Risk management & insurance

Scope

The Federal Motor Carrier Safety Administration (FMCSA) requires many carriers to demonstrate financial responsibility. The primary method of doing so is through an insurance vehicle. In addition, many states require vehicles to be insured.

Regulatory citations

• 49 CFR 387.7 — Financial responsibility required
• 49 CFR 387.9 — Financial responsibility, minimum levels
• 49 CFR 387.31 — Financial responsibility required
• 49 CFR 387.33 — Financial responsibility, minimum levels
• 49 CFR 387.303 — Security for the protection of the public minimum limits

Key definitions

• Bodily injury: Injury to the body, sickness, or disease including death resulting from any of these.
• BIPD: Bodily injury and property damage.
• Financial responsibility: The financial reserves (e.g., insurance policies or surety bonds) enough to satisfy liability amounts set forth in this subpart covering public liability .
• Insured and principal: The motor carrier named in the policy of insurance, surety bond, endorsement, or notice of cancellation, and also the fiduciary of such motor carrier.
• Property damage: Damage to or loss of use of tangible property
• Public liability: Liability for bodily injury or property damage and includes liability for environmental restoration.

Summary of requirements

Risk assessment. Risk management begins with risk assessment. Risk assessment should lead to determining what is needed to protect the carrier from risks. It should also lead to operational changes that reduce risks through a strategy of continual risk assessment, risk avoidance, risk reduction, and risk allocation or transfer.

Risk assessment is an in-depth study of the risks the carrier is exposing itself to. Common risks include vehicle accidents, cargo claims, driver injuries, theft of equipment and cargo, breech of contract, and non-compliance issues. Risk assessment also involves determining the level of risk, both in terms of frequency and severity. Risks that are identified as recurring or have the greatest chance of substantial loss require immediate attention.

The most often occurring and largest risks faced by all carriers are vehicle accident claims and litigation. To protect against these risks carriers routinely purchase insurance. While this is a form of risk management, it is actually risk allocation.

Risk avoidance. Risk avoidance is a practice of structuring the operation in a way that eliminates a risk. Not all risks can be avoided or eliminated however, such as intangible risks tied to uncontrollable events.

Other risks that are unavoidable are those risks that are inherent to the activity. This would include the risks involved with hiring a new or inexperienced driver. Newly hired drivers statistically have a higher incidence of accidents. Carriers can try and reduce this risk by establishing hiring standards but the risk cannot be eliminated.

Risk reduction. Risk reduction is accomplished through the use of internal management controls and proper training. Examples of risk reduction strategies include hiring standards, training programs, safety policies, and verification of driver qualifications. Generally, risk management initiatives undertaken by carriers will result in a reduction in losses over time. This is the goal of a risk reduction program.

Risk allocation. Risk allocation, sometimes referred to as risk transfer, involves the sharing of, risks with other parties that agree to accept the risk, such as insurance companies, customers, or captive groups. For many risks, a carrier can allocate the full value of the potential loss to an insurance company but this may lead to excessive premiums.

Assignment or assumption of risk. Assignment of risk, usually involves a third party such as an insurance company or other entity. Through the risk assessment, the motor carrier needs to determine what risks it can assume and what risks it needs to assign to others.

Most risk assumption is based on a legal and financial determination by the company that it can survive a risk and the associated potential for a claim. An example of this would be a company in Wisconsin accepting the risk of a hurricane destroying its facility. As the probability of this risk happening is relatively low, the assumption of risk is minimal, and purchasing insurance (assignment) for this risk would not be necessary.

Another assumption of risk is that associated with hiring new drivers as mentioned earlier. This is an unavoidable assumption of risk since the carrier must hire new drivers to survive and grow. Associated risks can be reduced through proper screening and training however, a certain level of risk will always be assumed that can not be assigned to an outside source.

Insurance strategies. There are various insurance strategies available to assign risks associated with a transportation company. A risk and insurance assessment can be used to determine which strategies would be most advantageous to a particular company.

Single sourcing or “packaging” is a way to attempt to reduce insurance costs while addressing both good and bad risk exposures. Furthermore, by packaging all of a carrier’s insurance needs with one insurance company, that carrier can simplify notification, reporting, and filing requirements.

Layering insurance coverage is a way to attempt to get the best cost for a company’s insurance by establishing monetary layers of coverage and then negotiating rates for each separate layer. A carrier may secure one policy for the first million dollars of loss. This would be seen as the first layer. The company would then negotiate policies for additional amounts (layers) as they saw fit. This practice is becoming more common, as carriers typically have claims under one million dollars but settlements exceeding 20 million dollars are becoming more prevalent.

Self-retention is another way of covering risks associated with the transportation industry. Self-retention is also referred to as self-insured, thereby being viewed as an insurance strategy. This type of “insurance” is often associated with a smaller level of exposure such as $250,000. All claims filed against a transportation company under this amount would be paid directly by that company, as no outside insurance company would be attached at this level. The trucking company may then determine that all claims over $250,000 must be covered by an outside company. This of course, refers back to the layering approach, with the trucking company “carrying” the first layer, while additional layers are assigned to outside insurance companies.

Self-retention is an excellent way to reduce the costs associated with insurance policies however; a financial analysis must be done to determine what level the trucking company can handle out-of-pocket without negatively affecting its financial position.

Captive insurance groups. One alternative to traditional insurance is captive insurance. Captive insurance companies are private, self-funded, limited purpose companies, specifically constructed to provide insurance coverage to a select group. In some cases captives can offer coverage at a more attractive rate, or provide insurance to a carrier that is having difficulty locating the proper insurance for their needs.

There are several types of captives, the most common being Single Parent, Group, and Agency:

• Single Parent captives are similar to self-insurance as the parent company establishes, funds, and operates the captive for the purpose of a single company.
• Group captives on the other hand, are owned by several companies that share a similar risk. They are operated by an administrator that performs the day-to-day operations of the captive and its support functions.
• Agency captives are formed by insurance companies or brokerages. These captives function similar to Group Captives with the agency or brokerage serving as the administrator.

Captives typically will only insure a portion of the total risk and have direct access to the reinsurance market to assign that portion that they do not cover. Benefits to working with a captive include potentially lower premiums, profits of the captive being returned as dividends to its members, and more streamlined claims handling.

Risk reduction techniques. There are many risk reduction techniques that can be put in place by a transportation company. The following is a list of some of those techniques.

• Properly written safety plan
• Established recruiting practices
• Establishment of hiring standards that include proper screening and review of applicants
• Mandatory orientation and training
• Accident and incident tracking, follow-up, retraining, and corrective/disciplinary programs
• Supervisory training and performance reviews
• Proper regulatory compliance
• Threat and problem identification, evaluation, and sharing