Introduction

The year 2003 began with a sluggish economy, fear of war and exploding business scandals. It ended on a potentially upbeat note, as reports indicate an improving economy. War continues in the Middle East, but thankfully year’s end finds Saddam Hussein in custody. During the course of this roller coaster ride, Americans have learned to accept the ever-present threat of terrorist activity. As strong willed as ever, we have persevered to ensure that the freedoms which we hold so dear will endure.

The trucking industry continues to play a critical part in the war on terrorism. 2002's defense spending act directed $20 million toward security grants for the trucking industry. It is anticipated that much of the money will be used to fund the American Trucking Associations’ Highway Watch program, which was designed to use the trucking industry as a mobile guard against terrorist activity. In early December, the Department of Homeland Security issued a special alert encouraging motor carriers to be aware that increased "chatter" may indicate potential future attacks on the trucking industry, especially fuel and chemical tanker operations. The general public is being advised to keep a safe distance from these types of trucks.

While these concerns exist, they have not substantially hampered the economic recovery. Third quarter economic reports indicate that we are on the right track, as everything from factory orders to consumer spending to employment growth has improved in recent months. The stock market has begun a slow recovery. However, there seems to be some hesitancy in the actions of investors and consumers alike, perhaps due to a fear of a sudden downturn.

The ever-changing landscape of the economy was mirrored throughout the year in the transportation industry. Diesel prices hit all time highs, with the fluctuations in fuel prices becoming front page news, monitored almost as closely as the stock market. Insurance costs also increased as premiums continued to rise. On the whole, the transportation industry found it difficult to implement rate increases to counter these increased expenses. At the close of the year, transportation industry projections indicated forward movement, with truckers reporting increased freight tonnage. However, with this good news comes reports of potential capacity deficits and higher freight rates due to driver shortages and insurance costs. Insurers also found it difficult to obtain the results of past years as the rate of premium increases moderated and investment income remained below the level of the bubble years.

The North American Bill of Lading Conference met again in 2003 in an effort to move forward with the creation and implementation of a uniform bill of lading for transportation between the United States, Mexico and Canada. This project has been in proposal for ten years and finally appears to be moving toward presentation to the various governments. This is an important issue for both the motor carrier and insurance industries as its implementation would substantially affect the liability regime.

While often at loggerheads, the motor carrier and insurance industries worked together last year to ensure advancements in tort reform. Arkansas and Idaho capped non-economic and punitive damages and repealed joint and several liability. Montana has capped punitive damages, while more than 20 other jurisdictions, including Louisiana, Texas, Colorado and Ohio have passed legislation designed to curtail judgements in various types of tort proceedings.

In last year’s resumé we reported that the Truckload Carriers’ Association had petitioned the Department of Transportation to rescind the requirement that larger motor carriers file financial information. The DOT solicited comments on the petition and Central Analysis Bureau joined with insurance carriers, associations and academia to make the government aware of the critical need for this information. We are following this issue and will keep you abreast of developments in the coming months.

It is too soon to tell whether the current economic rebound is here to stay. We remain cautiously optimistic that the worst is behind us. The country has begun to move along a more positive and grounded path and hopefully we will find a way to protect our safety and economy and bring our soldiers home.

Government Activity

During 2003, the Federal Motor Carrier Safety Administration introduced the final version of the contentious hours of service rules which took effect January 4, 2004. The new rules permit drivers to drive 11 hours after 10 consecutive hours off-duty, which ultimately results in decreased operating time. Similar to existing rules, drivers may not drive after being on-duty for 60 hours in a seven-consecutive-day period or 70 hours in an eight-consecutive-day period. The on-duty cycle may be restarted whenever a driver takes at least 24 consecutive hours off-duty. Penalties for violations include removal from service until the driver has accumulated enough off-duty time to be back in compliance; state and local fines; civil penalties imposed on the driver or carrier, ranging from $550 to $11,000; reduction in a carrier’s safety rating along with federal criminal penalties for knowing and willful violations. We remind you that a driver’s compliance with the rules is examined carefully after motor vehicle accidents and any violation is generally used against the motor carrier in subsequent litigation.

