Alternative risk solutions for the commercial automobile market

Gary Osborne (pictured right) of Risk Partners and Rob Walling (pictured left) of Pinnacle Actuarial Resources take a look at recent developments in the commercial automobile market.

In recent years, captive managers have seen three coverage types drive most captive formations: commercial property, commercial automobile and medical stop loss. 

Of these, commercial automobile has been the most challenging for which to develop cost-effective solutions as the issuing carriers and reinsurers have continued to have poor loss experience. 

Insurers and captive insurance regulators both need convincing the exposure being considered will produce acceptable underwriting results. The risks they are taking on require more collateral, more loss control and safety measures, closer oversight of claims and greater commitments of capital. 

Let us look at the state of the market, alternative market developments and what can, and is, working in the alternative risk space.

State of the market

The commercial automobile market has had unprofitable underwriting results going back to 2015 with a “blip” during Covid where mileage driven and traffic volumes dropped substantially reducing risk factors and lowering losses. A special report from AM Best, Best’s Market Segment Report, ‘Different Year, Same Story: Deteriorating Commercial Auto Results’, had these comments on current market conditions:

• US commercial auto insurance incurred a net loss of $5 billion in 2023;
• The first half of 2024 shows further deterioration;
• US commercial auto continues to lag behind other P/C lines in profitability despite targeted underwriting initiatives;
• Claims frequency and severity are being impacted by distracted driving and the shortage of experienced commercial drivers;
• Claim severity has been exacerbated by the cost of advancing technology components in newer vehicles; 
• However, third-party liability losses are driving the deteriorating commercial auto results. “Social inflation, including the impact of nuclear verdicts, has been a large contributor to increased loss severity.”

What this ongoing deterioration has meant to the alternative risk market is a severe lack of coverage affordability and availability. Issuing carriers (fronts) have been reluctant to underwrite “start-ups” or new programmes without substantial historical data and demonstrated commitment to loss control and safety initiatives (e.g., driver training, telematics, maintenance, driver monitoring). 

Retentions have increased to at least $350,000 per occurrence and with a strong preference for $500,000 per occurrence. Reinsurers are back to offering limited type coverage such as swings, profit corridors and/or limited limit reinstatements. Increasing rates from primary carriers and reinsurers have had a compounded effect of transportation company insurance costs. 

This has created one new carrier that has been well funded but is being driven by strong loss control and active data management. 

Innovation in the commercial auto marketplace

“Nirvana Insurance, an AI-based commercial insurance platform for the trucking industry, has raised a $100 million Series D round at a $1.5 billion valuation, it tells Crunchbase News exclusively. The raise comes just over nine months after the start-up raised $80 million in a Series C round of funding at an $830 million valuation.

Put simply, Nirvana’s goal is to build “the world’s first AI-powered operating system for insurance”. The start-up uses real-time driving telematics and 30 billion miles of truck driving data to build and manage insurance policies for truckers.” (Crunchbase News)

Nirvana is mentioned as it clearly shows the need for large commercial automotive exposures to get serious about loss control and safety. There is a great need to train and manage drivers especially with an ageing workforce.

“A report released earlier this year by the American Transportation Research Institute highlighted that the average age of truck drivers has increased from 42 in 1995 to 47 last year, with retirements accelerating and a shortage of younger entrants.

Commercial Carrier Journal’s 2025 What Drivers Want report, a survey of company drivers and leased owner-operators conducted in partnership with Netradyne, found the average age to be much higher: 59.5 years among survey respondents. Just 2% were 34 years old and younger.” (CCJDigital.com)

The ageing workforce, poor underwriting results, nuclear verdicts and need for investment in modern loss control and safety are driving large automobile risks to consider alternative risk structures.

What are your options?

Four main alternative markets risk financing options are currently available.

