Stanley Birch was the Comptroller for Littlewood Trucking Company, a long-distance trucking company located in Fredericton, New Brunswick. His responsibilities included all insurance-related matters for the firm. Insurance premiums had risen dramatically during the past three years (1986-88) and the Chief Executive Officer, Oscar Littlewood, insisted that within the next month Stanley develop specific recommendations on how to minimize these increases.


Littlewood Trucking was incorporated in the Province of New Brunswick in 1980, and had its head office and home terminal in Fredericton. Its principal business function was full-load long-distance transportation of non-hazardous cargo. The company was authorized by the provincial governments of Ontario, Quebec and the Atlantic provinces to haul freight in these provinces as a common carrier. The company had a similar authorization issued by the Interstate Commerce Commission (ICC) in the United States. As a common carrier, the company was responsible for the safekeeping of merchandise entrusted to it, and was required to carry insurance to meet claims on shipments which were damaged or destroyed.

Ontario and Quebec were the company's most active and lucrative market. Management had thus focused on procuring shipments destined for this market at the beginning of operations in 1980. At that time approximately 75 per cent of the company's shipping runs were within Canada, and the remaining 25 per cent were to the United States. The company gradually increased its contracts for hauling Canadian manufactured building products, Christmas trees, fertilizers and peat moss to the United States, and carried return loads of citrus fruit and fresh produce from Florida and South Carolina. This favourable market penetration resulted from a combination of factors. First, the company was very close to an international trucking corridor (the United States Interstate Highway 95 had been extended to the upper Western border between Maine and New Brunswick) at a time when trucking was rapidly replacing the railway as a means of moving freight. Second, the international currency exchange rate increasingly favoured the United States; the exchange premium rose from around 10 per cent to over 40 per cent during the eight year period starting in 1980. This provided American shippers with a distinct cost advantage when hiring Canadian trucking firms to handle their freight. By 1988, shipping runs to the United States accounted for nearly 60 per cent of Littlewood's activity.

1 A common carrier is an individual or company that provides public transportation of goods or persons for a fee.

This case was prepared by Professor Gerald D Cook of the University of New Brunswick for the Atlantic Entrepreneurial Institute as a basis for classroom discussion and is not meant to illustrate either effective or ineffective management.

Coppyright 1991, the Atlantic Entreneurial Institute, an Atlantic Canada Opportunities Agency funded organization. Reproduction of this case is allowed without permission for educational purposes, but all such reproductions must acknowledge the copyright. This permission does not include publication.

In its ten years of operations, the company had experienced significant changes in the capital cost for its equipment. Whereas in 1980 the cost of a tractor-trailer unit was around $55,000, similar units in 1989 ranged in price from $100,000 to $125,000. During this time the fleet had expanded from eight to thirty-two units.


The property/casualty insurance industry had habitually followed cycles of alternating "tight" and "soft" markets which resulted in wide fluctuations of premiums. A "tight" market occurred when demand for insurance exceeded supply. This often resulted either from an insurer's lack of financial capacity to underwrite insurance or its unwillingness to participate in a specific insurance market sector due to unusually heavy loss claims. Such was the case during the mid 1980's. For example, Canadian Insurance reported in April 1985 that "a sluggish 4.1 per cent growth in earned premiums, coupled with a sizeable increase of 14.8 per cent in losses incurred, resulted in an Underwriting Loss of $962 million (112% operating ratio) last year for the P/C industry in Canada." In 1985 the underwriting loss reached an unprecedented historical high of over $1.334 billion. On the other hand, keener competition among insurers, frequently combined with rate cutting, resulted in a "soft" market.

Beginning in the mid-1980's, trucking was generally considered to be one of the high risk segments of the insurance industry's liability sector. This situation was succinctly described in the Report of the Superintendent of Financial Institutions for Canada for the year ending December 31, 1986. A section of this report reads as follows:

Early in 1986, the Canadian liability insurance market was affected by an international crisis in liability insurance. This resulted in both availability and affordability problems. Most seriously affected by the problems were organizations in the public sector (e.g. municipalities) and public service (e.g. charitable societies), as well as small businesses, particularly those exporting products to the United States. This situation seemed to be attributable to a number of coincident circumstances including the competitive and cyclic nature of the industry, serious deterioration in operating results in 1984 and early 1985, concern that the increasing trend in the United States of large court awards for liability cases is becoming prevalent in Canada and contraction in the international insurance market.

Echoing this, the Globe and Mail reported on June 10, 1986:

Not only are premium rates rising (by an average 40 to 200 per cent on busses, and 20 to 300 per cent on trucks) but markets are drying up as many insurers retreat from these volatile and claims-prone sectors. Trucking companies which formerly could buy insurance at rates of 1.2 per cent of gross receipts, now have increases of 3 per cent and up to 7 per cent in some cases, depending on a trucker's claims experience and use of deductibles. Reinsurers have been taking a hard line on all types of commercial liability insurance in recent months.

Generally a trucking company required the following types of insurance coverage:

(1) bodily injury (public liability) and property damage;

(2) collision (all perils); and

(3) cargo.

