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Looking back over the initial half of the decade, the early years each had defining moments; terrorist attacks, hurricanes, tsunamis, and political scandals, which impacted the future of the country and overshadowed the less significant general events. The start of the second half of the decade was different. Perhaps we have become immune to the shock of those types of events, which were relatively unknown before then, and therefore more alarming. Terrorist attacks, on a smaller scale, continue. War is now just a part of the news. While in 2006 we did not have the fury of hurricanes, the helter skelter pattern of weather, with warmth in the cold areas, cold in the warm areas, dry in rainy areas and wet in dry areas seems almost to be a metaphor for the rest of the events in our society. This year the eyes of the country were focused on the continuing war in Iraq, the daily toll of loss, the ever changing weather patterns and the changing political climate. Each played its role in the overall economic picture and consumer confidence.

At the end of 2006, economically the country is sluggish. Strong demand earlier in the year, consolidation and tight capacity helped increase profits overall for the year for some truckers. However, the broad industrial slowdown as the year progressed has filtered down and affected the trucking industry. 2006 started as a good year; however a faltering economy resulted in a softening in the trucking market. Consumer spending fell, leading to a weakening manufacturing sector, which led to reduced freight tonnage. A stalled housing market and troubles in the automotive sectors have also resulted in reduced freight. Fuel prices were erratic throughout the year. Freight tonnage plunged as 2006 drew to an end and motor carriers report that the annual peak season simply never occurred. On the up side, fleet operators bought record numbers of tractors, in part to avoid buying new models in 2007, which have more stringent emissions regulations. There is an expectation that the industry will readjust and rebound. From a financial standpoint, many publicly traded companies continue to be profitable businesses as successful truckers change the focus of their operations to select better freight and to offer more tailored services to select customers. Just as the insurance industry tightened its belt to reduce the impact of reduced investment results, trucking is moving to operate more efficiently

The results of a GE Capital Solutions survey conclude that fuel prices and the driver shortage are two of the most serious concerns facing trucking companies. The survey indicated that roughly 70 percent of respondents believe that fuel prices are putting their businesses at the most risk. Sixty-nine percent felt that driver shortages were the top concern for business, while another 40 percent said that excessive regulations were the biggest threats to business performance. Of course insurance premiums are always on the list.

Politics, as always, plays a factor in industry changes. The Democratic party has taken control of the reigns of Congress the first time in 12 years. The possible changes are being carefully considered by all industries. For trucking, the incoming Congress is expected to favor fuel taxes over tolls and is not inclined to support the privatization of public highways. Industry groups are gathering forces to seek acceptance of tax incentives for low emission engines and increased safety technology, which have long been favored by Democrats. Elections in Canada and Mexico resulted in new leadership in those countries with expectations that the new leadership will continue to promote trade with the United States. Whether the Democratic Congress will continue keeping the borders closed remains to be seen.

The Port Security bill was signed into law, authorizing $3.4 billion over the next five years to bolster cargo security. Answering a question many cargo underwriters can answer without further investigation, a $75 million dollar study by Department of Homeland Security found that cargo containers can be opened secretly during shipment without government alert and cargo can be added or removed. Of interest to underwriters will be Transportation Workers Identification Card which will assist in conducting threat assessment of drivers. As port security is high on the agenda of the incoming Congress, additional cargo security features may be forthcoming this year. Campaign promises during the recent election indicated that homeland security, and by definition, port security, would be a major concern of the incoming Congress. Increased scrutiny of cargo is expected, but not necessarily welcomed, by the marketplace.

Overall, insuring truckers is still a good business option for insurers with a knowledgeable staff and quality underwriting guidelines. ISO reports that the frequency of auto claims from 2001-2004 has dropped 20% nationwide. The slowdown is attributed to a general economic slowdown, but also to improvement in risk management and safety.

Federal transportation agencies saw a number of leadership changes this year. After various reports were issued raising questions about the failure of the Federal Motor Carrier Safety Administration to complete its many assigned tasks, Annette Sandberg resigned as head of the FMCSA, with John Hill taking over the reigns and refocusing the department. President Bush’s cabinet then lost its last Democratic member when Norman Mineta resigned as Secretary of Transportation. Mr. Mineta was originally tapped by President Clinton as his Secretary of Commerce and later by President Bush as Secretary of Transportation. Mr. Mineta oversaw the department during the 9/11 events and was a facilitator in creating and implementing many of the security departments and regulations which we see on a daily basis as a result of the attacks. Mary Peters has recent replaced Mr. Mineta. Ms. Peters, at least initially, has indicated opposition to changes in size and weight restrictions for trucks.