During the last six months industry executives and analysts have issued dire predictions that implementation of these rules will force some trucking companies to raise rates in order to maintain current levels of profits. The FMCSA anticipates that the cost of compliance will be $611 million a year and will result in a need for 84,300 additional drivers at a time when driver shortage is already an industry problem. In anticipation of the effect that reduced hours will have on driver salaries, some carriers have already begun raising salaries in order to keep drivers, further reducing profits.

In 2003, the government continued its implementation of security and related regulations which will impact the transportation industry in coming years. The initial rush of quick-fix interim regulations which we saw in 2001 and 2002 are now being replaced with more thought-out detailed regulations. Although each new regulation has seen opposition by some group, most parties have accepted these changes and understand the need for increased regulation.

With the continuing concerns about the security of the food supply chain, the Food and Drug Administration released its rules regarding the notices required for the import of foods into the country. Thankfully, the motor carrier industry was exempt from the notice requirements of the new regulations. However, analysts contend that the delays which will stem from complying with these regulations will affect the movement of goods in the country. These delays, coupled with the new hours of service rules, are expected to have an impact on the prompt movement of freight.

Regulations concerning the procedures for the issuance of commercial driver’s licenses for hazardous materials are still not in place. Last month the Transportation Safety Administration extended the deadline for state compliance until April, 2004 and left open possible further extensions until the end of 2004. Both the states and motor carriers continue to question the feasibility of implementing the required fingerprint and criminal background checks in a timely manner.

The battle over who is responsible for the safety of intermodal equipment also heated up last year. For as long as most of us can remember, the motor carrier industry has assumed responsibility for accidents involving defective or unsafe chassis and containers. Bills have now been introduced in the House and the Senate which would transfer the risk back to the steamship and rail lines. As the exposure for personal injury and property damage claims stemming from accidents is very high, this legislation will be hotly contested by the rail and steamship lines.

NAFTA continues to be an unresolved issue as the border opening continues to be thwarted by various organizations. As a result of last year’s decision by the 9^th Circuit Court of Appeals, the DOT has begun to undertake the environmental impact studies mandated by the Clean Air Act and the National Environmental Protection Act. At year’s end, the Supreme Court had agreed to step in and hear the DOT’s appeal to overturn the ruling. Whether the report or the appeal will be completed first remains to be seen. In addition to these problems, Mexico and the United States have been unable to reach a consensus on the issues of safety audits, hours of crossings and English literacy. With over 4.5 million border crossings each year, the resolution of the issues will have a substantial effect on commerce.

The FMCSA has also put forth a proposal for driver screening which we believe will ultimately benefit the insurance industry. Verification of employment and accident records along with drug and alcohol history will become mandatory. It is anticipated that these new rules will eliminate many unsafe drivers and result in reduced accidents. While many carriers bemoan the effect that these rules will have on the ever-growing driver shortage, the removal of unsafe drivers can only be a benefit to the industry.

Legislation designed to ensure the safe movement of household goods was also proposed last year. In the March 2003 edition of "Bits and Pieces" we reported on the Securing Consumers’ Assurance in Moving Act of 2003 ("SCAM"). That act, if implemented, would provide for civil and criminal penalties for improper actions by household goods carriers and allow for punitive damage claims. The proposed legislation was strongly opposed by much of the household goods carrier industry and subsequent legislation, the Consumer’s Relocation Protection Act of 2003, was proposed in response to their objections. The new proposal would eliminate a private right of action for customers. We expect this to be a political hotcake this year.

