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Commercial Auto: Profitability, Capacity and Coverage

By June 15, 2021July 13th, 2021Charlie's Corner, Iroquois News

John Woods, Vice President of Transportation at Burns & Wilcox is on the podcast this week give us a comprehensive overview of the commercial auto market. We talk about how fleet size affects coverage and capacity. Not only that, we also cover where agents can turn to find solid coverage for their customers. These types of accounts can generate a nice income for an independent insurance agency. Tune in to get a better handle on things. Come back next week for part two of this episode.

Edwin K. Morris (5s):
Welcome to the trusted adviser podcast brought to you by Iroquois. Iroquois is your trusted advisor in all things insurance. This week, you’re listening to the special segment of Charlie’s corner hosted by our very own Charlie Venus.

Charlie Venus (22s):
Welcome to today’s Charlie’s Corner podcast. Today we have as our guest John Woods. John is the national practice group leader and vice president for Burns and Wilcox. Prior to joining burns and Wilcox in December 2019, John spent 34 years with several carriers, primarily specializing in commercial auto and transportation risk. He’s started with Safeco insurance is spent considerable time with national interstate insurance, Carolina casualty and nationwide insurance. John hails from Philadelphia and currently resides in Scottsdale, Arizona, with his wife, Sherry, and their to golden doodles.

John Woods (1m 1s):
Charlie, thank you for having me and I look forward to our discussion.

Charlie Venus (1m 4s):
I want to start by asking you to give a, a quick general overview of the Commercial Auto market focused on profitability mainly, but then we can talk about market Capacity and Coverage availability.

John Woods (1m 17s):
Well, the profit part of the equation is easy to talk about because there isn’t a, and, and hasn’t been any for the last 11 years, 2019 commercial auto space ran a 109.4 are combined and lost over $4 billion dollars and the reality is it just hasn’t improved since then. Six months ago, the market was pretty steady that you know, that there really wasn’t a lot of people that are entering or exiting the market, but I’ll tell you over the last couple of months, we started to see a few people come into the market, primarily on the program space, you know, changing things up a little bit. So we’ll see what happens is over time.

Charlie Venus (1m 56s):
Now just for clarity, when you say program space or you talking something like the Amazon, DSP, FedEx, those types of programs or, or something else?

John Woods (2m 6s):
No, we’re actually seeing programs put together by basically a investment groups and their MGA type operations, they typically have a focus. You know, they enter the space, they are typically very competitive on their rate structures. They are focused on risk selection, but they do tend to be much more aggressive than the carriers that have been in this space for years.

Charlie Venus (2m 32s):
Have you seen a lot of activity and in the last, you know, four to six months, is that increasing of the available capacity in the auto market, from where we’ve been for the last say two years?

John Woods (2m 43s):
I think from a general perspective, not really, but if you’re talking about specific classes of business with very well-defined risk characteristics, yes. Those particular spaces tend to be offering a little bit more capacity. We’ll talk about some of those, I think, further down in our conversations, one of them being the Amazon last mile delivery, I think it’s a perfect example of things that we’re seeing today that we haven’t seen over the last several years.

Charlie Venus (3m 11s):
Oh, OK. From admitted market standpoint, a, do you have any a, you know, any comments on that? Because what I see on my end is that they’re just are not a lot of admitted markets that are very aggressive in auto at all, or maybe even using the term aggressive is not the right terminology, just that they don’t really even want to participate in heavy fleet operations.

John Woods (3m 35s):
Charlie, I kind of define it maybe slightly differently. What I look at it is that you have your standard carriers and then you have your more, what I’ll call E&S type carriers. I agree with you, standard carriers are typically not ones that like to play in this space because of the challenges from a profit perspective. Transportation is really a class of business you either have to be all in or out, you can’t dabble in it. And I think a lot of standard carriers are typically dabbled in it and realized that that wasn’t the space for them and then got out of it. On the E&S side, most of these carriers, right, both on admitted and not attended paper depending upon the state.

John Woods (4m 20s):
So I don’t look at it from the perspective that admitted market’s, aren’t playing, they are playing, they’re playing for these E&S carriers in the states that allow you to write on admitted paper. Is that answering your question?

Charlie Venus (4m 33s):
Yes. And what do you see in, in terms of the availability of market capacity for smaller fleets-say under 10 units versus something 10 plus or a 20 plus

John Woods (4m 46s):
Again, I think that goes back to carriers, the carriers that have had success in the non fleet business and, and we’ll use non-fleet, let’s say for the purposes here is 10 units and under, the people that have done really well at that continue to expand their marketplace, but really focus on profitability because I think it really has been a part of the market that has been challenged the most, but there are carriers out there that do it very, very well, and they continue to look to grow that business. There are other carriers that write both non-fleet and fleet and I think what they’ve found is that their having a lot more success on the fleet side and probably downplaying their desire to right binding business going forward, I don’t want to speak specifically to carriers, but there are some well-known carriers that are in that second space that are really moving away from bindings and suggesting that they wanna focus more on the mid fleet and the large for a while.