With fuel prices still a tremendous part of any trucker’s operations, eyes have turned to find ways to reduce those costs. Motor carriers are projected to have spent $98.3 billion on fuel in 2006. There is an increased interest in alternative fuels. Hot fuel challenges are the newest target. Nearly a century ago fuel companies and regulators determined that fuel should be held at 60 degrees and fuel pumps are set at that standard. However, in a community where temperatures routinely exceed 60 degrees the fuel will ultimately heat above 60 degrees, resulting in higher costs to the consumer. Suits have been filed in various states seeking class action status and modification of these rules in order to drive down costs. While fuel costs remain high for commercial and personal users, it apparently is not keeping Americans off the road. The most recent statistics reflect that Americans drove almost 3 trillion miles in 2005, nearly a 25 percent increase over 1995 numbers.

January 1, 2007, saw the repeal of the Single State Registration System. The Unified Carrier Registration was supposed to be in place in time to simply step in as a replacement. As the program was not ready for implementation, efforts were undertaken to extend the SSRS for an additional year, however Congress adjourned without passing the extension, creating much confusion on exactly what exists at this point. Under SSRS, now repealed, only regulated for-hire motor carriers had been covered. But the UCRA, when implemented, will require all motor carriers to register with the U.S. Department of Transportation including private, for-hire and exempt carriers, as well as brokers, freight forwarders, and leasing companies. Purely intrastate motor carriers are not subject to UCRA. However, they must pay UCRA fees if a state participating in UCRA elects to extend the requirements of UCRA to its intrastate carrier population.

Tort reform also remains a joint focus of insurers and truckers alike. The Supreme Court has recently heard arguments on whether punitive damages can be supported when the damages are not associated with the harm suffered by the actual plaintiff in the suit. U.S. tort costs in 2005 reached $261 billion——approximately $880 per person and $4 less per person than in 2004——according to the "2006 Update on U.S. Tort Cost Trends" released by Towers Perrin. The Fulbright litigation trends survey finds that large U.S. companies face an average of 305 pending lawsuits, with the biggest litigation burden borne by the insurance industry. They have an average of 1,696 lawsuits pending at any one time.

The U.S. government, long recognized as the largest shipper of household, general and military commodities, has begun efforts to streamline its transportation operations. The Defense Transportation Coordination Initiative was implemented to allow the government to select a logistic management team to handle all logistics and moves. Joint venture proposals have been put together by many larger organizations. Obviously the selected winners will have a lucrative future, although many smaller carriers and logistics providers could be downwardly effected by this program. At the end of November the Government Accountability Office (GAO) rejected a protest against the program filed by 90 motor carriers and the Transportation Intermediaries Association, paving way for the operation to proceed. It is anticipated that a contract will be awarded this coming year.

Hours of service remain an issue, both here and in Canada. Canada’s new hours-of-service regulations take effect Jan. 1. In Canada the maximum driving time for truck drivers was reduced from 16 to 13 hours in a 24-hour period, decreasing the daily maximum on-duty time from 16 to 14 hours and increasing the minimum off-duty time from eight to 10 hours. Confusion is expected as the rules have not been enacted in all provinces and may be enforced in different fashions in each province. In the U.S. another suit has been filed seeking to have the court review the revised hours-of-service (HOS) rule. The suit alleges that the revised rule increases both the number of hours that truckers may drive without a break and the number of hours truckers may drive per week. A recent survey released indicates that 77% of drivers who responded indicated that they currently violate the hours of service rules. 78% log off duty time when on-duty, 21% have duplicate log books, and 11% report team driver operations when only one driver is used. The responding drivers report that they intentionally violate the rules on average 5 days a month, with an additional 6 days of unintentional violations.

The transportation of hazardous materials remains in the forefront of regulatory concern. Increased regulations by various government agencies has created much confusion and further increased cost for the trucking industries. According to government officials, more than 3 billion tons of regulated hazardous materials (hazmat)--including explosive, poisonous, corrosive, flammable, and radioactive materials--are transported in the United States each year. Many additional products have been classified as hazardous materials, putting trucking companies in a bind as they need increased insurance limits and more certified drivers. Haz-mat transportation and relevant violations are a consideration for any underwriter as there is an increased safety risk for those carriers

