Perfect storm drives trucking insurance premiums to historic highs

Speaker 1:

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Speaker 2:

What is driving trucking soaring insurance prices? New research tells the story.

Speaker 3:

Hey everybody. Welcome back. I'm Jason Cannon and my co-host is Matt Cole. Commercial auto liability insurance premiums are soaring for motor carriers and insurance costs and availability are among the top three issues facing the industry. According to the American Transportation Research Institute between 2014 and 2024, liability premiums rose by 37.8% to 10.2 cents per mile.

Speaker 2:

New research from ATRI analyzes the issues that have led to the big insurance price hikes of the last decade as well as opportunities for fleets to control that spend.

Speaker 1:

Insurance costs have been a big concern for the trucking industry for quite some time. And in fact, just in this past year, it was ranked in the top three industry issues along with litigation costs and concerns. Those two are right next to each other at number two and number three. They're deeply related. So that tells us that this is a top tier concern in terms of the cost, of course, but also in terms of what do carriers have to do to manage that cost and to simply manage their risk in a broader sense. What we sometimes talk about is the total cost of risk. So with this report, we wanted to go back, revisit some previous research we'd done on insurance, be able to give fleets some benchmarking guideposts, but also look at what are fleets doing to manage their total cost of risk in this uncertain environment.

We broke things down here by layer of insurance policy in order to really get some detailed data. So of course, small fleets, they'll just have a single policy, maybe it's a million or $2 million and that's it. But once you start adding more trucks to the mix, most of these medium and larger fleets, they'll have insurance stacks or coverage stacks that include multiple different layers. So they might have a million from this insurer, they might have five million from that insurer coming in at different sort of attachment points is what they're called. They might have self-insurance in the mix. So we wanted to be able to collect data not just on that total stack as a whole, but actually layer by layer to understand what's happening at these different levels. How is different coverage shaking out in different ways? So that was really to get the deep dive what we were looking for collecting from motor carriers.

But we also got some data on crashes, on safety technology, some of those other factors that impact the cost of risk.

Speaker 3:

Some of the biggest factors that have driven insurance costs up probably aren't very surprising. Litigation, medical costs, crashes, and more.

Speaker 1:

First of all, like I already mentioned, litigation has been a big factor. After the research that we talked about previously and we published late last year, showed that the number of lawsuits is increasing by over 3.5% each year on average. And then the costliest half of awards, those problem awards, they're increasing in cost by over 5.5% each year on average. So litigation, the increasing number of cases and the increasing expensive cases is a big piece of this. Another piece of it is medical care inflation. If we look back at the decade leading up to the pandemic, medical care inflation was consistently rising one or two percentage points faster than inflation overall. The years after the pandemic, of course, we had high inflation, there was some flux so that it's a little bit different there, but there's been this consistent period of rising litigation, rising medical care costs.

Crashes are becoming more expenses, crash severity. And then this has put a lot of pressure on insurers. So we have essentially then we've got the litigation, we've got medical inflation, we've got crashes becoming more expensive. All of that puts pressure on insurers. And in the commercial auto line of insurance coverage, they've been running losses for the past decade and a half with one year of exception. Right after the pandemic, they made a profit for one year, but that was it. So they're running these consistent losses which forces them to turn around and keep increasing premiums. They run losses for a variety of reasons. Sometimes you've got new insurers coming into this space and they frankly don't understand how risk works in this market. It is a unique market in the world of insurance. And in some cases it's again, these increases in costs are just rising so fast that it's hard for insurers to appropriately price out the risk that they're buying essentially from motor carriers.

That's sort of the way that they're selling. They're acquiring the risk from motor carriers in ways that haven't quite matched up with the costs of it. So that's sort of on the insurance side. And then in addition, as a result, when insurers run losses, they want to get out of the space. So they're moving their capacity out of the commercial auto segment and into other more profitable areas for insurance. So when that happens, it's the same thing like supply and demand in the trucking industry. The less capacity there is, the more it drives up the rates of insurance premiums. So that has been a factor as well for fleets again in this last decade and a half or so. So it's a real perfect storm essentially of all of these different factors going badly essentially for the commercial auto segment.

Speaker 2:

Despite insurance costs going up as much as they have, fleets generally have kept their coverage limits at the same levels in recent years.

Speaker 1:

Coverage limits actually remained pretty stable in the period that this report looks at. So this report covers 2021 to 2024, just focused on auto liability insurance. And we found that coverage limits were mostly stable. That was interesting because when we did a previous report on insurance that covered the period of 2018 through 2020, we actually saw coverage limits were decreasing. Fleets were decreasing the amount of total coverage that they purchased during that period. In this period, we think that this part of the stability is because of the fact that there was so much uncertainty during this period, 21, 22, 23, 24, we had huge influx of capacity, huge increase in freight, and then we saw the freight recession kick in during that four-year window as well. So partly the stability related there, but there is one caveat, which is most fleets during this period actually increased the number of miles they ran.

So if you step back and think about that, running more miles means you're increasing your exposure. Essentially, you have more risk, but we saw that fleets, even though that was the case, they were keeping the same level, the same dollar amount of coverage. So that tells us that in one sense, they weren't increasing that dollar amount, but they were increasing their amount of risk by running more miles. So in a sense, it was stable, but they were still running a bit more exposure.

Speaker 3:

Now, insurance costs aren't the same for every fleet across the board. The size of the fleet and what they haul play a role.

Speaker 1:

Fleet size is a huge factor here. We see the small fleets are paying twice as much as large fleets for premium costs. So for example, if you look at fleets of five to 25 trucks in 2024, they were paying a little over 20 cents per mile on average for insurance. Compare that to fleets of 250 to a thousand trucks they were paying a little over 10 cents per mile on insurance. So fleet size is a huge factor here. There's a lot of reasons for that. Smaller fleets don't have access to all of the technology necessarily, or rather they're not spending necessarily on all of the technology that large fleets are to improve safety. They might not be able to do some of the levels of training that larger fleets are increasingly pursuing. But another factor is that small fleets they just don't have as ... If you have a smaller fleet, it's a smaller sample size essentially when an insurer is looking to try to figure out, okay, what is the risk here?

Insurers are looking at often five years, sometimes even more of the loss history of a fleet, their crashes, how expensive those crashes were. And the smaller of a fleet you are, the more uncertain that is. You just have fewer trucks, you have less of a sample size. So insurers have to price in that uncertainty as well. And again, that increasingly as costs go up for everyone, it's the smaller fleets that feel that even more as a result.

Speaker 3:

Now be sure to tune back in next week when we hear more from Alex about the opportunities identified by ATRI that fleets are using to control their spend on risk. That's it for this week's 10:44. You can read more on ccJdigital.com while you're there, sign up for our newsletter and stay up to date on the latest in trucking industry news and trends. If you have any questions or feedback, please let us know in the comments below. Don't forget to subscribe and hit the bell for notifications so you can catch us again next week.