The Motor Carrier Industry

After suffering for the last few years, many of the nation’s motor carriers are reporting slightly better financial results. Earlier in the year the less-than-truckload carriers reported bottom line increases stemming from the effects of the previous wave of company failures, including increased freight demand and pricing. But by mid-year the LTL carriers were reporting lower rate gains due to the still weak economy and increased competition arising from the ashes of the Consolidated Freightways demise.

In a surprise move, two of the country’s largest motor carriers, Yellow Corp. and Roadway Corp. announced their merger last year. With an asset base of $6 billion, the new company will be the largest carrier, union or otherwise, and will have a market share of 60% in the LTL sector. At year’s end, the shareholders of both companies approved the merger and it is expected to proceed without incident. The positives and negatives of this merger are being widely discussed and only time will tell whether this merger will be a benefit or detriment to the transportation industry.

In February, the Teamsters successfully negotiated a new National Master Freight Agreement prior to the expiration of the prior contract. In addition to agreements on salaries and benefits, employers agreed to provide improved equipment and new tractors which will cap speed at 62.5 miles per hour. These new agreements will hopefully reduce accidents. Later in the year the Teamsters reached an agreement with major car haulers after a reportedly difficult round of negotiations.

Early in the year the ATA reported that trucks are expected to carry 68.2% of the nation’s freight tonnage by the year 2008, an increase over the current market share. However, recent concerns over the shortage of drivers has many shippers looking to air and rail carriers to move freight.

Through a federation of other trucking groups, industry-related conferences and its 50 affiliated state trucking associations, ATA now advises that it represents more than 37,000 members covering every type of motor carrier in the United States. The ATA has continued its move to recruit many of the transportation organizations with whom it was previously affiliated. Last year the National Tank Truck Carriers rejoined the ATA, increasing its political power. The ATA also ended a long battle with the Association of American Railroads and the two organizations have resolved to work together to improve intermodal facilities, oppose diesel fuel increases and minimize the disruptive effect of environmental and safety regulations. The Highway Watch program instituted by the ATA after 9-11, designed to help law enforcement officials find criminals and prevent terrorist attacks, continues to grow and provide good press for the trucking industry.

In other good news for the industry, preliminary estimates of traffic fatalities in 2003 showed that crashes involving large trucks dropped by 3.5 percent. This was the best highway safety improvement since 1995 and the first time the number of deaths dropped below 5,000.

Insurance Underwriting

The insurance industry has continued its struggle to increase profitability in a difficult economic market. Consolidation, pricing, tort and other legislative reforms, together with capital and reserve issues, dominated the market this year. For some, mergers are viewed as the way to create greater market share and raise capital, as evidenced by the business agreements entered into with Royal & SunAlliance, Atlantic Mutual Insurance Company, Travelers Insurance Company and St. Paul Companies, just to name a few. The face of the industry changes daily as companies merge and others fail. For some the demands were too great, as evidenced by the 17 property casualty insurers that failed and were placed under regulatory supervision last year.

By the third quarter, the major property casualty insurers were reporting increased profits resulting from an emphasis on tighter underwriting and rate hikes. Reserve adequacy continued to be the main focus for most insurers. Many insurers took offsets against profits to add to reserves in order to protect themselves from the dangers illustrated by other carriers which were under reserved for certain tort liabilities.

The market condition of reinsurers also reflected the industry’s ups and downs. On the whole, reinsurers have indicated that new rate increases are expected to be moderate due to the absence of catastrophic losses during the last two years. The financial stability of reinsurers has become a concern for some primary insurers. There are reports that some primary insurers are requiring reinsurers to provide additional financial protection to insure their financial viability.

After much hoopla in 2002 over the need for terrorism insurance, it appears that most insureds are not buying the coverage. Indications are that as few as 10-15% of property insureds have opted for the coverage. Rumors abound as to whether the legislation will be extended or simply permitted to fade into the sunset.