As we end off this section of the resumé, it has become almost a tradition to note that the Mexico/U.S. border is still not opened for full operations for trucks. In the fall, press releases indicated that a possible pilot program for 100 Mexican carriers would be implemented, however that has still not happened. With a Democratic Congress the border is not expected to open any time soon, as possible leaders of the relevant committees have already expressed opinions against opening the borders. Issues which continue to prevent full access include operations for on-site safety reviews by U.S. inspectors, the inability of the Mexican government to perform the new criminal history record checks for Mexican drivers who haul hazardous materials, along with needed improvements in safety monitoring of Mexican driver records. U.S. truck unions and safety coalition groups continue to fight the border opening. Meanwhile border operations on the other side of the country have become a bit contentious as U.S. Department of Agriculture seeks implementation of fees for carriers. Overall trade between the three nations continues to grow. The Bureau of Transportation Statistics reports that surface transportation between the United States, Canada and Mexico was 4.5 percent higher in October 2006 than in October 2005, reaching $66.8 billion.

A number of different government agencies are involved in implementation of programs and rules which will impact trucking in the coming year. As noted earlier the Department of Defense is seeking to revamp its use of carriers. Also as noted earlier, the USDA has sought imposition of fees on all truckers entering the U.S. from Canada. This user fee is ear-marked to pay for border inspections of agricultural products entering the country. The fee, originally scheduled to start January 1, has been pushed back to March as trucking organizations seek withdrawal or reduction of the new fee. Apparently truckers crossing the border into the country also face penalties for failing to declare the contents of their lunch box as they enter the country.

The DOT also rolled out its Framework for a National Freight Policy. The lofty goals of the program seek to target ways to reduce congestion, increase freight capacity and protect the environment. The proposed national policy recognizes that the DOT does not have the funding to implement the appropriate programs to achieve the steps necessary and therefore its proposal includes direct participation by public and private sources.

Following implementation of the highway act, questions were raised as to whether the DOT would continue to register and monitor brokers and freight forwarders of non-household goods. The FMCSA has issued a clarification of its intention, confirming that it does intend to continue to regulate these groups. The notification also indicated that there are 16,930 general commodities brokers who are already registered to operate.

As you are aware from the many bulletins released by CAB over the last year, there was a government glitch in the handling of carrier financial information. The program had been transferred to the Bureau of Transportation Statistics without funding. The program, and all requisite regulations, has been transferred back to the FMCSA. Class I and Class II motor carriers remain required to file annual reports with the DOT.

The FMCSA is also looking into a number of issues this coming year which will affect insurers of motor carriers. At year’s end they accepted a petition to add a policy territory limitation to the MCS-90 endorsement in response to litigation which extended the protection to shipments in Mexico. Canadian insurers have also been successful in getting the FMCSA to consider their petition to allow Canadian insurers to make filings without the need for U.S. fronting companies

The FMCSA also appears poised to begin addressing various regulations which had been put on hold following the Mineta-Peters transition. The proposed rules on intermodal containers were published at the close of the year. The FMCSA proposal would subject intermodal equipment providers (IEPs) to federal safety regulations governing motor carriers. They would be required to register and file with FMCSA an Intermodal Equipment Provider Identification Report (Form MCS-150C); display a dot number, establish a systematic inspection, repair and maintenance program to ensure the safe operating condition of each intermodal container chassis; maintain documentation and provide a means to effectively respond to driver and motor carrier reports about intermodal problems.

The FMCSA continues moving forward on its Agency's Comprehensive Safety Analysis 2010 initiative (CSA 2010), a comprehensive review and analysis of FMCSA's current commercial motor carrier safety and enforcement programs. Public meetings have been held as the FMCSA seeks information. Studies and proposals as a result of this initiative are expected this year. The FMCSA also announced the establishment of the Motor Carrier Safety Advisory Committee. The advisory committee will provide advice and recommendations to the FMCSA Administrator on the needs, objectives, plans, approaches, content, and accomplishments of motor carrier safety programs and motor carrier safety regulations. The FMSCA has proposed a modification to its current safety ratings to include only "continue to operate" or "unfit". With an elimination of a middle category, it becomes all that more important for underwriters to monitor the safety of its carriers.

The OMB has also cleared the way for the FMCSA to issue its rules for the use of on board recorders as a means to insure compliance with hours of service rules. As the proposed rules have not yet been issued it remains uncertain as to whether the FMCSA will mandate use of the records or limit the use to motor carriers with certain requirements, or simply allow their use for those carriers who make that election.

