What fleets are doing to keep insurance costs in check

Speaker 1:

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Speaker 2:

With trucking liability insurance costs soaring, what are fleets doing to keep those costs in check?

Speaker 3:

Hey everybody. Welcome back. I'm Jason Cannon and my co-host is Matt Cole. On last week's episode, we talked with Alex Leslie at the American Transportation Research Institute about the firm's latest report on trucking's insurance costs. If you missed it, be sure to check that out. This week for part two of that report, we're discussing the ways ATRI found that fleets are reducing their overall risk spend.

Speaker 2:

One of the most common ways to do that is by having a higher deductible. That of course means a higher cost in the event of a claim but lower premiums. As fleets get larger, however, self-insurance becomes more common.

Speaker 1:

In a classic insurance policy, the kinds that you and I pay for health insurance or what have you, a deductible is the amount that we usually pay first when any incident happens before the insurance policy itself kicks in or responds to that loss or that incident. So a traditional deductible policy is for small fleets usually the go- to move. We found that fleets with fewer than 50 trucks, the majority of them by far are using deductible policies, essentially all of them. Some of them have what's called first dollar coverage and that's where you don't have a deductible, but the insurer pays from the very start. The premiums on those policies are higher, but you're not paying out of pocket for those deductibles. As fleets got larger, they are increasingly turning towards self-insurance instead. And self-insurance, it functions essentially the same from that sort of structure perspective.

Self-insurance is what you as a fleet are paying first before any insurance policy kicks in and responds to an incident. Now, there are a number of different ways for self-insurance to work, but usually it does involve the fleet taking more responsibility for claims management and usually it does mean that the fleet is paying that directly immediately rather than getting billed later for a deductible. So the fleet or the motor carrier is either managing that themselves or hiring it out. So self-insurance, what we've tended to see is that the fleets opting for self-insurance are usually the ones who want to retain more of their own risk. That is to say they want to manage more of that on the front end. They have lower premiums as a result, but they have to pay more in direct losses out of pocket. So we found that the shift towards self-insurance begins to happen really in that 50 to about 500 truck fleet size group.

In our sample, fleets in that size group were evenly divided on whether they went for deductibles or self-insurance. But then above 500 trucks is when fleets really turn predominantly almost exclusively towards self-insurance and they start taking out self-insurance policies of a million or more on average at that threshold.

Speaker 3:

Some of the nation's largest fleets self-insure up to $10 million or maybe even a little more.

Speaker 1:

The reason for that is the initial layers of insurance coverage, those are the ones that are getting hit every single time there's a crash. Most crashes don't cost $10 million. Occasionally they do and you have to be ready for that. But most crashes right there coming in less than that, $20,000 here, $100,000 there. So fleets who retain more risk, whether that's through a higher deductible or through a higher amount of self-insurance, they're covering those smaller crashes. They're paying for that right out of pocket and they're not paying the premiums, which would be higher if they were to actually price that out and buy it from an insurer. So they're able to get better premiums on their other policy layers that they're higher layers of coverage that, like you say, might not kick in until $10 million. And in a lot of cases, frankly, insurers right now don't even want to insure those initial primary layers for large fleets because they're just getting tapped so often by crashes.

But a smart fleet that is taking proactive steps to improve safety, to improve, even when a crash happens to improve the severity of that crash, those fleets are able to actually see savings when they look at self-insuring a larger portion of their own risk.

Speaker 2:

With deductibles and self-insurance in mind, Alex says risk retention is one actionable thing fleets can do to lower their spend on risk.

Speaker 1:

This was one of the biggest findings of the report. I mean, this is a silver lining. This is something that fleets can do, can look at to help improve their total cost of risk. It's not an automatic though. It means that you have to take the steps to improve your safety, but this is a real way that fleets can improve their total cost of risk. So we looked at it a couple different ways and one was just looking at, okay, fleets that retain different percentage of risk, what does their total cost look like as a result? So again, you've got your deductibles, you've got your self-insurance. Those are all covering a part of your risk. Those are all an amount of your risk that you are retaining. You're retaining it in the sense that you're paying for that amount whenever there's a crash. So you might retain 1% of that, you might retain 5%, you might retain 10% of your initial primary risk.

And what we found is that the more of that initial risk fleets retain, the lower their total cost of risk is. So if you're a fleet retaining just 1% of your primary risk. On average in this data, we found that the total cost of risk was about 15.5 cents. So that's your premium cost, but then also whatever you're paying out of pocket for that deductible or potentially for that self-insurance. Now, if you were retaining say 5% of risk, that drops down to 12.5%. So an immediate three cent per mile saving. And again, your premium is dropping significantly because you're retaining more of that risk yourself, but your losses are increasing a little bit as well. So that breakdown does shift, but overall it is a cost savings. Now step that up one more. If you're retaining 10% of your primary risk, your initial layer of risk, then that average cost dropped down to eight and a half cents per mile.