In addition to terrorism issues, privacy issues rose to the forefront last year. Many privacy compliance regulations became effective as deadlines passed and insurers faced a myriad of state regulations detailing what could and could not be released. While it has been three years since the enactment of the federal Gramm-Leach-Bliley Financial Services Modernization Act, legislative interest in expanding privacy requirements has not diminished. The battle over opt-in versus opt-out systems will continue in 2004.

The skyrocketing premium increases of the last few years appear to have slowed last year. Insurance rates in the transportation industry were generally reported to include increases of between 10% and 20% compared with 30% increases in prior years. Increased deductibles and better loss prevention have been cited as reasons for the slower increases. Although the early part of the year showed indications that additional insurers were re-entering the trucking market, the recent spate of sales and mergers may well reduce the number of insurers interested in underwriting the transportation industry. Our conversations with insurers and insureds indicate a growing trend toward larger deductibles, self-insured retentions and captive insurers as alternatives to higher premiums.

We reported last year that a petition has been filed seeking to increase the limits of the BMC-32 cargo endorsement to $25,000, well above the current $5,000 cap. We anticipate that the petition will be docketed and comments requested by the government during the coming year. As this change would have a substantial impact on the underwriting of cargo insurance, insurers would have to decide whether they were willing to accept such an increase.

A petition has also been filed seeking modifications to the MCS-90 endorsement. A number of insurers have joined together seeking to clarify, and hopefully limit, the exposure of the endorsement. Recent court rulings have greatly expanded the application of this endorsement and have made proper underwriting of a motor carrier’s financial stability even more critical.

Whether the exposure under these filings has scared some insurers away from this book of business remains to be seen. We remind underwriters to maintain a close watch on the financial condition of their present and prospective insureds, especially in a tight economic market where bankruptcies and closures are more likely.

Central Analysis Bureau

The services of Central Analysis Bureau are designed to provide underwriters with important tools that help with the underwriting of specific motor and passenger carriers as well as improving the quality of transportation insurance programs. For "automatic" subscribers there is only one annual charge for financial analysis reports on risks insured. All other services are provided without additional charge. During 2003 we continued the process of seeking out new sources of information, new ways of presenting this information to our subscribers and trying to provide a "one-stop" web source for all available information regarding motor carriers.

The use of our internet-based "clearing house" continues to be very high. This website provides the CAB rating for a carrier, all the information that CAB has on the carrier and easy links to all the DOT databases. It is the only place on the internet where underwriters need to go to research a carrier, either for a new submission or at renewal time. This valuable resource is only available to underwriters at insurance companies that are "automatic" subscribers to CAB. For those of you who are eligible for access to our website but have not yet signed up, you can start the enrollment process by going to our website cabfinancial.com. Then just click on the link for "Subscriber Area" in the upper right corner and then on the link "New User Signup" on the resulting page.

For "automatic" subscribers there is never a charge to get information on a prospect. This includes our reviewing any financial information received from the prospect and providing our assessment of its financial condition. Therefore, we urge our subscribers to request financial information as part of their application and to send us the financial information included with the submission for our review. When accounts are written there is only one charge assessed per year no matter how many times a carrier is checked on our website or how many times during the year financial information is submitted to us for our review.

CAB ratings are customized for the motor and passenger carrier industries. Our financial analysis uses the specialized knowledge we have developed during the more than 50 years we have been providing financial analysis services. This specialized knowledge, our database of information on many tens of thousands of motor and passenger carriers and the many years of historical data we have for most of the carriers in our database allow us to provide a depth of understanding and experience not available from any other financial analysis source. Our ratings are designed specifically to measure the financial strength of motor and passenger carriers and are tailored to the needs of the underwriter.

We continue to add to the list of notifications on our reports and website denoted by ***ALERT. These highlight certain anomalies of interest to underwriters, such as when a carrier has a cargo filing but is not registered as a common carrier or where liability filing limits are higher than those required by the DOT for that carrier. In 2003, we began to collect from motor carriers the percentage of operations that are common carrier, contract carrier and broker. We provide this information in our report and also add a notification where the information provided to us by the carrier differs from the registrations it holds with the DOT.

