4 Must-Have Coverages for Transportation Firms
Transformation firms face many risks, both on and off the road, requiring thorough, 360-degree coverage.
There's no doubt much has changed in the commercial trucking industry over the past few years.
While much of the change has come from regulations and official rule changes, best practices have also shifted. Some of this shift stems from aftereffects of the COVID-19 pandemic and geopolitical factors, but not all. Other parts of the business have simply evolved on their own, unconnected to the big-picture events of recent years.
Many changes are improvements to business practices or reactions to standard market forces. Other trends and issues are changes that have been a long time coming.
While it may not always be apparent, the face of the commercial transportation industry is gradually changing, shaped by the constantly moving world we live in. Instead of looking at the industry from the top down, it can be useful to look at a few of the individual elements of the commercial transportation industry that are changing.
Auto Liability coverage is required for all drivers. An update to required minimum coverage is long overdue and could require many companies to adjust how they do business.
Although it has been around for decades, auto liability remains the backbone of our roadway safety and insurance system. The basics of auto liability are simple: Everyone who operates a motor vehicle on public roads is required to hold a policy covering them against damage they may do to other parties on the road. This type of coverage does a lot to remove financial pressure from the driver and keep prices for liability insurance low everywhere.
If auto liability were optional, we would probably see a much higher incidence of hit-and-run accidents, as people who chose not to purchase auto liability try to escape the consequences of their actions. Even with auto liability required by federal law, hit-and-runs make up over 10% of crashes.1
Even though these incidents are criminal offenses, an alarming number of hit-and-runs still occurs each year. It's not hard to imagine what would happen to these numbers if auto liability weren't mandatory.
Just as all private operators of motor vehicles need auto liability, so do all commercial operators. Auto liability is even more important for commercial operators, as commercial vehicles are often larger and more difficult to operate, and cause more damage in accidents.
Auto liability was mandated for all commercial operations by the U.S. Congress in the 1980s, fundamentally reshaping the commercial insurance field.
The current insurance liability minimums2 haven't changed in decades. They are:
When the Federal Motor Carrier Safety Administration (FMCSA) created these minimums, the trucking industry looked quite different. Crashes were more frequent but less expensive. In fact, everything about the trucking industry was less expensive because of the natural upward trend of inflation.
These minimums haven't been adjusted since their creation in the early 1980s, which highlights a number of insurance problems that the industry has slowly grown up around.
According to a FMCSA financial responsibility study,3 "Insurance rates for the same level of coverage have decreased in nominal dollars and thus even more in real (inflation-adjusted) dollars." Likewise, the commercial insurance market has almost completely accepted $1 million as the standard minimum amount of coverage for the average truck. This amount is worrying — especially at a time when U.S. inflation is historically high.4
Insurance already cannot cover all damages resulting from many accidents. Inflation is only worsening this problem, making component parts and other essential commodities more expensive.
While it may not happen in the immediate future, odds are a time will come when liability minimums will be raised. Then insurance brokers and trucking companies will have to renegotiate the fundamentals of their business.
Because trucking is such a low-profit-margin business, higher minimums could have a sizable impact on the industry. While large carriers and companies should have the equity to adjust to higher federally mandated minimums easily, smaller organizations may struggle. Owner-operator companies are sensitive to even small bumps in the price of fuel or parts, and a change in the minimums could reshape the way they do business. While their business models won't suddenly become unprofitable, companies would have to make big adjustments.
As the baseline minimum insurance rates for cargo changes, so will the rates for hazardous materials. If the standard cargo insurance minimum is roughly $1 million and is adjusted by a small percentage to accommodate inflation, the $5 million minimum for hazardous materials would probably increase proportionately.
This increase could mean that companies that routinely transport high volumes of hazardous cargo are hit even harder than other trucking companies are. There's a chance the increase could affect the overall cost of hazardous materials everywhere, sending ripples throughout the economy.
Commercial transportation is such an important part of the material transportation system in the U.S. that it's unlikely to become obsolete anytime soon. However, inflation will make it more expensive, as it does with every other major industry. In fact, transportation is one of the key ways inflation spreads across the country.
Inflation isn't necessarily a bad thing in normal economic times. Ordinarily, a reasonable level of annual inflation is a sign that an economy is growing steadily, as consumers acquire money and spend it on goods. Inflation is a natural force in most stable economies.
