The past few years haven’t been easy for the trucking industry. In addition to the supply chain crisis that was made drastically worse by the economic impact of the COVID-19 pandemic in 2020, we’ve also faced a persistent driver shortage, rising gas prices, an automation evolution and shifting client expectations. While fleet owners have been scrambling to find solutions to all of that, insurance costs have crept up in the background. Rising insurance costs has now become so substantial that ignoring it is no longer an option.
Over the past decade, insurance premiums have risen by 47%
The latest report by ATRI, the American Transportation Research Institute, found that insurance premium costs per mile increased by nearly half over the course of a decade, rising from 5.9 cents to 8.7 cents. Insurance rates also fluctuate substantially. Fleet owners hop on an unpleasant roller coaster ride when it’s time to renew coverage each year.
The last four years have been especially challenging. Between 2018 to 2020, virtually all motor carriers saw substantial rises in insurance costs. Despite efforts to improve safety and lower risk, insurance premiums continue to creep up.
ATRI’s report noted that truck crash frequency and severity increased between 2009 and 2018. The rate of insurance cost leaps during that span, however, drastically exceeded the increase in crashes.
Litigation is one of the more substantial contributing factors. It’s not just “nuclear verdicts,” or exceptionally high jury awards, that have an effect. Small verdicts and settlements result in payments of anywhere between $406,386 and $449,792. Enough settlements like that are enough to strain an insurance company’s pocketbooks. In short, every lawsuit puts financial pressure on insurers. Then, they pass the pressure on to the motor carriers they insure.
The economic conditions within the insurance industry play a role as well. Between 2015 and 2019, incurred losses for insurers of commercial vehicles rose by 50%. Insurers responded by raising premiums and reducing offered coverage limits. Some have even left the market completely.
Small fleets are hit by rising insurance costs the hardest
Insurance premiums increased for all sectors. On average, however, small fleets pay over three times as much per-mile as the largest fleets. The larger you are, the more insurance breaks you get. Still, even the costs for moderately large fleets aren’t sustainable.
One-third of companies asked in the report said that they cut bonuses or wages to offset rising insurance costs. 22% of them reduced their budget for upgrades in equipment and technology. In the long run, these cutbacks may exacerbate the frustrating driver shortage, compounding the industry’s woes.
What trucking fleets like BYX are doing in response
92% of respondents in the study reported that they had adopted new safety technology in the previous three years. Road-facing cameras are a popular upgrade. They allow drivers, carriers, and insurers to provide irrefutable documentation of accidents, lowering the cost of claims. Sadly, even the best safety technologies have a minor influence on rates themselves.
Many fleets have responded by decreasing coverage levels. While the reduction in premium costs is helpful in the short run, it puts carriers at risk in the case of a nuclear verdict. Some carriers have also switched to policies with higher deductibles, which also comes with risk.
For medium, large, and very large carriers, the risks are worth it. Their out-of-pocket expenses are still lower than what they would have spent on net rising insurance costs. For small fleets, that’s rarely the case. They typically have smaller profit margins, and paying a higher premium is often the better option.
There’s one additional option to offset rising insurance costs: Captive insurance
Also known as “self-insurance,” captive insurance is a licensed insurance company that’s owned in full by those it insures. Companies assume part of the risk by investing their own capital. The remaining balance is taken on by an additional insurance company, commonly referred to as a “reinsurance” company. In effect, it reduces premiums for small claims, while elevating risk for large ones.
In today’s economic climate, captive insurance is worth consideration
Captives aren’t an end-all-be-all solution, but they do have advantages, like:
- Tailored coverage
- Improved cash flow
- Investment income to help fund losses
- Greater claims control
- Reduced operating costs
- Access to wholesale reinsurance markets
- Insulation against risk
- Incentives for minimizing loss
- Retainer earnings
For these very reasons, BYX has opted to make the leap to a captive insurance plan. In addition to the benefits above, we can now hire any driver with a Class A license. Before, drivers needed two years of experience and had to be between the ages of 23 and 63.
While the change doesn’t come without risk, we’re hopeful that the new policy will help us to shield our customers from startling price hikes. If it makes it easier to find qualified drivers to join our team, we’ll consider that a bonus.