Fronted programme. This requires seeking out a commercial carrier willing to issue at least a $1m primary limit CAL policy and agreeing to reinsure a portion of the risk into a captive or captive cell. Carriers will look for a captive to assume the first $350k or $500k per occurrence, then retain the balance up to $1m. It is important to check insurance requirements to see if more than a $1m primary limit is required. This option will require the risk-bearing captive owner to post collateral of at least 30% of the gross premium written (GPW) for at least two and probably three years – a $5m gross premium will likely require $4.5m of stacked collateral and might also require $750k of capital in your captive or cell. This can be secured by some combination of a Reg 114 trust, letters of credit or funds withheld. This level of risk assumption, plus posting these levels of capital and collateral, are often challenging for trucking companies operating on thin margins. This is particularly true in the current trucking industry where hardly a week goes by without the announcement of another trucking company bankruptcy.

High deductible. This is an option for accounts large enough to be offered large deductibles. The captive or captive cell is then an option to obtain a tax deduction for funding the expected losses in the deductible layer. However, some trucking companies simply fund these deductibles without the benefit of a captive insurance company. If the trucking company is not profitable or would be challenged to post collateral or capital, a high-deductible programme is unlikely to be a good option. This is likely best for a company who feels they are not getting sufficient credit for implementing effective loss control and safety and are running a profitable operation where deducting the premium for the loss funding balance would be beneficial. 

Group captive. Many trucking companies are simply not large enough or do not have the financial wherewithal to consider the first two options. For these companies, a group captive might be a much more viable option. There are two common forms of group captive. One is the traditional group captive approach where several commercial auto companies join together to create a programme and share proportionately in underwriting and investment profits and losses. The biggest challenge for this form of group captive is getting buy in from possible competitors on underwriting and safety standards to create a successful programme. A great deal of effort has to go into the membership requirements for both new and renewing companies. It is also critical clearly to set out entry and exit terms as members have to be clear on the time frame to exit. Many of these groups clearly indicate five years after policy termination is the appropriate time to return any remaining surplus belonging to that member. It is essential all members of this type of group are comfortable that the premium determination process is fair and equitable and there are no perceived biases or subsidies.

The second type is an assessable group captive, sometimes called an A/B fund captive where the primary layer (e.g., the first $200k per occurrence) is established as a member’s own account, akin to a self-funded or deductible layer. In many group captives, this A fund amount is assessable for up to 100% of the initial A fund based on claims experience. The working excess or B fund layer (e.g., $150k xs $200k) is a pooled, risk-sharing layer where all losses in the captive are jointly insured by all members of the group. The risk distribution that occurs in the B fund layer is essential to this form of group captive. The fronting carrier, or an unrelated reinsurer, provides coverage for losses excess of the A and B fund layers, as well as aggregate stop loss coverage. This adds cost certainty to captive members as their total costs cannot exceed two times the A fund, plus the B fund, plus expenses. This is a key advantage of A/B group captives.

In most such captives, it is desirable not only to insure the auto liability, but also auto physical damage, workers’ compensation and general liability to create a better underwriting mix, less loss variability and more risk distribution than insuring commercial auto liability alone. These group captives can consider adding members with as little as $300k in premiums across the three lines, much smaller than single- parent captives. They will also require substantial collateral and a lengthy time period before exiting.

Both forms of group captive discussed here need to find a willing commercial carrier to front for the programme. This has become an even more challenging prospect in the current market conditions. This will also, again, mean they will require substantial collateral and capital.

