By Joe Dunn, Angel Mendez, and Scott W. Dunn

 

Agribusiness clients are acutely aware of the high premiums they pay for workers’ compensation, premises liability, health insurance and the steps they can take to mitigate those costs. On the other hand, automobile liability has historically been a low-cost, low-visibility afterthought. Not anymore.

The risk associated with catastrophic vehicle-related losses is on the radar of underwriters who insure agricultural operations.

Many have seen loss ratios spike to 90 percent or higher on their auto liability book of business and are alarmed by the skyrocketing frequency and severity trends. In an informal poll, agricultural insurers expressed concerns that the market for auto coverage is seriously underpriced, and some are considering rate increases as high as 30 percent. Said one underwriter, “If you can’t get enough rate, you just have to walk away from some accounts.”

Consider the following scenarios:

• As he does every day, a California farm labor contractor transports employees to and from job sites. One evening, while driving six workers home, the contractor drifts off the highway. He overcorrects, causing the van to flip several times. All six passengers, including two underage girls, are ejected from the vehicle. Three men are pronounced dead at the scene and one of the underage girls later dies from her injuries.
• After inspect-ing a field to be harvested, a farm labor contractor employee stops at a bar and consumes five shots of whiskey and two 22-ounce beers in a three-hour period. He subsequently climbs into his truck and, while texting, rear-ends a car stopped at a red light. A four-year-old boy in the rear-ended car is killed instantly, while his mother and sister are injured.

Catastrophic vehicle losses have a significant impact on the agribusiness industry and create turmoil for both insureds and insurers. The emotional and financial toll in the case of a death or severe disability resulting from a vehicular accident can affect victims and their families forever. Employers dealing with vehicle-related claims involving their employees also face the devastating financial consequences of insured and uninsured costs increasing exponentially.

The insured costs most likely to be impacted arise from automobile liability, umbrella/excess liability, workers’ compensation and employers’ liability policies. Insureds typically have deductibles, or self-insured retentions and claim costs will need to be paid. In the longer run, a poor motor-vehicle or employee-injury-loss history can result in premium increases, mid-term cancellations, or worse yet — the unwillingness of any carrier to quote the account. Uninsured costs, including the following, are frequently overlooked but can be even more costly:

• Lost production time;
• Damage to crops/other products;
• Increased overtime for existing employees;
• Loss of experienced staff;
• Need to hire and train new/temporary labor;
• Damaged employee morale;
• Investigation and legal expenses;
• Governmental agency audits/fines;
• Loss of management’s time; and
• Negative publicity.

The risk associated with catastrophic vehicle-related losses is on the radar of underwriters who insure agricultural operations.

According to the National Highway Traffic Safety Administration (NHTSA), 2016 was a deadly year on the roads with 37,461 deaths — a 5.6 percent increase over the number of deaths in 2015. In addition, vehicle crashes are the leading cause of work-related deaths, accounting for 24 percent of all occupational fatalities, according to the National Safety Council.

The silver lining in the NHTSA study is that more than 94 percent of accidents are caused by human error and are thus preventable with proper training.

For employers, the best preventative tools are careful driver recruitment and comprehensive driver and fleet safety education. The “gold standard” of driver training is the National Safety Council’s Certified Defensive Driver Courses, which are available in either a classroom setting or online. For employers that are unable to commit their workforce to the time and expense of an intensive certificate program, insurers and broker loss control and claims consultants can tailor short “tailgate talk” training sessions that focus on, amongst other things, the following topics:

• Driver-selection tips;
• Drug-and-alcohol testing protocols;
• MVR-review policies;
• Defensive-driving techniques;
• Cell-phone usage;
• Vehicle inspection and maintenance;
• Accident response and investigation procedures;
• Post-loss claim-mitigation strategies;
• Driver-incentive and discipline programs; and
• Mock DOT and OSHA audits.

Employers’ negotiating positions on auto liability, umbrella/excess and workers’ compensation program renewals are strengthened when they can demonstrate to underwriters the tangible steps they have taken to become a better-than-average risk. The potential return on investment? Objectively, a well-designed safety program that has achieved meaningful reductions in auto and employee injury claims can yield the following financial benefits:

• Increased competition for the account as underwriters vie for quality risks.
• The ability to effectively counter upward premium pressures.
• The confidence to increase deductibles or retentions, thus lowering premiums.

Subjectively, employers will have a safer workplace and more contented workforce.

The farm labor contractor from the first scenario did not have a driver’s license and ended up being sued by multiple parties. He filed for bankruptcy and ultimately went out of business. In addition, the U.S. Department of Labor sued the grower that hired him for violating worker safety and transportation laws.

