Hit by a sharp increase in accident claims, Roadrunner Transportation Systems Inc. is stepping up its safety and risk-management efforts.
The rapidly growing Cudahy trucking and logistics firm has hired an industry veteran to fill a newly created position — vice president of safety, with authority over the company's various safety directors.
And Roadrunner soon will add another new executive to oversee risk management and help the firm reduce the amounts it pays after accidents.
The actions come as Roadrunner's costs for insurance and claims jumped by $8.1 million last year, to more than $20 million.
That's a small slice of the company's 2013 revenue — at $1.36 billion, Roadrunner has become one of the country's 25 largest trucking firms.
But the added costs came right off the bottom line, knocking 13 cents off the company's earnings per share, a decrease of about 9%.
With 3,500 trucks on the road, accidents are inevitable, President and CEO Mark DiBlasi said. But Roadrunner's crash rate of 0.43 accidents per million miles driven is well under the industry average of 0.76, he told analysts on a conference call Feb. 5.
Still, he said, the entire trucking industry has seen damage awards and settlement amounts rise — an observation confirmed by Thomas Bray, a motor carrier safety specialist with J.J. Keller & Associates Inc., a Neenah company that helps clients comply with federal regulations.
"Not us, but in the industry there have been some $10 million, some $15 million, even one $20 million settlement in the last year or so, and people are seeing dollar signs when that happens," DiBlasi said.
Roadrunner pays the first $500,000 of its liability claims. But with insurers largely taking charge of negotiations even below that threshold, there's not great incentive to push to bargain a $300,000 settlement down to $100,000, DiBlasi said.
"For the first $500,000, they're playing with your money," he said.
A key job of Roadrunner's yet-to-be-hired risk management executive will be to give the company more leverage in those negotiations.
"Taking more control of those claims that used to maybe be a $50,000 claim that now are being settled at $250,000," DiBlasi said.
The new vice president for safety, Michael Humm, comes from FedEx and has nearly 30 years of experience in the field, DiBlasi said.
Do safety scores matter?
Beyond reducing accidents, Roadrunner's efforts potentially will improve its scores on a controversial safety measurement system the Federal Motor Carrier Safety Administration put into effect in late 2010.
Roadrunner's performance on that system falls well below the average for carriers of its size on three key measures: compliance with hours-of-service rules, vehicle maintenance, and unsafe driving. For all three, the company exceeds the thresholds for intervention by federal authorities.
DiBlasi said the 2010 system's metrics — often referred to as CSA scores — aren't correlated with accident risk. He notes that Roadrunner's official carrier safety rating is the highest possible — "satisfactory." According to the motor carrier administration, a satisfactory rating indicates "no evidence of substantial non-compliance with safety requirements."
Nor do the CSA scores really matter to insurers, DiBlasi said. Roadrunner's rates are based on its accident history, he said, and are very good.
Rich Bleser, a Milwaukee-based executive with Marsh Risk Consulting who specializes in advising fleet owners, agreed that CSA scores do not directly affect insurance pricing.
But three other industry observers said the scores do matter. For better or worse, they said, the publicly available scores have become part of the fabric of insurance underwriting.
"I can tell you, proof positive, it definitely has an effect on...insurance premiums," said Brian Balongue, an agent with R&R Insurance in Waukesha and a trucking coverage specialist since the 1990s. "More so now than ever."
Dan Jones, owner of Truck Safety Consulting Inc. in suburban Chicago and a former loss control risk analyst for an insurance company, said insurers look at the CSA scores if they're not familiar with a trucking company.
While some insurers pay little attention to the scores, Bray said, "the vast majority of them factor it in somehow, usually in the underwriting process as far as it's a risk factor."
Balongue said that with virtually every account he submits to an insurance company, "the first thing they do is pull these...scores and look at them."
Many shippers, meanwhile, have used the scores in deciding which trucking companies to use, a 2012 study by the American Transportation Research Institute found.
Critics file legal challenge
Whether all this is appropriate is another question.
The Transportation Department created the system to identify which trucking and bus companies should be targeted for enforcement efforts among the country's more than 500,000 interstate trucking firms and 12,000 passenger carriers.
But critics such as a group of trucking companies, shippers and brokers that have mounted a court challenge to the system argue that it is wrongly being regarded as an official safety rating.
The system's flaws, the group says, are many, including grading carriers "on the curve" rather than by objective standards; disregarding geographic differences in things such as speeding enforcement; and "over-emphasis on paperwork violations with little direct relationship to actual highway safety."
Roadrunner's worse-than-average CSA scores alongside a low actual crash rate is the sort of discrepancy cited by critics of the system, said Kristen Monaco, an economist who has studied the trucking industry.
Such conflicts drive complaints that the system wrongly categorizes relatively safe carriers, said Monaco, herself a critic.
A recent report by the Government Accountability Office also found fault with the system, particularly as it is applied to small carriers with very few of the roadside inspections on which the scores are largely built.
And most regulations used to calculate the scores aren't violated often enough to be strongly associated with crash risk for individual carriers, the GAO said.
It said the precision and confidence of many of the scores is limited, raising questions about whether the system "is effectively identifying carriers at highest risk for crashing in the future."
In the wake of the GAO report, the American Trucking Associations, the industry's leading trade group, called for the scores to be removed from public view.
Study finds crash risk correlation
At the same time, another 2012 study by the American Transportation Research Institute, which is affiliated with the trucking group, supported significant aspects of the scoring system.
The research institute found that some aspects of the scoring were flawed, but that higher crash risk was indeed connected — on average — to poorer scores on the measures of unsafe driving, vehicle maintenance and compliance with hours-of-service rules.
Crash risk also rises — again, on average — at carriers with multiple scores above the intervention threshold levels, the research institute said.
And the motor carrier administration this month published an analysis of the CSA system by a sister entity in the U.S. Transportation Department, the Volpe National Transportation Systems Center.
It essentially concluded that the system works, saying companies earmarked for intervention, as a group, had significantly higher crash rates.
That, though, is hardly the last word.
While one of three outside reviewers supported the conclusions, the other two — one of them Monaco, who called the research "over-simplified" — said the Volpe analysis fell well short of proving the motor carrier administration's case.
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