Inflation also positively affects people or organizations that hold tangible assets for a considerable length of time. Inflation helps to adjust the value of property in step with the market's rate of inflation. Individuals and companies that own stock sometimes also count on inflation5 to demonstrate growth in different sectors of the market.
But trucking is different. Commercial transportation is often a gig-based business, relying on a revolving door of clients who need to move goods across the country. Trucking companies can't change the price of fuel or other essentials they rely on to continue running their business. As almost the entire trucking business relies on diesel fuel, that cost alone dictates the rates that customers must pay to have their goods delivered.
An increase in the price of diesel fuel in the U.S. directly affects the price of almost all goods transported any significant distance in the country. Trucking communicates these price changes extremely quickly, even to isolated parts of the U.S., driving up prices well before some people might expect.
This increase doesn't necessarily decrease trucking's profitability. The majority of the increase in cost is passed on to clients and, through them, to the wholesalers of the products. But many smaller companies are struggling to compete with larger entities as fuel prices continue to rise. As these companies seek to solve this problem, some have inadvertently exacerbated another one.
As smaller companies try to keep up with rising costs and pushback from clients on rising rates, they've been unable to increase wages for drivers at a time when the cost of living becomes increasingly expensive. This situation has contributed greatly to a shortage of drivers, as better-qualified operators look for work that can support them.
To make matters worse, qualified drivers often shuffle between companies, hoping to get more per mile at their new place of work. Small incentives lead to high rates of driver turnover6 and don't ultimately offer most drivers a sufficient bump in pay to stay long. The market for truck drivers continues to exist in turmoil, and companies are left continuously looking for fresh drivers.
Because things change so quickly and the industry is so functionally dynamic, it's difficult to standardize trucking rates for a longer period.
In turn, this instability has recently resulted in a lower reliability for commercial transportation. Clients are less inclined to count on their cargo arriving at their destinations on time.
Because many of the delays in the commercial transportation market result from logistical and contract issues, there's room for improvement in this space. Much of the administrative work of the trucking industry is done with paper contracts and manual systems. These processes move slower than the day-to-day changes in the market, resulting in contracts that may be outdated by the time they're carried out.
Artificial intelligence (AI) systems and smart contracts may be able to help. While AI can't solve root issues like fuel price instability or geopolitical issues, it can help with the downstream symptoms.7 Using computer systems to optimize the use of drivers and trucks could streamline the process of matching cargos with available drivers.
This change could take place both inside companies and in the market at large. It's easy to imagine AI systems at work in large trucking companies that can do the work of multiple human logistics agents in far less time. Likewise, applications and programs for freelance drivers might be able to match companies to drivers more quickly, improving turnaround time and getting more done with less.
One of the most important things for insurance brokers to keep in mind as they deal with new clients is the volatility of the trucking market. Instead of relying on long-term contracts as you might with private customers, trucking insurance often benefits from an increased level of management. When speaking with clients, you can let them know that you can offer them more time and attention than other insurance agents, as well as more options.
An increased level of flexibility in commercial trucking insurance can also attract more clients to your insurance business. As a broker, you can work on developing plans and options that allow the clients to change their coverage on the fly, sometimes without consulting you.
While insurance rates that you can offer clients will end up being largely static, and the amount you'll need to increase those rates to make a profit will vary only a little, the things you can always offer clients are personal connection and a guarantee of service. In the quickly changing world of commercial transportation insurance, these things often make a real difference.
1Benson, Aaron et al. "Hit-and-Run Crashes: Prevalence, Contributing Factors and Countermeasures," AAA Foundation for Traffic Safety, Apr 2018.
2"Insurance Filing Requirements," Federal Motor Carrier Safety Administration, 15 Dec 2021.
3"Financial Responsibility Requirements for Commercial Motor Vehicles," Federal Motor Carrier Safety Administration, Jan 2013. PDF file.
4"Monthly 12-Month Inflation Rate in the United States from January 2020 to October 2022," Statista, 15 Nov 2022.
5Fernando, Jason. "What You Need to Know About the Purchasing Power of Money and How It Changes," Investopedia, 13 Sep 2022.
6"Is the U.S. Labor Market For Truck Drivers Broken?" U.S. Bureau of Labor Statistics, Mar 2019. PDF file.
7Ranjan, Priyesh. "Inflation Rises While Driver Salaries Stay Stagnant," Food Logistics, 30 Sep 2022.