The alcohol-impaired driver from the second scenario was sentenced to a mandatory 16-year prison term for gross vehicular homicide. His employer’s auto and umbrella liability coverage ended up paying out a multi-million-dollar settlement.

 

This whitepaper was featured in Insurance Journal’s Workers’ Compensation Newsletter on March 1, 2018 and published as an eMagazine on February 19, 2018.

Joe Dunn is the claim services manager, Mendez is a senior loss-control consultant, and Scott W. Dunn is vice president/risk advisor specializing in agribusiness, all of Pan American Insurance Services, a Relation company.

For the first time since 2010, the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) is changing the formula for calculating experience modifications, effective January 1, 2017. This could impact your Workers’ Compensation premiums.

What is an Experience Modification?

Experience rating is a method that compares an employer to other companies in its industry class based on their historical claims experience. It is expressed as a percentage—called an experience modification factor, or “Ex Mod”—and utilizes past loss experience to help predict future losses. The Ex Mod is applied against premium and either penalizes a company (if its loss experience is worse than the industry average) or rewards it (if its loss experience is better than the industry average). Experience modifications create a powerful incentive for employers to prevent claims and control claims costs.

How is it Currently Calculated?

The experience modification rating process uses what is known as a split point of $7,000. An insured’s actual losses below $7,000 are considered primary and go into the formula at full value. Losses above the split point (to a maximum of $175,000) are considered excess losses and have less weight in the formula. Dividing losses into primary and excess components gives greater weight to loss frequency, which is typically more controllable by the employer, than to loss severity, which is typically caused by less predictable catastrophic claims. The current formula, in effect since 2010, is a one-size-fits-all approach for all employers regardless of company size.

How will it be Calculated Starting January 1, 2017?

WCIRB found that the pattern of claim frequency and severity in California has changed over time, and the single $7,000 fixed split point was “no longer producing optimal results.” On January 1, 2017 it will be implementing a variable split point methodology where, depending on the size of the employer, there will be 94 different primary loss split points between $7,000 and $75,000. Losses above an insured’s split point will no longer be used in the experience modification calculation. The overall effect of the change will be to give greater weight to claims frequency while claims severity, although still a factor, will be limited at no more than $75,000.

What is the Potential Impact?

The WCIRB states: “While the variable split point plan represents a fundamental change in the values used to calculate experience modifications, there is no expectation that experience modifications for California employers as a whole (emphasis added) will change.” However, each individual insured’s experience modification will be dependent not only on its losses, but also on its size. Under the new formula, insureds whose split points increase above the current $7,000 level will have a greater amount of their losses designated as primary and will be more negatively affected by frequency than severity.  This in turn could lead to an increase in their Ex Mod. On the positive side, the $75,000 excess cut off limits the impact of catastrophic losses which should especially benefit smaller employers.

This article was first published by Captive Review, and written by Richard Cutcher.

 

California-based Ascension Insurance Services is expecting to add a second cell to its segregated portfolio company (SPC) in the Cayman Islands.

Captive Review reported in February 2015 AARIS Insurance Company SPC, owned by Ascension Insurance Services, had formed the jurisdiction’s first portfolio insurance company (PIC) – AGG 1 PIC.

Legislation enabling PICs, comparable to incorporated cell companies (ICCs) in Guernsey, came into effect in January 2015.

“We were up against a tight deadline because the renewals for the members were in February and the legislation was only passed the month before,” Paul Tamburri, west coast risk management practice leader at Ascension Insurance Services, told Captive Review.  “We had to get the fronting in place and ensure the carrier understood they were now contracting with the PIC rather than AARIS.”

When AGG 1 PIC was established it originally had 13 members.  That has since grown to 15.  All members are agriculture businesses with California or Arizona risks writing workers’ compensation.

The rush to find a solution for the original 13 members came about after the owners of a separate Bermuda segregated account company (SAC) changed hands and the clients in two of the three cells wanted to continue working with Ascension.

Tamburri said one of the reasons the SPC option was so attractive to Ascension was they saw the potential to offer a PIC solution to other groups of clients.

“We are already working on a segregated portfolio which we hope to get running by 1 April,” he added.  “That cell will be for another group of agricultural clients and is also for workers’ compensation.”

Ascension also works with the trucking industry and education institutions.  A large part of its client base is non-profits and the firm is considering setting up another vehicle especially for medical stop-loss.

“The SPC is a big opportunity for our company as a whole, and not just for this one PIC,” Tamburri said.

 

This article was first published by Captive Review, and written by Richard Cutcher. Captive Review was launched in 1999 and caters for the risk management and captive insurance communities.