We all know insurance rates are going up. The question is - what should you do about it? In this episode Dr. Alex Leslie tells us why rates are rising, what trucking company owners are doing about it. You’ll hear what strategies work and which strategies will get you into trouble. Trust us, you need to know this.
Highlights from the conversation:
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Derek Rogers 0:05
Welcome to Safe as Truck, the podcast focused 100% on breaking down the challenges of compliance and safety in the trucking industry. Safe as Truck is powered by LogRock, the only digital tool built exclusively to help America's trucking companies stay compliant and stand strong when the DOT or lawsuits come knocking at your door. Now, let's jump straight in with our host, Hunter Yaw.
Hunter Yaw 0:34
All right, welcome, everybody. This week with us we have Dr. Alex Leslie of the American Transportation Research Institute. And we became aware of Dr. Leslie and his work when we read a report that he recently put together called the impact of rising insurance costs on the trucking industry. For the fleet owners who we know listen to our podcast, the fact that insurance rates have been rising is not going to be news at all. And this is a topic that we know trucking companies are dealing with struggling with really on a daily basis and have been for years. Now. Before we jump in and ask him for a whole bunch of information and insight based on that. Let me give you just a chance quickly to introduce yourself Dr. Moseley and the work that you guys do at the American Transportation Research Institute.
Dr. Alex Leslie 1:18
Thank you, Hunter. It's great to be here. I'm a research analyst at ATRI, as we call it. We love acronyms in this industry. We're the not-for-profit research arm of the trucking industry.
Hunter Yaw 1:29
Let's jump straight in. I read your report. And there were a few things that just stood out. It just knocked my socks off. To be honest. Let's start with the first one insurance premium costs per mile. So how much folks are paying for their insurance per mile increased by 47% over the last 10 years. And to put that in, in dollar terms that went from almost six cents per mile. So 0.059 cents per mile to be precise, to basically almost nine cents per mile. So a 50% increase in 10 years is is absolutely insane. And the second fact, and this is one that I'd love if you can just help me understand that really blew my mind was that the rate of insurance cost increases was greater than the rate of the increase in crashes. So we assume that insurance rates are all driven by what's the likelihood that I'm going to get in a crash? What's the insurance company going to have to pay out if that crash happens? But the rates are going up faster than the amount that people are crashing, so it's almost like the costs that are related to accidents (which is what we think insurance is there to protect us for) is actually not related to how much I'm paying for my insurance. Why do you think that's happening? What's driving that?
Dr. Alex Leslie 2:45
It's a complex series of factors really, on the one hand, we have simple inflation, we combine that then with what a lot of people in the industry called Social inflation, which is just a change in social attitudes towards who should receive payment, and how much that should be. Social inflation can be good in some situations, but it can also fuel things like nuclear verdicts and sort of excessive litigation, which is one of the major issues that we've seen, especially in the last decade or so and actually has a couple of reports focus specifically on those issues. But there's also sort of broad economic factors at play here, too. A lot of insurers have had issues with profitability in the last decade, and especially in the world of commercial auto insurance. Part of that is connected to vehicles becoming more expensive due to new technology. But again, there's it's it's this whole ecosystem really in right how it is just like all the different factors involved are chipping into to raise the prices and insurers are trying to adjust to that and, and also trying, of course, to look ahead to what next year's losses might look like.
Hunter Yaw 4:08
So there's one more thing I wanted to dig into in terms of what has been driving up these rates that I thought was interesting, which was the speed with which folks are adding trucks, adding drivers and growing their businesses to try to meet this enormous demand that we're seeing out there in the freight markets, that actually is making it harder for insurance companies to predict risk. Because you've got drivers moving between companies, you've got new trucks, you've got new entrants to the market, new companies being incorporated businesses expanding and that all of that change is hard for insurance companies to digest because it makes it harder for them to predict what's going to happen. Is that right? Is it almost fair to say that in a sense, businesses are being punished for growing/for expanding because the insurance companies can't necessarily immediately keep up to understand what that means from a risk perspective.
Dr. Alex Leslie 4:52
Insurers are very good at this kind of calculation, of course, but when you have new fleets without loss history, for example, these are unknown quantities. And so that's going to inevitably sort of add something in. And when you have issues with either an expanding driver force or turnover in the driver force, that's something right now that insurers are also looking at very carefully, they want to see experienced drivers, they want to see drivers who remain with the same company. But those are signs to them. And the data bears it out of safe driving. And so when you have something like expansion, that that throws that extra variable in there, so it's, it's these couple sort of indirect ways where expansion good, but it can also come with these extra bits of unknowns that then require sort of time to bear out.