Risk retention group. There are also two variations on the this form for commercial auto risks. First is a group programme for multiple companies. The capital requirements for this type will be much higher as this captive formed under the Liability Risk Retention Act does not need a fronting carrier and can directly issue policies to their member owners. There have been some very large failures of this type of insurance company, so state regulators are wary of approving these without at least $2m or more in initial capital and that level will also be driven higher based on coverage limits and reinsurance attachment point and loss limiting features (e.g., sliding-scale ceded premiums) of the RRG. The NAIC has a rule requiring that no more than 10% of capital be at risk in any one occurrence and while this is not mandatory for RRGs it is a consideration that many regulators will consider when reviewing a business plan. A $500,000 per occurrence retention with $500,000 in reinsurance supporting it is likely to need at least $3m (6 times per occurrences retained) to pass muster with a state’s actuarial review and the regulators review. It is important to note that due to prior RRG failures some companies and captive domiciliary regulators have stopped accepting RRG’s unless they are rated BB+ or higher (at least). They are also quite sceptical of new commercial auto RRGs, where a broker or MGA plays a central role as this is a common denominator of many recent insolvencies.

The second form of RRG has become colloquially known as the single-parent RRG. This involves a trucking company with more than one legal operating entity resulting in each one being “members” for the RRG. The concept was to write a high-deductible policy from the RRG and the RRG to not mandate collateral to secure the deductible. This resulted in the release of substantial amounts of collateral over several years as prior agreements with commercial carriers were unwound. This has also seen several failures putting regulators on guard with these structures and only accepting applications for companies with strong financials and asking for higher capital at launch such as $2m or higher even for $250 xs $750 policies.

It all comes down to data

There are basic data requirements that will apply to all four commercial auto captive insurance options:

1. Description of operations includes such things as radius of operations (interstate and intrastate, local, short-haul, intermediate or long-haul, states driven in), cargo types (non-hazardous, hazardous, nuclear), trailer type (flat-bed, refrigerated, box, low boy, western double trailers, car haulers, tankers). Do your vehicles operate in multiple or 48 or 50 states or do you avoid metro areas such as NYC and LA? Given the litigiousness, social inflation and litigation financing in specific areas, this can dramatically impact premiums.
2.  Several years’ exposure data by vehicle and state of registration.
3.  At least three years and preferably five of loss history including detailed information on large claims (such as any driver with a death claim). This will be needed to produce an actuarial analysis that develops these claims to an ultimate settlement basis.
4.  Insurance requirements – required limits, all rating requirements. This is especially important if a risk retention group is being considered as MCS-90 forms and state specific filings are a significant administrative activity.

Requirements for success

All the captive insurance options presented, fronted, large deductible, group captive and RRG are possible but the following factors are imperative to viability and long-term success:

Ability to post substantial capital and collateral, demonstrate strong financial performance or availability of funding and a proven solid loss history;

• Proactive claims management;
• Ongoing commitment to modern driver screening, safety and loss control;
• Professional service providers with extensive experience and expertise in transportation insurance, rather than just general captive experience;
• Willingness to invest the time and effort required to operate a captive insurance company.

Holman, the parent organisation of Risk Partners, Inc has been in the fleet management business for decades and has extensive data showing that the use of telematics and other technology (e.g., lane monitoring) and driver selection and training, make a material difference in loss ratios in these commercial automobile programmes.

Putting its money where its mouth is, Holman has built a programme for its fleet clients and partnered with PMA Insurance to offer a competitive product for its client whose eligibility for the programme was based on utilising some or all of Holman fleet management offerings.

Clients also had the option to assume up to 50% of the primary $250k per occurrence (but this is not required). Holman also assumes a quota share position in the primary $250k to demonstrate to PMA that it will financially support its position that its programmes will lower the loss ratio.

The programme had grown to more than $40m in annual premium and to date the developed, ultimate loss ratio remains below 50%. This example is to highlight the need to differentiate a programme and justify why the participants, carriers, and regulators believe it will outperform the current market to improve your programme’s odds of success.

In the current commercial auto insurance marketplace, captive insurance companies and other alternative markets are playing a central role in helping trucking, bus and livery companies design insurance funding mechanisms to attempt to control their costs. These solutions require proactive investments of time, effort and capital by the insured businesses and partnerships with professional service providers. When these factors are present, substantial insurance cost savings, lower claim frequencies and severities and a sustainable competitive advantage are possible, but require hard work. 

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