So again, 15.5 for 1% of retained risk, 12.5 cents per mile for 5% retained risk, 8.5 cents per mile for retaining 10% of risk. You're almost cutting that total cost of risk in half by retaining more risk yourself at the fleet level. That's a significant area of savings. And again, I always want to emphasize this. It doesn't just automatically happen. It's because fleets who are retaining more risk are looking at improving their safety. They're incentivized. That's what you're doing. If you're retaining more risk instead of pricing it out to an insurer, you're incentivizing yourself, you're betting on yourself and the fleets that did that did indeed see preferential outcome

Speaker 3:

ATRI's research found that fleets using certain safety technology on their trucks do experience lower losses. What technologies make the biggest impact?

Speaker 1:

The approach that we took to this question was let's look at losses. Let's look at liability losses. So again, that's the money that fleets are paying out of pocket, whether it's deductibles or self-insurance because again, we collected that data so we have that here. We can actually look at how does it impact the bottom line and not just the crash numbers because frankly, and you know this too, the impact of a lot of safety technologies, yes, we want them to reduce the number of crashes, but we also want them to reduce the severity of a crash when it happens. So that's not always present in the crash numbers, right? Was there a crash, was there not? Whereas it does often play out in that loss dollar amount. So we found that when fleets deployed more of these safety techs on their fleet, they did indeed have a correlation with lower losses, a statistically significant correlation with lower losses.

The biggest ones were forward collision warning, lane departure warning, and then collision mitigation systems. But we also found that there were, again, statistically significant correlations with automated emergency braking, blind spot detection and adaptive cruise control. So all of these technologies will reduce per mile liability losses and that's pretty significant.

Speaker 2:

Finally, insurance captives are another avenue fleets are using to keep their insurance spend in check.

Speaker 1:

Fleets are all looking for other ways to reduce their total cost of risk. And one way we've talked about that is safety technology. One way we've talked about that is retaining more of their own risk. The big fleets have all kinds of specialized options for retaining more risk. These specialized insurance policies like swing layers and quota share layers and multi-year aggregated programs that can allow them to essentially spread out their risk or retain a bit more and improve better premium pricing as a result. But that's really the place for the big fleets, fleets with more than 750 trucks. Well, what do you do if you're a safe fleet and you have fewer trucks than that? You can't go down that highly specialized policy road just yet, but you're doing all the right stuff. You're reducing your crashes, you're improving crash severity, you're really managing your risk.

For those fleets, insurance captives are one option that can help reduce premium costs. Now it does come in with a trade-off as all of these options do for reducing your premium. The simplest way is to just go out and buy the coverage and pay a super high premium. But if you're trying to reduce your costs, you have to have some trade-offs. And in the world of captive insurance, that means that yeah, you are working on a team with other fleets. You have to share all of your safety information, all of your policy information with those other fleets. You're going in together. The safe captives, they don't let just anyone in. They want to make sure that any new fleet being added is going to live up to their high established standards of safety. And if the captive isn't a super safe captive, you probably don't want to be in it because your cost of risk is tied to all of those other fleets.

If one of them has a catastrophic loss, guess what you're all going to be paying as a result. So you are sharing risk with a smaller group. That means that your standards have to be higher. It also means that you have to be able to pay in the first place. So you have to have some of that additional capital available. You have to be willing to sometimes take constructive criticism. The captive itself as a group makes decisions that can impact each of the members of a captive. So there are all these, you have to really be a team player in terms of entering a captive. Often that means a longer term commitment as well. You can't just willy-nilly change your policy and you have to really, again, any way to reduce your premium costs involves putting skin in the game. And for a captive, again, putting skin in the game means getting involved with the other members of the captive and working together.

Like I said a couple times already, I'm sort of beating the dead horse now, being a team player is really a key part of being a captive. But if you do that well, if your team does that well, you do have the ability to see lower premiums costs or potentially investment income earned on the collateral for that captive. So a lot of factors to consider there as with all these other ways of reducing premiums. But for some fleets, a captive is a very strong option.

Speaker 3:

Now we've covered a lot over these last two episodes. So what should Fleet's big takeaway be from ATRI's report?

Speaker 1:

Here are the ways I would suggest fleets use this report. If you are a fleet that's purchasing excess coverage layers, look at our data there on the trends in the costs of premiums at excess coverage layers. You can use that essentially as a kind of benchmark to understand how those costs are trending. Another thing I would say is use this information on safety technologies. If you aren't already implementing those safety technologies, there's a real financial incentive to do so. If you're a fleet who's looking for ways to reduce premium costs, I would also look at the data that we have on that total cost of risk based on how much of risk you're retaining and maybe the right choice for you is retaining more risk. Again, you're going to have higher losses that you pay out directly, but you're going to see a lower premium as a result.

If you're a safe fleet, think about betting on yourself and increasing that amount of risk retention. And then for larger fleets, again, we've got some information on some of those other policy types that are available that are maybe worth discussing with your insurer, some of these other more bespoke policy types for figuring out ways to more creatively reduce premium costs. Unfortunately, we are just in this tough environment where insurance costs are going up, they're going to keep going up. We see the improvements in crash numbers, but it takes a while even for that to really fully materialize. And there are all these other cost factors that are driving up the expense of each individual cost, even as the number of crashes are going down. So we have to do whatever we can to bet on ourselves as fleets to improve our own safety. And again, we can't control the bigger trends.

A lot of this report is about the bigger trends, but the things that we can do internally can have a meaningful impact on those incremental costs.

Speaker 3:

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.