Hunter Yaw 5:47
Yeah, and this is not these rising insurance costs, they are not hitting every trucking company. In the same way. When we talk about rising costs, we assume that, sure, if I have more trucks, I pay more for insurance. But that roughly I'm paying the same ballpark rate as the trucking company next to me at least if I have a roughly similar loss history and a similar kind of safety culture at my business, that is just not the case. Your research showed that small fleets pay twice as much as large fleets, and large fleets pay twice as much as very large fleets. So the guys at the midsize end of the spectrum can be paying multiple times—not like 10%, more 20% more—can be paying multiple times more per truck per year than the large fleets and the very large fleets are paying even a fraction of what the large fleets are paying, so this is not impacting everybody equally. The smaller and medium-sized fleets are getting hit multiple times harder by these insurance rate increases than the big guys. Do I have that right?
Dr. Alex Leslie 6:56
Absolutely. And this is relatively consistent with how a lot of other cost centers work for small fleets versus large and very large fleets. And we can see that bear out every year in our operational costs of trucking report. But again, it's one of those factors where if you're already talking about small fleets paying that much more to begin with those extra increases every year, each time that hits a little bit more. It's one of those difficulties, that it's not surprising that many of the small fleet owners or owner-operators listen to this. But it's an extra challenge for them, especially because they don't have some of the other sort of financial tools, or some of the staffing resources to be able to either work around the traditional deductible policy, or try to mitigate some of those issues that insurers consider as a risk.
Hunter Yaw 7:59
The core of your research here was trying to understand how trucking companies are responding to these rate increases. We all know the rates are going up, we now understand by how much and that they're not impacting everyone the same way, but they are going up. You've identified three ways that trucking companies are responding to these rate increases, what are those three ways?
Dr. Alex Leslie 8:25
The first step is trying to restructure insurance policies, trying to either decrease their total coverage or increase their deductible per incident are the amount that they have to pay. First out of pocket before the insurance policy begins covering costs. The second is by improving safety, we see a lot of carriers who are taking incentives right now to take more of that risk into their own hands. And I think that's very exciting, and I think encouraging development. And then third, we're seeing some attempts to redistribute operational costs, essentially, and this one is a bit more risky, trying to move some expenses from different cost centers in order to help cover that added insurance cost.
Hunter Yaw 9:19
So let's go into each of those out one by one because I think it's gonna be very helpful for folks to understand what of those strategies are effective, what are less effective? And what are the risks that are associated with them? So the first one, restructuring insurance policies, what impact is that actually having on what they're paying? Is that actually lowering their total cost on insurance?
Dr. Alex Leslie 9:40
The short answer is no. No, it's not. There are some exception cases that these carriers it's not really that they're sticking with their policy and that sort of doing it by itself. It's that combined with other things. Again, the carriers are reducing their coverage sometimes quite drastically, and increasing their deductibles again, shrinking that space that the insurance policy covers. But for the most part, it's not, it's not actually having an impact on premiums, their premiums still go up. They're paying more essentially for less coverage. If you go to a store and buy 50%, of the cereal that you bought last week, we'd think that our bill would be lower. But when you're buying insurance, you're not, you're not really buying just that dollar coverage. What you're buying is your binding someone's trust in your safety. And so it makes sense, then that really, the bigger impact is carriers changes in how they approach risk, rather than the coverage total number, the deductible tool.
Hunter Yaw 10:57
You would think that if I increase my deductibles, which is basically saying I got, I got to pay more, I have to spend more before my insurance kicks in. Or if I am taking on self-insured retention, which is really just a fancy way of saying I'm holding more of the risk myself, I'm giving less risk to the insurance company, and I'm holding more of the rest of myself, you would think that doing those two things means that your out of pocket costs related to everything involving accidents involving the results of accidents, whether it's equipment, or people everything else, you would think that your out of pocket costs would go up, right? I assume that if I go, for example, a personal cheaper medical insurance policy that has a higher deductible, I figure I'm probably gonna end up spending more out of pocket on my medical costs, right, because my insurance is going to cover it. But actually, that's not been the case for trucking companies. In fact, if I got this right from your report, 61% of trucking companies who increase their deductibles or who took on more of that risk themselves, actually saw lower out-of-pocket costs, despite taking on more of that risk themselves. Is that right?
