In the past year and a half, insurance rates for car rental companies have skyrocketed, leaving many small operators befuddled and frustrated. Even rent-a-car companies with impressive loss runs and solid risk management programs have had to grapple with steep rate increases.
At the Car Rental Show last fall in Las Vegas, Mark Plousis of Philadelphia Insurance Companies addressed this troubling trend during a seminar titled, “The Future of Insurance.” For the past 13 years, Plousis has managed the underwriting and claims of rental, leasing and commercial fleets for Philadelphia Insurance Companies.
Several factors converged to trigger the drastic rate hikes, Plousis told show attendees. Among them: claims arising from the 9/11 attacks, fewer insurance carriers competing for car rental accounts, and excessive jury rewards in liability cases involving car rental companies. Nonetheless, operators still have available options to help minimize exposure and avert further premium hikes.
“The insurance industry is a cyclical industry,” Plousis says. “We had been in a 10-year soft market. You could go out, bid your business, and have four or five carriers give you a price. And the next year, you could go out and probably get a better price. That was the effect of a soft market.”
But the 9/11 terrorist attacks, coupled with the sagging economy and stock market decline, changed everything.
Causes of Hardening Insurance Market
In property and casualty claims, the 9/11 attacks cost the insurance industry $50 billion to $60 billion. As a result, fewer re-insurers are available or willing to help spread the risk for car rental accounts, Plousis says.
Moreover, the stock market no longer represents a reliable source of income for insurance companies. As a result, they’re taking a more conservative approach to underwriting accounts. There’s more pressure for this line of business to turn a profit.
Another major factor is insurance industry consolidation. Fewer carriers are competing for car rental accounts. Companies such as Reliance, Legion and Frontier no longer serve the car rental market.
“That means less competition, which means the price goes up,” Plousis says. [PAGEBREAK]
Knowing Your State Laws
Some excessive jury verdicts against car rental companies could have been easily avoided, if only the operator had been familiar with state laws, Plousis says. For example, some operators fashion their car rental contracts to transfer risk, seeking to make the customer’s insurance primary instead of secondary. But state laws regulate how and when such a transfer can occur. Some state laws, for instance, even specify the point size of the type in such a rental contract provision. Some states require that customers initial such a provision. When rental agreements and counter personnel ignore such state-mandated requirements, a risk-transferring provision is about as legally binding as a weather forecast.
“This is a big issue,” Plousis says. “This is the difference between you being primary for liability and you being secondary. Know the laws where you do business. It’s your job to know the laws.”
It’s also important to confirm that vendors such as repair garages and car wash/detail shops are adequately insured. Otherwise, if a vehicle is involved in an accident while it’s under their care, the car rental operator may be held liable.
Whenever a car is dropped off at another site, there must be thorough documentation of the delivery. Whenever a customer returns a vehicle with damage — even minor scratches — the car rental company should document the damage with a camera. That way, if the customer ever tries to claim an injury, the photograph can help discredit the claim in a courtroom.
Guarding Against Vicarious Liability
Many excessive jury verdicts and settlements have also arisen because of vicarious liability laws in certain states, including New York. Even operators based in states without vicarious liability are at risk, Plousis says. They should consider restricting customers from driving into states where such laws are in effect.
“If you’re doing business in New Jersey and a group of guys comes in to rent a car for a trip to Brooklyn to see some relatives, you’d better be aware of that,” Plousis warns. “If an accident happens in Brooklyn, the keys to your company are there.”
If a rental agreement prohibits a customer from entering certain states, and the customer drives into one anyway, the operator may still be held liable. Nonetheless, such operator-imposed restrictions discourage such travel and help manage risk.
“These are all defense mechanisms for you,” Plousis says. “They won’t protect you if the car still goes to New York, but they can act as a deterrent. The whole purpose is to put up roadblocks right at the pits — the counter — where you’re renting the car.” [PAGEBREAK]
Weighing Risks Associated With 15-Passenger Vans
Plousis also warns about the extra risk assumed by operators with 15-passenger vans in their fleet mix. In the past couple years, the National Highway Traffic Safety Administration has issued consumer advisories warning about the vans’ increased risk of rollover when they’re fully loaded. The combined weight of the passengers raises the van’s center of gravity, making the vehicle more top-heavy and prone to shifting rearward. This risk is reflected in higher insurance rates.
“Right now, from an insurance standpoint, the ratings on 15-passenger vans have gone through the roof,” Plousis says.
Operators with such vans need to take extra steps to manage the risk and educate customers. For example, families making long treks across state lines are more likely to roll the van over than church groups traveling across town.
“If you’re renting a van to a family that’s going to a funeral five states away, that’s when you’re likely to have an accident,” Plousis says. “The guy driving is going to try to be a hero and drive all night. He’s going to fall asleep and roll the van.”
After dosing off, drivers tend to overcompensate the steering when they are jarred awake, leading to a rollover. An accident in a fully loaded van that rolls over typically results in major losses. More people sustain injuries, and the injuries tend to be more severe. Moreover, the van suffers greater physical damage.
“It’s a big liability issue,” Plousis says. “When you’re putting your fleets together, you should be cognizant that 15-passenger vans really rate out a lot differently.” [PAGEBREAK]
Keeping Your Underwriter Informed
To qualify for the best rates available, car rental operators need to make sure that their underwriter is aware of all their efforts to manage risk. Before a meeting, operators should gather all related records and paperwork that document loss control.
“You should prepare for an underwriter like you would for a banker,” Plousis says.
Operators need to inform underwriters if they’ve invested in such products as GPS tracking systems and key boxes. If a security guard patrols the lot on a regular basis, this is a detail worth mentioning. Insurance companies can’t take these precautionary measures into account if they don’t know about them.
Plousis advises operators to study their loss runs as closely as they study their monthly financial reports. Identifying trends and patterns in a loss run can help operators pinpoint vulnerabilities and create more efficient risk management programs.
“Rather than have a reactive attitude regarding insurance, take a proactive approach,” Plousis recommends.
Managing risk also means training counter personnel to spot the red-flag signs of potential fraud. For instance, if a customer walks in and seems overly eager to purchase collision damage waiver and supplemental liability insurance, the counter personnel should proceed with caution. The customer might be planning to stage an accident in order to commit insurance fraud.
“Someone can rent a car for $30 or $50, pile a bunch of people in, and then have a convenient accident,” Plousis warns. “As rental operators, you are targets for this kind of unscrupulous activity.”
Plousis also stresses the advantages of building a strong relationship with a single insurance carrier. In a hard insurance market, operators who have shown little loyalty toward carriers won’t find much loyalty in return when it’s time to renew. An underwriter will be more flexible if the client is established with a stable loss run record and a proven risk management program.
Having a lax attitude about risk management is no longer an option. The exposure is simply too great in today’s market.
“Your philosophy should be one of preventive risk management,” Plousis says. “By paying attention to your business, you can stop the silly, stupid claims that occur frequently because of laziness. In this new insurance marketplace, the consumer with a good loss history will always receive favorable pricing.”