The issue of "brokerage" in motor carrier transportation continues to be one of the most difficult areas for underwriters and carriers. On one hand, many carriers consider parts of its operation to be "brokerage" when it does not meet the legal requirements to be a brokerage operation. In this case the insurance company may face higher liabilities than it expects and may be receiving lower premiums than it should. On the other hand, companies whose operations are brokerage often apply for and are issued motor carrier policies that are not suited for them. We are always happy to discuss this issue with any underwriter, so if you have questions in this regard please do not hesitate to contact us.

We are in the final stages of preparing a Power Point presentation about our website and CAB services. This presentation will be available to be viewed on our website and will help to provide underwriters with a better understanding of all the items on our reports and all the data available on our website. The presentation will also be available on CD. We will alert you when this presentation is available.

In 2002 we added a summary of recent court decisions, as well as a link to the full text of the decision, to our free monthly newsletter, "Bits and Pieces". Recently, the courts have been very active in ruling on issues involving insurance and transportation. These court decisions have a direct effect on potential exposure and need to be considered as part of underwriting activities, in developing policies and in structuring programs. If you do not currently receive "Bits and Pieces" by e-mail and would like to, please furnish your e-mail address to Mark Schweber.

Our affiliate, Transportation Technical Services, Inc., is America’s foremost publisher of transportation directories, both on the web and in print. Its subscription-based web directory, fleetseek.com, has information on over 161,000 for-hire motor carriers, private fleets and owner-operators in the U.S., Canada and Mexico, and is updated continuously throughout the year. To become a subscriber or get further information phone (888) ONLY TTS or visit their website at ttstrucks.com. The senior staff of TTS (and CAB) are recognized transportation experts with many years of experience and are available for litigation, consulting or other purposes.

TTS is excited to announce that they will shortly be introducing a subscription-based marketing tool specifically designed for the insurance industry. Subscribers will be able to go to fleetseek.com and generate lists of motor carriers with insurance expiring during selected months. This list will be customizable by state, type of insurance, DOT safety rating, fleet size and other criteria. This will allow likely prospects to be targeted. Please contact us or TTS if you would like additional information.

The law firm of Schindel, Farman & Lipsius LLP specializes in transportation and other coverage matters. It has prepared the following pages concerning recent legal developments and you may wish to share them with your claims department staff.

It is an emotional time at CAB as we are completing a generational shift to the third generation of leadership. At the end of 2002 Andy Schindel retired and at the end of 2003 Steve Schindel retired. Central Analysis Bureau was started by Andy and Steve’s father, Kalman Schindel, and traces its origins back to the late 1930's. It was built by Kalman Schindel and Hylan Cooper. Andy and Steve Schindel were the second generation. Leadership has now passed to the third generation but that certainly does not mean that we are newcomers. The family of CAB and the law firm of Schindel, Farman & Lipsius is a place where people come to and stay. Jean Gardner may be the member of the third generation of leadership who has arrived most recently but she has been a member of our family for 18 years! You can continue to rely on us for the depth of knowledge that you have come to expect and we are here to answer any of your questions. Here is our new lineup: Ira Lipsius is President, Jean Gardner is Chief Executive Officer and Mark Schweber is Vice President - Finance and Development (and is in charge of our financial analysis activities). Matthew Kirschbaum (who is now also our Director of Operations), Judy Silpe, Gary Bitsko, Alex Bentsen and Daniel Bong are all still here to help you with ratings or other questions about carriers. Hennie Singh is the person to contact if you have any questions about invoices. The entire staff of CAB wishes you the best for the coming year. Please do not hesitate to contact us with any questions regarding specific motor carriers, the industry in general, regulatory issues or coverage questions. There is always someone here to help you.

Schindel, Farman & Lipsius LLP's "Recent Developments in Transportation and Insurance Law"

Copyright 2003, Central Analysis Bureau, Inc.