Dr. Alex Leslie 12:03
Yeah, and this was a really interesting finding for us. Like you said, the risk of trimming your policy is essentially that you're increasing your exposure to especially those large nuclear verdicts, but potentially even litigation that doesn't reach that nuclear level. And you're potentially limiting some of the contracts that you can pursue because some shippers have minimum coverage levels, that if you decrease your total coverage, you might fall out of that acceptable range for certain shippers. So there are these risks associated with decreasing your insurance coverage. But we saw, like you said, this jump where the carriers that, in our data, at least, decreased their coverage or increased their deductibles saw lower out-of-pocket incident costs. And the way we have interpreted that is that these are carriers who made this choice carefully. They, they looked at their own, they looked at their own costs, they looked at their own processes and decided to take that initiative, essentially, because there's otherwise no direct, right, you would expect, like you said, four out of pocket costs to actually increase if your exposure increased. So it's this taking initiative, for your own wrist, and for your own safety. That is, is the sort of silver lining of this process. And that, I think, at least is a potentially really exciting development.
Hunter Yaw 13:38
Got it. So that's kind of ties into the second way that trucking companies are responding to these increases in insurance costs, which you mentioned, which is improving safety, right? If you have less coverage, but you also improved your safety, what we're seeing is that folks are actually able to spend less than total, they are able to save money, even though the premiums keep going up. They have less exposure to the premiums, they're basically exposing them, they're relying less on the insurance companies and more on themselves. And in doing that they're able to reduce their costs. And a lot of that is through improving safety. So what are carriers doing to improve safety? What are the tactics? What are the strategies that your research found? These trucking companies are deploying to basically own their own destiny to be less dependent on the market, less dependent on the insurance companies and more reliant on themselves and to reduce their costs by doing that?
Dr. Alex Leslie 14:28
One of the tools is of course, technology, but we saw a large number of carriers 56% over half, adding in three or more new safety technologies just in the last three years. But this is a huge sea change, I think, that we're witnessing right now. And there's a variety of different technologies that they're adding of course, and different carriers have different preferences, but that has been huge road-facing cameras. In particular, helped squash a lot of verdicts, excuse me a lot of litigation from ever becoming litigation, a lot of crashes from the coming litigation. And that helps save some expense as well. Outside of the world of technology, of course, I think we really are seeing some changes in the way that we think about safety culture. This has been an issue that has been talked about for a long time, but it's really taken on new legs as a lot of carriers are realizing now that safety isn't just one department that you have over on the side. It's gotta be part of the entire operation and it's gotta be present from the bottom up, the top-down, everywhere. It has to be present in the executive leadership of a carrier. And it has to be emphasized as important, every sort of step of the way, within a company, drivers have to feel like their skill in driving safely, is actually valued is actually important and not just a Well, you better be safe as a sort of afterthought kind of comment. And one of the ways that we do that, or one of the ways that we're seeing that happen, is by the development of coaching strategies, essentially ways of checking in with drivers more frequently try to work with drivers to develop those strategies, rather than either sort of just sort of speaking down to drivers at what they've got to do next time. We're just sort of leaving it to let drivers fend for themselves.
Hunter Yaw 16:41
I'm curious if you saw this, but we're hearing more and more people putting their money where their mouths are and actually paying drivers safety bonuses. Putting a dollar value on and saying, listen, for every X number of miles you drive with no crashes with no incidents, we're gonna pay you at your salary is gonna have a bonus on top of it if you drive safe, is that something you're your research also picked up on?
Dr. Alex Leslie 17:06
Yeah, in our operational costs of trucking report that we do each year, we found last year that safety and retention bonuses actually jumped ahead of signing bonuses, despite the fact that we are in a bit of a tight market for drivers right now. And I think that's a very strong development, it shows that carriers are beginning to think more long term about drivers staying in driver staying safe being of greater value to them and to the roads, rather than just getting people in the door. Of course, we have to get people in the door to but safety bonuses, I think, are going to continue to probably become even more important.
Hunter Yaw 17:50
The other piece of what people are doing to improve safety, you mentioned is technology. The numbers here that you found are crazy 92% Of all the carriers adopted new safety technology in the last couple of years. And 56% of carriers invested in three or more new safety technologies. So technology is playing, it isn't just culture, it isn't just training, it isn't just paying your drivers more to be safe, technology is playing a big role in this, not just in terms of new technology out there, folks are using it folks are adopting it folks are bringing these technologies into their fleets. That's a big part of the picture. Is that right?
Dr. Alex Leslie 18:30
Really what's important here is that technology isn't just adopted, but he's folded into the safety culture. Again, really made to be an extension of the drivers skill, which is I think the most important point when we're talking about safety tech to begin with.
Hunter Yaw 18:48
So the last strategy that are that folks are deploying, and it's that when we leave this one for last, it really should be your last resort, right? Because it's can be really detrimental to the business is redistributing operational costs, which is a formal way of basically saying, in order to pay my insurance bill, I'm gonna have to spend less on something else. What is that something else? Who's spending less on which part of their operation? What did your data show on where people are tightening their belts in order to pony up the cash to pay for these more and more expensive insurance policies?