FMCSA has also issued new proposed rules for new motor carriers, identifying 11 regulations that it believes are essential elements of basic safety management controls necessary to operate in interstate commerce. Violation of any of the regulations will fail the entrant, which is a new policy change. The 11 regulations include: failing to implement an alcohol and/or controlled substances testing program; using a driver who has refused to submit to an alcohol or controlled substances test required under part 382; using a driver known to have tested positive for a controlled substance; knowingly allowing, requiring, permitting or authorizing an employee with a commercial driver's license that is suspended, revoked or canceled by a state or who is disqualified to operate a commercial motor vehicle; knowingly allowing, requiring, permitting, or authorizing a driver to drive who is disqualified to drive a commercial motor vehicle; operating a motor vehicle without having in effect the required minimum levels of financial responsibility coverage; using a disqualified or a physically unqualified driver; failing to require a driver to make a record of duty status; requiring or permitting the operation of a commercial motor vehicle declared "out-of-service" before repairs are made; and using a commercial motor vehicle not periodically inspected.

The Federal Highway Administrative has approved standards for a new program to provide additional information to truckers on where to park their rigs and receive general services. Although this new program, authorized under last year’s highway authorization program, will spend considerable monies on providing directions to truckers, it contains no funds for the creation of more parking for trucks, which are often forced to park alongside highway roads.

The later part of 2006 saw a sharp downturn in freight tonnage. Accordingly to the American Trucking Associations, November 2006 marked the single worst month of for-hire truck tonnage since the last recession. While 2006 began with acceptable freight numbers, they plummeted in February and March, with average freight volumes through October flat as every gain since May was followed by an equal or greater loss the next month. Since September the numbers have steadily dropped. As the trucking industry has long been viewed as an indictor of economic activity, as it represents nearly 70 percent of tonnage carried by all modes of domestic freight transportation, it is expected that any economic turnaround in 2007 will be slow, at best.

Overall the forecast for the future of trucking still remains high, with the expectation that these end year numbers are simply an adjustment in the marketplace, similar to that facing the housing industry. The recently released ATA transportation forecast still foresees increased freight tonnage and increased revenues for truckers in the coming years, although the start of 2007 may be somewhat sluggish.

Driver shortages continue to be a major focal point for the trucking industry. At least one large internet employment agencies places trucking on the list of the top 25 job opportunities. Most motor carriers see turnover in excess of 100% each quarter. The national shortage for truck drivers stands at around 20,000. If current trends aren't reversed the shortage could reach 111,000 by 2014. Third quarter reports on turnover for 2006 showed a 121% increase for large LT carriers, with a 114% increase for smaller carriers. In 2006 the focus changed to finding solutions to the problem. The efforts of larger companies are centered on providing additional services to drivers in order to retain their current staffing levels. For example, students at Carnegie Mellon University were provided funds by industry organizations to come up with incentives for drivers, such as racks to permit mobile scooters to be stored on trucks. The ATA has begun a marketing campaign to attract older drivers and there has been a push in the industry to make driving a more attractive option for women. The ATA has also announced that it will provide low-interest loans for students attending driving schools

Fuel prices were volatile, starting the year at $2.442 per gallon, with a high of $3.065 by August, and then dropping in the fall. The end of 2006 has seen at least five weeks of increased costs, with fuel ending the year at $2.62. The Department of Energy reports that the average price next year will be higher, at $2.659, with a spring peak at $2.742, resulting in more expense to truckers. On a different, but interesting, note the ratio of trailers to tractors has declined for each of the past 5 years. This reduction is attributed to earlier increased freight demands, and the desire of motor carriers to avoid purchase of new equipment, with new engine requirements.

Jimmy Hoffa was reelected as head of the Teamsters. Indications are that the organization, looking to expand its work base, is focusing on owner-operators. Organizations, including the Teamsters, are challenging the concept that owner-operators, as contractors, can not unionize.

Possible implementation of speed governors on new heavy duty trucks has created division in the trucking industry. Owner operator organizations have opposed implementation of 68 mph governors. However the ATA has petitioned the National Highway Traffic Safety Administration and the FMCSA for these governors to be required.

The National Motor Freight Classification, the largest single motor carrier classification, has adopted the North American Uniform through Bill of Lading. Under this new bill of lading, designed to cover shipments from Mexico to Canada, the carrier’s liability will be determined according to the liability regime of the originating country. Mexico, the U.S. and Canada each maintain separate liability standards. The impact of this bill of lading is not yet known, as cargo loss and damages claims under the bill of lading will not come under judicial scrutiny for a year or so.