Charlie Venus (5m 49s):
How much of that do you believe is just those non fleet’s that the carriers just can’t get enough premium to cover, you know, all the large losses that we’re seeing on the auto side, there’s so many million dollar plus verdicts out there is that one of the drivers or the main driver?

John Woods (6m 7s):
Oh, it certainly is, it certainly is one of the main drivers. It’s a space where those risks come and go very frequently for a variety of reasons, whether it’s rates that they can afford, whether it’s other issues within the space in which they play that they can’t do. Right. And so they end up leaving the market. So characters are constantly having to deal with that. You know, secondly, you’re right, that the rates for these risks have grown exponentially and that’s all driven by lack of profit on the carriers.

Charlie Venus (6m 40s):
People have heard this term thrown out there, social inflation. How much does that play into the overall profitability issue on the auto side?

John Woods (6m 49s):
It’s absolutely huge. Everybody relates social inflation to these nuclear verdicts. Everybody deserves. And, and I use the old story. You know, when I first started in the industry, you know, if a tractor trailer ran over somebody’s toe, you settle it for 10, 15, $20,000. Nowadays that same tractor trailer runs over that same person’s toe. And it’s like hitting the lottery. There is no more of these, you know, reasonable judgments. Everybody’s is striking out after the million dollar limits. And that is just exactly what social inflation is.

John Woods (7m 30s):
It doesn’t really have to deal with damages anymore. It really just has to do with how much can we get?

Charlie Venus (7m 37s):
Do you have any statistics? I’ve seen some that attorney involvement on auto claims is up somewhere around 40%. Do you see that as being reasonable facts? And is that adding to this whole social inflation issue?

John Woods (7m 52s):
Charlie, I’d be surprised it’s that low, to be honest with you, but attorneys now are funding clients in order to get them to go to court, because they know that that, that will get paid back and they’ll be able to hit these home runs a, you know, it used to be the attorneys used to focus on things like med mal ’cause that was, that was the big ticket number, right. But then they really realized it takes a lot of work to take a med mal claim to court. And then they looked over at Commercial Auto. Wow, this doesn’t take too much, you know, you got big truck, small car, or you got injury, the facts are the facts. And I think hit a home run. So a lot of those attorneys that used a focus on claim’s of a different nature have now migrated to the Commercial Auto space because they know that it’s almost like it’s a never ending pool of a large judgements.

Charlie Venus (8m 43s):
When you’re seeing all of these large judgements, what is that doing to the umbrella of a market for these fleets?

John Woods (8m 48s):
It used to be $1 million or half a million dollars was the working there right, for these auto risks. Now $2 million, $3 million has almost become the working order. So, while there tends to be quite a bit of capacity in the excess market or the umbrella market for Commercial Auto, it takes a lot more players in order to fill out these towers. And obviously the cost has gone up for this because these carriers, they’re the ones that are getting hit with these large judgements, you know, as well, even more so than the primary.

John Woods (9m 29s):
Yes. The primary is going to pay out a million, but these excess policy umbrella carriers, you know, they’re getting hit for 10, 20, 30, 40, 50 million dollars at a time. So the capacity’s there, it takes more carriers and it costs more money .

Charlie Venus (9m 45s):
So what typically see, you would see the first primary million. Then you would see a buffer, a layer of maybe 1 million or 2 million. And then somebody attach above that for three to 5 million and then if you need a higher limits, another carrier, two above that, if you were looking to get to 10?

John Woods (10m 4s):
You certainly play it out that way. But a lot of carriers that I’m seeing, they’re not necessarily afraid to weigh out 5 million. It used to be that they would lay out 10 or 15 million. They’ve really cut that back, but they’ll play in that $5 million where you could get a $1 million primary. You can put a $5 million on top of that, and then maybe another 5 million on top of that. It all depends on the carrier and what they wanna do and what the price looks like. But there are a lot of people out there that say, I’d rather have, you know, that two or $3 million buffer before I jump on with 5 million other carriers are more than happy to put a 5 million, but it comes to the cost of college.

Charlie Venus (10m 47s):
Yeah. Then they are just trying to pay for it.

John Woods (10m 49s):
Yes. Yep.

Charlie Venus (10m 51s):
So when you look at the increased cost of insurance and what we are experiencing recently with the increase cost of fuel, particularly in commercial auto fleet operations, I mean, they’re just seeing huge increases in their costs. Do you have any data as to what this is doing to them from a business standpoint and how many of them can survive in this type of inflationary marketplace?