Dr. Alex Leslie 19:22
Yeah, of our participants in this study, we found just over a third where we're actually cutting costs and salaries, wages and bonuses, which is a risk actually we found a number of carriers again try to cut their insurance. We found almost a quarter of carriers that were cutting back on equipment purchase or maintenance costs. These costs cost-cutting efforts can be a double-edged sword, and so they need to be very carefully weighed, in part because delaying maintenance on equipment or delaying the purchase of new equipment, paying your drivers less, those are both factors that are likely to increase your premiums. They're also factors that are more likely to increase your crash risk down the line. But even from day one, insurers are going to see those changes. And, and they're going to result in higher premiums to begin with. So you end up cutting somewhere to save for premiums, only to have that actually cause the premiums to go up more than what they would have otherwise. So this is, I think, a real warning sign for us as an industry of stealing Peter to pay Paul. It's risky and it has multiple layers of Fallout.
Hunter Yaw 20:54
That's really important for folks to think through, it may feel like by cutting your spend on any one of these things, you're making ends meet. But in the long run, that lack of investment in safety in equipment, maintenance, it's taking them back, and really but you and your long run cost ends up actually being greater than what you save by cutting those in the short run.
Dr. Alex Leslie 21:22
And this is why we emphasize in the report, this idea of total cost of risk, which is really just taking a perspective of all of the different costs, that involve safety. All of these factors are part of your total cost of risk. And, and when you sit back in view, all of those factors together like that, it can allow you to better understand where costs can be redistributed. That I think is really the key finding that we've had, in doing this research that that taking those steps ahead of time taking that broad approach, understanding insurances, one component of this total cost of risk, rather than leaning on it, as the number one part of your risk costs, is the best way to decrease costs overall, but also to improve safety.
Hunter Yaw 22:23
I think it makes a lot of sense. You're seeing trucking company owners, trucking company leaders, responding to the insurance company's continuing to raise rates by saying, alright, I'm going to think about insurance as part of my total cost of risk. And I'm going to look to see where can I take this in my own hands? Where can I own this problem? Where can I be part of solution and not just keep getting my ass kicked by the insurance market? And what can I do to reduce my overall total cost of risk? So that that total number for my business is going down? Not just thinking more insurance versus less insurance, seeing the whole picture, owning more of my own fate? Taking this into my own hands and seeing what impact that can have on business? So I think it's really important for folks to understand that. So to wrap up, what do you see happening in the coming years? What is your crystal ball telling you? What is on the horizon, Dr. Leslie? what do you see?
Dr. Alex Leslie 23:19
Well, I think we're going to see more of this trend, really, I think we're gonna see more carriers, look at that rising premium costs, and ask the hard questions about where can we maybe spend a bit more ahead of time, in order to avoid some of those costs, larger costs, down the line, unfortunately, I hate to say it, but we're gonna continue to see insurance rates go up. We've heard some insurers that we spoke to when we were doing this report say that the rate of insurance rates increase may begin to taper. But that was before we had some of the big inflation issues at the start of this year and in some of the geopolitical conflicts. So right now, I think that's probably up in the air. As a result, I think we're gonna see more carriers continuing to see what can we do? What costs can we take on upfront to try to avoid leaving ourselves at the mercy of premiums each year? Some of that for large fleets especially is going to look like increased SAR investment. I think we discussed a little bit earlier that captives could potentially go either way, I think based on how some of these hot button issues like younger drivers end up playing out. But I think what I would like at least to see is that even smaller carriers begin to take some of these initiatives and some of these His total cost of risk lessons as well, we're all going to have to I think, as premiums go up, and the silver lining to that is, again, in our report that it does seem to be decreasing out of pocket costs and crash rates. So I think I think there's, there are definitely challenges. But I think that we have a lot to gain from rising those challenges. I think the initial work that we've seen here gives us is this cause for excitement.
Hunter Yaw 25:38
We did not think that a conversation about insurance in the trucking industry could end on a high note, but we found a way to get there, there is cause for optimism, folks are taking this into their own hands. They're being smarter. They're being proactive, and your research has played that out. And I think that's should confirm for the companies that are doing that, that they're on the right path and for the companies that aren't that they need to take this seriously. Dr. Alex Leslie from the American Transportation Research Institute. This has been absolutely fascinating. Thank you very much for joining us.
Dr. Alex Leslie 26:07
Thank you for having me. It's been a pleasure.