INSURANCE IN THE 3PL space has evolved over the past decade. Exciting innovations in this arena have led to wariness among insurance providers, supported by an unprecedented cadence of claims. Backward, right?
Innovation is exciting and change is good in most industries. What this means is that a traditionally fixed industry has become fluid in order to accommodate the changing landscape of risk management. It has been highly publicized that freight brokers and their insurance partners are being named in lawsuits and claims in which they may not even be liable. Regardless, they have to respond which is a financial burden on both brokers and insurance companies.
Even the ways in which a 3PL may be found liable have shifted, causing insurance markets to have to pay out on a broader variety of claims situations or deny their trusting clients’ claims. These changes and innovations have reformed the ways in which insurance providers are willing to work with clients and have even changed the roster of insurance providers willing to write 3PL coverages—companies keep bowing out altogether.
Where Did It Start?
With misperceptions. Like any trend generating revenue, property/casualty insurance agencies who didn’t have a firm grasp on transportation risk jumped at the thought of 3PLs being lucrative clients. Several of these markets jumped head first into the logistics pool customizing coverages which sound like logistical coverages, but don’t necessarily respond as described. Think of an experienced market writing a true Contingent Cargo form versus a less experienced but eager market writing a Contingent Property in Transit Floater coverage, which may be seen as more of a business personal property coverage for goods in transit but not meant to respond in the same fashion. In a land grab, many of these less experienced in transportation markets wrote coverage for as many 3PLs as possible without having seen true loss history or knowing the premium to claims ratio they would experience.
Cue reality—the writers of policies designed to emulate true logistical coverages had to decide how they would respond to the variety of claims for which freight brokers may be liable. As claims began to stack up, some markets took major losses at a higher frequency than anticipated, which may have affected their pricing for their core business outside of transportation as well, raising their premiums across the board. This unappetizing loss ratio was becoming a common story as freight brokers were increasingly looped into nuclear verdict cases which have put both transportation companies and their insurance providers in challenging situations.
On the other side of the coin, some markets decided to limit their liability by exercising an OPTION to defend their 3PL clients instead of a DUTY to defend clients in the event of a claim, which is now more common. Freight brokers could see that many of these insurance markets didn’t offer true protection in their policies.
What was the result of clients feeling misled by weak coverages and standard property/casualty insurance companies being in over their skis on claims? An exodus of insurance markets able to write these coverages. In the past seven years, numerous reputable insurance markets have pulled out of the 3PL game and each time they do, other agencies are either strengthened in absorbing those clients or weakened in dealing with more losses and setting higher premiums to offset said losses.
There are fewer insurance companies writing coverage for the modern 3PL and it may be speculated that another few insurance markets could be dropping out of writing coverage in the coming years. The direct response to the limited number of insurance companies currently playing ball and their higher number of losses has increased premiums across the board. While most insurance quotes will be rated on the gross freight receipts of a 3PL, the shear value of losses has raised the pricing many 3PLs will pay year over year even if they maintain the same gross freight receipts (GFRs).
Is the Freight Broker Insurance Landscape Becoming Monopolistic?
Not necessarily, and with good news attached. Most of the market leaders who have pulled to the top of insurance underwriting are specialized in their approaches to risk management. As with evolution, the strongest are forefront and able to absorb the large cadence of claims and continue to support their transportation clients. We are seeing the strongest and most innovative coverages on everything from usage-based cargo solutions to auto liability limits of coverage extending higher than were previously attainable for the price. Even if insureds only have their pick of the half dozen top insurance markets, their broker/agents have the task of knowing coverages and market highlights in order to assign clients the best markets for their needs.
What we may see is a deeper loyalty to insurance markets from their clients and agents. Doing right by a client is as effective as ever in winning and keeping business. Conversely, those same insurance markets doing wrong by clients could lead to fewer submissions, binds, and less financial stability at these insurance markets. There are exciting times ahead as insurance continues to pace with the innovation of 3PLs. Risk may be evolving but risk management is making leaps and bounds to predict the coming trends in what was once seen as a more fixed industry.