How Inflation Is Impacting Towing and Trucking Insurance in 2023

Inflation has become a serious problem for all industries, triggered by the onset of the COVID-19 pandemic. While it can be said that everyone was negatively impacted by the effects of the pandemic, the trucking industry has sustained a bigger blow since it was already dealing with such serious issues as an increase in gas prices and truck driver shortage (which still impacts the bottom lines of shipping companies, sellers, and buyers alike). Aside from driver shortage, we could also see a shortage in parts, low vehicle inventory, and replacement costs.

Inflation is a problem that continues to gain intensity, but what does it mean for the towing and trucking industry? This article will discuss the impact of inflation on this industry and the reason behind rising trucking insurance rates.

The Impact of Inflation on the Towing and Trucking Industry

While inflation burdens us all, the commercial trucking and towing industry suffers a massive impact from the combined rising in fuel, equipment, and labor costs. The increased price of steel, lumber, aluminum and polyethylene additionally increases the cost of new equipment. According to the research done by Heavy Duty Trucking, what used to be a $30,000 trailer now costs $39,000. However, this is just one problem.

According to FTR Intel analysis, rising demand spiked spot trucking quotes upwards of 24% when compared to 2021. What’s more, freight spot load postings increased 44% at the beginning of this year. Even if we take the rising prices of fuel out of the equation, rates were up 18% year-over-year, along with rates for refrigerated and dry vans and flatbeds. FTR Intel does predict slowing freight volumes throughout 2022, although they will stay elevated. However, inflationary pressures over future supply chain disruptions and the ongoing Russian-Ukrainian crisis could prove to be unknown variables for the rest of the year, as it is still unclear how these developments could further affect consumer demand. Whatever happens, the shortage of capable truck drivers and dwindling pandemic stimulus will, in all probability, play important roles.

Many companies have benefited from lower diesel prices during the most difficult period of the COVID-19 pandemic. These lower prices were mostly due to less driving during lockdowns. However, gas and diesel prices have been steadily rising, reaching levels higher than before the pandemic. Because of this continuous increase in gas prices, cash flow and fuel management are becoming crucial pieces of any organization’s profit margin, and they must be integrated into their business strategy and accounted for in their revenue projections.

Despite high demand from trucking companies, orders for Class 8 trucks fell 55% at the end of last year. Aside from the ongoing supply chain issues, the continued semiconductor shortage adds to the production uncertainty. According to Paccar Inc, a class 8 truck manufacturer, the semiconductor shortage has reduced their sales by about 7,000 vehicles. Because of the same problem, Tesla Inc. has pushed the production of their electric class 8 Tesla-Semi to 2023. All of this has forced large trucking companies to use their existing trucks beyond their usual trade-in cycles.

Despite the growing demand caused by booming e-commerce markets, the continuous shortage of truck drivers has led to warehouse clutter, port backlogs, and delayed shipping times. But, as we already mentioned, this shortage is nothing new. We could see turnover rates spiking since 2017 when workers started changing employers for higher salaries, better benefits, and more convenient scheduling. According to the American Trucking Association (ATA), the industry is 80,000 drivers short due to Covid-19 and high turnover rates. ATA further predicts that these shortages could reach a whopping 160,000 by 2030 if current hiring and training strategies fail to attract and retain new drivers. The industry must hire approximately one million new drivers over the next decade in order to replace retirees and other vacancies. Transportation demand will continue to increase due to the rising numbers of people turning to e-commerce for their shopping needs.

However, the large trucking companies are not the only ones dealing with a booming demand due to flourishing e-commerce. The number of light truck drivers is also projected to increase by 6% between 2019 and 2029. Short-haul companies will continue to compete with one another and with long-haul companies who are looking to capitalize on the growing need for new drivers in general. When we add moving companies, distributors, and courier services to the mix, we will get a picture of a very competitive recruiting environment for a limited number of qualified, available drivers.

How is Inflation Impacting Trucking and Towing Insurance?

Inflation can cause difficulties for all lines of commercial coverage, however, the rising litigation costs associated with (social) inflation often result in expensive insurance claims, forcing insurers to make massive payouts to affected policyholders. These major payouts can lead to poor loss ratios and reduced underwriting profits. In order to properly deal with such losses, insurers are likely to elevate policyholders’ premium costs and establish additional coverage restrictions.

While such challenges happened throughout the commercial insurance space, the auto insurance segment has been particularly affected by inflation. This is mostly because, for the past decade, the commercial auto market had already been unprofitable for insurers. As AM Best reports, commercial auto underwriters saw more than $22 billion in underwriting losses between 2011 and 2020, despite underwriters increasing premium pricing for over 40 consecutive quarters, dating back to Q3 of 2011.

As a result, rising inflation issues have aggravated the commercial auto segment’s existing profitability concerns, extending the hard market and creating further challenges for policyholders and insurers alike. Industry experts further predict that this hard market will continue to pose a concern throughout 2022 and beyond.

Because of this, most companies with commercial auto exposures will likely have a more difficult renewal process via lowered capacity, greater premium rates, and more stringent policy requirements or restrictions. Additionally, companies with larger fleets or a poor loss history will likely experience serious rate increases.

The reason why the commercial auto insurance market is facing prolonged profitability issues and is being so strongly impacted by inflation lies in the various trends within the trucking industry that contributed to these challenges. Such trends include:

  • Elevated accident frequency: Fatal truck crashes have become increasingly common over the last decade, leading to further litigation and associated expenses. According to the National Safety Council (NSC), the number of fatal crashes involving large trucks has increased 43% since 2010, amounting to more than 5,000 incidents annually. Most of these crashes have been connected to an increase in unsafe or negligent driver behavior (distracted driving, hard braking, speeding, etc.);

  • Great accident severity: The rise in severity of accidents can be seen in the increase mentioned above in fatal crashes as well as the rising cost of a single fatality. According to Advisen, the median cost of a single fatality increased to $3.7 million in 2020, a 60% increase from $2.3 million in 2010. Apart from fatalities, road incidents with major injuries have also contributed to greater accident severity. Such injuries often require numerous doctor visits, surgeries, and advanced treatments, which can extend recovery time and impact overall medical costs;

  • Increased violations: Driver and vehicle violations have inevitably led to additional litigation and costs across the trucking and towing sector. These violations happen because of poor vehicle maintenance protocols and a lack of driver safety education. However, the most common violations include defective brakes, tire problems, and faulty turn signals. As ATRI reports, the most frequent violations which have resulted in plaintiff-favored verdicts include those related to fatigued driving, poor driver history, hours-of-service rules, and the use of substances while driving.

The result of these trends can be seen in the massive increase in average jury awards for lawsuits above $1 million involving truck crashes. Over the past decade, such cases have climbed from $2.3 million to $22.3 million. Furthermore, the percentage of trucking awards surpassing $10 million increased 15% between 2017 and 2021, with the majority of losses accounting for 35% of trucking losses over $1 million. This is a substantial increase compared to previous years, with trucking awards over $10 million accounting for 20% of losses over $1 million.

As inflation, nuclear verdicts, and litigation continues to impact the commercial auto insurance market, it is important that business owners consider measures for preventing claims and minimizing coverage challenges. These measures include maintaining compliance, ensuring adequate hiring practices, establishing a safety culture, utilizing technology, prioritizing retention, and regularly communicating with a trusted insurance professional. Mike Keith Insurance offers reliable, affordable trucking insurance for businesses of all sizes. Contact us today to get started!