In further efforts to create some uniformity in transportation, the Transportation Intermediaries Association (TIA) and the National Industrial Transportation League have created a model broker-carrier contract for intermodal freight. The TIA and the ATA have competing model broker-carrier contracts for truck transportation. Underwriters for both auto and cargo would be wise to review these proposed contracts to evaluate the current assumption of liability and insurance requirements for carriers and brokers alike

The FMCSA Safety Progress Report indicates that large truck fatalities decreased in 2005 from the previous year, but were up from 2003. The 2005 figures are still preliminary, but fatalities currently number 5,212, a rate of 2.34 per 100 million truck miles driven. 222,826 million miles were driven by trucks. The FMCSA has set goals to reduce fatalities to 2 per million truck miles driven The Large Truck Causation Study was also released this year which was a first nationwide look at all factors involving accidents with commercial vehicles. It was determined that driver or other failure of the passenger vehicle was more often the critical cause of the accident in two vehicle crashes, a result disputed by Advocates for Highway and Auto Safety, which also opposes the current hours of service rules.

It is clear that the industry is and will continue to go through some dramatic changes over the coming months and years, due to increased competition, changes in regulation, more public disclosure and the demands of customers for value added services. The property/casualty industry is expected to report record profits, and potentially the lowest combined ratio ever recorded. While the absence of large insurance hits from catastrophes plays a part in these numbers, favorable pricing also continued in 2006, at least for many areas of insurance. Insurers have also addressed the unfavorable reserve issues of prior years which also contributed to the reduction in the combined loss ratio. However that pricing is expected to take a downturn in 2007, as the market appears to be softening and cat models indicate some increased activity in 2007.

Insurers continued to be a focus of scrutiny by state attorney generals. The later part of 2006 saw additional efforts to resolve many of the suits and complaints related to commissions and insurer operations, paving the way for insurers to move on to correct those business practices and focus their energy on underwriting and investment.

Catastrophe losses were relatively small for insurers this year, after two years of hard hits. Third quarter catastrophe losses were estimated to be $971 million, compared with 48 billion during the Katrina-Rita hurricane season and 24 billion in 2004. However, a recent decision affording coverage for manmade floods may further increase losses for insurers who otherwise believed that floods were excluded from their policies.

In part as a result of the impact of some of these larger losses in recent years, Standard & Poor has indicated it will complete its major overhaul of its insurance capital model. The increased complexity of insurance products and volatility in the market are cited as the reasons for the changes. It is expected that insurers will be required to maintain increased capital to insure that they meet financial security requirements.

Statistics currently show that risk managers who have not had large losses are not increasing policy limits despite lowered or stable insurance rates. Having paid substantially higher premiums over the last few years insureds appear to be keeping the additional premium monies in hand. The same is not true, however, for those you that have felt the impact of large liability claims, in recognition that the greater limits provide increased financial security for their companies.

From a trucking perspective, some brokers are reporting that increased competition is resulting in reduced premiums for truckers. Whether that projection is true or not remains to be seen. According to one trucking organization, the average cost of insurance for a single vehicle carrier, including cargo, physical damage, trucker’s auto and bob-tail is approximately $9,000 a year.

With excess capital, and a strong year behind them, insurers are one again focusing on strengthening their underwriting and claims operations. One of the biggest challenges is the need to recruit and train new insurance talent. Transportation insurance, whether it is auto or cargo, is a unique business and the success of any company’s book of business lies, in part, with having a knowledgeable staff.

The Insurance Filing Monitoring program: Monthly, we scan through all the outstanding filings that an insurance company has registered with the U.S. Department of Transportation. Each individual filings is analyzed to determine whether or not it falls under any of the following categories which can potentially expose an insurance company to unnecessary liability: Filings with effective dates 5 years old or older; filings on behalf of carriers whose authority has either been revoked or never granted; filings utilizing a form that results in an effective filings with no dollar limit; filings for amounts in excess of the DOT required limit; unnecessary cargo filings on behalf of contract carriers; filings for brokers (a broker does not require a filing); filings on behalf of Mexican carriers (filings not required for Mexican carriers). We then send subscribers a report which lists all of these potentially problematic filings, and a spreadsheet with all outstanding filings for the subscriber's insurance companies. This report also has a special section dedicated to a "real time" analysis of all new filings, allowing an insurance company to fix errors quickly and to trace how these mistakes occurred. Since an insurance company's liability under a filing can range from $10,000 per accident for a cargo filing to up to $5,000,000 for a BIPD filing, avoiding even one payout from an unnecessary filing or limit will pay for the cost of this program for many years.

In 2007 we will continue to seek out new information to help underwriters to know their insured and work to provide this information in the most effective manner possible. We will also continue to solicit feedback and to incorporate that feedback into our products.