver, depending on the state,Armistead said.

Most have no problem obtaining adequate insurance, he said. However, if a driver or trucking company has a history of losses or financial problems and falls into the nonstandard category--about 15% do--they face a capacity shortage,Armistead said.

When a trucking company goes from being a standard risk to a nonstandard one, only a handful of insurers will entertain quoting that account, Armistead said. As capacity is being allocated to better truckers, the lack of insurance capacity for nonstandard risks can put a trucker out of business. "It is interesting that the lack of insurance availability can actually be making our streets safer by not allowing an impaired trucker the ability to operate without the insurance required," he said.

Ron Thornton

RELATED ARTICLE: Turning to technology.

Some new technology that helps the trucking industry doesn't necessarily help cargo insurers, while other systems that could help insurers are deemed too expensive by truck owners.

Global Positioning System, or GPS, helps trucking companies to track drivers and rigs, offer advice for alternative routes if traffic is a problem, manage efficiency of operations and monitor unplanned stops.

"Many people presume it's a good way to track theft, but we find it is not effective," said Steve Silverman, assistant vice president and product line manager of Inland Marine Specialty Property for Lexington Insurance Co., a subsidiary of American International Group. "Often when the trailer is stolen, it's taken to a discreet spot and the cargo is loaded onto another trailer before authorities can get to the stolen trailer. When we find the trailer, the cargo is gone," Silverman said.

In conjunction with the Department of Homeland Security, the Department of Transportation is "trying to come up with a legislative mandate that a trucker has to secure his load by locking his trailer. Some trucking associations have fought or not supported this initiative, which is a shortsighted move," Ben Armistead, chairman of Greenwich Transportation Underwriters, said. "We aren't even required to lock our trailers yet in this country, let alone use GPS technology. That's how far we have to go."

Some companies are arming their tractor-trailers with "kill systems." If drivers become aware that their truck is stolen, they can dial a number, and the vehicle's speed can be reduced and then the engine killed. The downside is that the cost of devices such as alarms, tracking devices and "kill systems" can be significant when they are put into hundreds of tractor-trailer units, he said.

Armistead said the industry hasn't done an adequate job of adopting new technology. "Prudent underwriters should welcome and align themselves with technology that will enhance lower loss ratios," he said. "The lack of joint ventures between insurance companies and technology partners is fairly discouraging, and we welcome the dialogue as it can only mean a better underwriting profit with a competitive advantage in the marketplace."

New technology that could be a boon to the industry includes "black boxes," or event data recorders, that record a vehicle's movements. This prevents drivers from keeping two sets of logs--one with the actual time spent driving, often more than the law allows--and the other a doctored set that appears to meet the laws. Today, the trucking industry is against this technology due to costs and further regulation.

"Because of the greater downtime required by the Federal Motor Carrier Safety Administration's last hours-of-service rules for drivers, the transportation industry needs more drivers,"Armistead said."Log-book violations are the biggest source for drivers being taken out of service. The shippers and manufacturers are trying to keep the lowest inventories, requiring just-in-time service, which runs completely counter to safe driving and log compliance issues. If a driver gets stuck in traffic, he still needs to get the load there and will have a log violation due to his running out of hours. It will be very hard to cheat an electronic monitor."