A blanket insurance premium rate for these combined coverages, was quoted to Littlewood trucking. Referred to as the gross receipts rate, it was calculated as a dollar amount per $100 of trucking revenue. Such rates were influenced by the levels of deductibles the insured was willing to retain for collision and cargo insurance. For example, doubling either the collision or cargo deductible could result in a premium reduction of approximately 7 per cent; doubling both deductibles could result in a combined reduction of 13.51 per cent.

In addition to premium and rate quotations, the insured also considered other factors when choosing an insurance company. One of these factors was the ability of the insurer to expedite the claims adjustment and payment processes so that damaged equipment would be back in service as quickly as possible. In addition, the financial stability of the insurers had become a matter of greater concern to all insureds. Between 1980 and 1988, seven property/casualty insurers had gone out of business. The insured not only lost his premiums and was left without coverage when an insurance company failed, but also was forced to shop the market for replacement coverage. In 1988 the Property and Casualty Insurance Compensation Plan was voluntarily introduced by the industry to bear some portion of the financial loss suffered by an insured in the event of an insurer's financial collapse. If a property and casualty insurer went bankrupt, this program would provide a maximum payment of $200,000 in respect of all claims arising from a single accident insured with the defunct insurance company. The fund, which operated across Canada, required agreement from ten provincial governments, two territorial governments , the federal government and over 200 general insurance companies. It was administered by a non-profit organization called the Property and Casualty Insurance Compensation Corporation. All participating insurance companies paid a small levy to the Compensation Corporation to cover its general running costs. If a bankruptcy occurred, the Corporation paid all valid claims and participating insurance companies then paid an assessment to cover the total amount of the claims.

Because of these insurance company failures, many corporate and individual insurance buyers began to question and doubt the effectiveness of the Federal Department of Insurance (FDI) in fulfilling its role of enforcing adequate regulatory safeguards. All property and casualty insurance companies were required annually to report to the FDI extensive information about their operating results and financial condition. The purpose of the statutory system of reporting and regulation was to preserve confidence among policyholders and to help them assess an insurer's claim-paying ability. Based on the required statutory reporting, eight widely used early warning test ratios provided indicators which might suggest the need for the FDI to scrutinize more closely certain insurers who appeared to be moving toward financial difficulties. Starting in 1982, these ratios were published by Collander Publications Limited in its first annual T.R.A.C. Report (trends, ratios, analyses, charts). As reported by the Globe and Mail on September 29, 1988.

A poor showing [on these early warning solvency tests] does not mean a company is insolvent - that requires more complex tests. But it sends a warning to insurance brokers to press those companies for explanations - and to consumers to get a status report from their brokers before signing on the dotted line .... In 1987 nineteen of the insurance companies failed to pass four or more of the solvency tests, compared with twenty companies the previous year. Several companies with the poorest showings do a large amount of automotive insurance business.

Stanley Birch examined the solvency ratios for the five companies that had submitted quotations for Littlewood's insurance requirements. See Exhibit IV for selected ratios.


There was no employee in the organization specifically responsible for the risk management function. It had thus taken Stanley more than two weeks to gather the relevant data (Exhibits I-IV). He realized that he also needed a methodology to analyze these data in order to address Oscar's concerns. Drawing on his limited knowledge of the risk management function, Stanley recognized that he must examine these data and identify where rising insurance costs were legitimately associated with increases in the size of the fleet and the expansion of trucking activities, and where cost savings might be realized by a more coordinated plan for handling the identified risk exposures. In particular, he was aware that he needed to examine the frequency and severity of loss experiences and the types and amounts of insurance being carried, as well as some rationale for the retentions (deductibles) being carried.


Before reviewing these data Stanley thought that premiums represented the full cost of insurance; after reviewing these data he realized that other factors must be taken into consideration to determine the full cost of insurance. For example, deductibles are a legitimate part of the total cost of insurance. Stanley's data also revealed that the gross receipts rate had increased annually. However, he was not sure what portion of this increase was related to the company's loss experience, and what portion was related to the general trend in the insurance market.

With Oscar's deadline rapidly approaching, Stanley was beginning to panic.


Revenue: 1986 - 88

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* Other revenue arose from internal allocations related to the repair and body shop operated by the company.

Source: The Comptroller, Littlewood Trucking Company


Schedule of Insurance Coverage

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Source: The Comptroller, Littlewood Trucking Company


Loss Summary By Year

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Source: The Comptroller, Littlewood Trucking Company


Exhibit 4

Performance of Selected Companies

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1 Claims ratio, sometimes called the loss ratio, is the value derived by dividing the Net Claims Incurred during the year by the Net Premiums Earned.   The ratio indicated how well the company's underwriting sector performed during the year but does not consider the costs of obtaining the business.
2 Expense ratio represents the percentage of premiums used to pay all the costs of acquiring, writing and servicing insurance.
3 Cost index, sometimes called the underwriting or combined ratio, is the sum of the claims and acquisition costs by the Net Premiums Earned.
This ratio is used as an industry barometer of a company's health.  It does not take into account investment income.

Source: The Blue Chart Report, 1988.