John Woods (11m 15s):
Well, I, I think that that’s one of the reasons that some carriers are focusing more on the, on the larger fleets because they have the financial stability, capacity and wherewithal to weather this storm longterm a, well, maybe I should say more than the intermediate term – time will tell. I don’t have any statistics, Charlie, but it’s very clear that it’s squeezing the margins. I mean, not only do you have a fuel costs rising, not only do you have insurance premiums rising, although they are starting to moderate a little bit a from what they have over the last few years, not suggesting they are going down, but they’re not going up at the rate that they use to, and in some respect, some of them are staying, I’ll say, relatively flat within that 5%, 6% range, but you got wage inflation, you know, these truckers now in order to get them to sign on because everybody needs drivers there having to pay significantly more wages.

John Woods (12m 12s):
The truckers are getting squeezed from every End so one can only assume that their margins are going down, rates are going up, but not probably nearly as much as the costs.

Charlie Venus (12m 24s):
You mentioned earlier with some of this capacity coming into the market place, that they were a focused on these Amazon, DSPs, FedEx and other last mile delivery operations. Can you tell us a little bit more about that? Because you know, here at Iroquois, we do see a lot of those opportunities coming from our members.

John Woods (12m 44s):
I use that as an example. I wouldn’t say the market is flushed with people that are striving after those, but I think more are willing to work at them now. When they first started out and I’ll use Amazon is an example, everybody clamored after, them, but then they quickly realize that the results were a disaster. So a lot of carriers withdrew from that market space. As they’ve gotten some experience, as Amazon has gotten better control over these more people have been willing to enter the market. We talked about one and while I certainly want to support, you know, Burns and Wilcox, so the wholesale side of the space, there is a market out there that’s writing directly with the retailers.

John Woods (13m 25s):
And you don’t mind saying this Berkley Mid Atlantic group, and you guys are aware of that. And I will tell you in Texas, there have been several programs lately that a popped up a small MGA types that have gotten investor backing in order to go after certain classes of business, we’re seeing a lot more of that. Now then we have over the last several years or whether they are going after NAFTA type or business, or they’re going after other specific types of business, but it’s very well controlled, very well defined. That’s what they’re targeting. And I lay Amazon in that same type of space.

Charlie Venus (14m 2s):
So that can be something for the short-term future that we see people coming into the marketplace with a very, very specific focus on what they want to write?

John Woods (14m 12s):
Yeah, I Think so. The rates have become very attractive to carriers, you know, at one point in time and I’m probably going to date myself, he probably looking at tractor trailer rights that, you know, five, six, 7,000 dollars as a unit, while now you’re lucky to touch one for 12 or $13,000 a unit. Most of them or north of that, now insurance carriers are going, oh, I can get 18 to 20, $25,000 a unit. I think I can make money at that. So I’ll define this program and I’ll write it for that type of money. It is more competitive than the general market might price at thing. So these programs some time, the last, very long couple of years they are in and out because they realized that maybe that attractive price just wasn’t attract as attractive enough.

Charlie Venus (14m 56s):
If they make money and other people start coming in at a cheaper price, then they feel they can’t get enough to, to get the return on that. They need to get

John Woods (15m 4s):
Great point. Absolutely

Charlie Venus (15m 5s):
We move onto something else .So geographically, and, and this, this is anecdotal, but you know, we have a lot of agents up in the, in the mid Atlantic, in the Northeast. And particularly when you get to the Northeast, even when you go to the E&S market, the availability of auto market seems to be pretty sparse. Is that truly accurate? That it’s much tougher to find markets are up there.

John Woods (15m 30s):
Yeah, it is that it’s not been a historical hotbed for transportation. Carrier’s for the write business for a number of reasons. You know, the new York’s, the New Jersey speak for themselves. The typically unless you get up into, into north Western New York to performance has been very poor regardless of the rate structure. There’s a lot of business there, so it’s been attractive to carriers, but it it’s not performed well as you start to get up more into the new England area, there is a fair amount of business, but not a huge amount. And carriers have still found it troubling to make money.

John Woods (16m 10s):
You know, whether it’s because of the weather conditions, whether it’s because of congested traffic, whether it’s because they’re going up and down, you know, the mountains of New Hampshire and Vermont there’s any number of reasons, but it’s always been a challenging geographic territory for a carrier to write. You tend to find a lot more standard carriers willing to, right. That type of business out there that you will find E&S carriers.

Charlie Venus (16m 37s):
Well, yeah, that’s interesting and, And great analysis on all the, all of the issues that you find that out.

Edwin K. Morris (16m 45s):
Thanks for listening to this addition of Charlie’s corner brought to you by Iroquois is your, I am Edwin K Morris, and I invite you to join us for the next, the edition of the trusted advisor podcast.