The Perfect Storm: Why Truck Insurance Rates Keep Going Up
The question you are asking your agent is, why do my rates continue to go up year after year? Why did my truck insurance go up even though I didn’t have a claim? Why is my truck insurance agent ripping me off? While this article will be focused on commercial trucking, the same principles apply to small commercial auto and even personal auto.
For the last few years we have seen nothing but rate increases from most of our carriers both in the small business auto insurance and the commercial truck insurance. This includes both local and long haul trucking, general freight to reefer goods, dirt sand and gravel, and even small service trucks. Some have experienced even more rapid rate increases in segments such as towing and hotshots. In order to understand why the rates are rising, we must first discuss how the insurance carriers make their money.
Insurance carriers in California are highly regulated by the Department of Insurance; this is important to start with so you understand there is an agency tasked with protecting the consumer. The DOI makes the insurance carriers justify their reasoning for rate changes: they cannot change rates without demonstrating to the DOI the need for the change in rate. All rates have to be filed with the DOI and subsequently approved after the carrier justifies the need for the rate change. Carriers can make money in two different methods- first by underwriting profits and secondly on their investment with the money collected as premium before the money is paid in claims. Underwriting profits means that they charge enough money from the consumer to pay for all of the claims and the administrative costs to administer that policy. Insurance carriers also can make money by investments, meaning they take the premiums you pay and invest them into the markets considered conservative safe investments. It takes almost seven years to close some claims, which means that the carriers will sometimes have up to seven years to make money on investments with premium paid until they have to settle the claim. This means if they don’t make money on underwriting, they must make money on their investments, and the opposite holds true if they are not making money on their investments, they must make money on their underwriting. Margins are generally pretty low from both the investment and underwriting side of the business.
This brings us to our first reason for rate increases- with returns on investments being so low in current market conditions, it is forcing insurance carriers to make money on underwriting. This means there are not any carriers that are selling rates below what they expect to be the cost of claims and trying to make up for it on their investments like there were in the early 80’s.
The second part is multifaceted and will take some time to explain, but if you can hang in there it will make sense to you. In order to understand this completely you will need to understand why the insurance carriers cost to cover claims has skyrocketed the last few years.
Miles driven in 2006, when the economy was doing really well, was close to 3 trillion miles per quarter according to the FHA. Total miles driven in the first quarter of 2016 was close to 3.2 Trillion miles. Even though the economy was doing really well in 2006, the cost of gasoline was a major deterrent from driving. Today the economy is recovering and the cost of gasoline is relatively low in comparison. This leads to roads being more crowded and the frequency of accidents increasing. Remember that term frequency as we will be referring to it again.
For almost a decade the number of fatalities has been dropping. This happened for a number of reasons; however, advances in safety equipment was one of the largest reasons. Legislation requiring the use of seatbelts; Anti-lock brakes, airbags, anti-collision sensors like lane departure warnings and so forth have made major advances in safety. While frequency has been up or down over the last fifteen years, this new safety equipment has been lowering the number of deaths in automobile and commercial trucks, thus lowering or keeping insurance pricing relatively stable for some time now. This started to change in about 2010 as the economy started to recover and fatalities started to rise again. Many experts believe the rise in fatalities and frequency to be more related to distracted driving as the rise of smartphones and the use of these devices while driving. The number of fatalities or severe injuries is known in the insurance industry as severity, which refers to how bad the claims or losses were. Since 2010 both severity and frequency have increased.
The next part is the cost to repair both property and bodies. With the economy recovering we are seeing the average truck cost up $17k nationwide. While we don’t have any numbers specific for California, it is safe to assume that number is even higher here in California as CARB (California Air Resource Board) regulations have forced everyone to buy filters or replace their trucks in the last few years. Newer automobiles and trucks on the road mean that the cost to repair or pay for total damages to these vehicles is increasing. It should be no secret to anyone that the Affordable Care Act (Obama Care) has not been so affordable; this translates to higher costs to get injured bodies repaired from truck and automobile accidents, putting addition pressure on underwriting profits.
Lastly, the increase has to do with the amount of experienced Class A drivers out on the road. Truck driving jobs have increased over 16% since 2010 according to the US Census Bureau, leading to a driver shortage that many of you have heard is here and going to get worse. This driver shortage is causing trucking companies to hire younger, less-experienced drivers. Drivers that are between the ages of 21-24 get into accidents more than twice as often as drivers over the age of 30. There is no substitute for driving experience.
With safe haven investment rates low and frequency and severity of losses continuing to increase, the perfect storm for increasing truck insurance rates has taken hold of the truck insurance marketplace. In order to get a break from increasing truck insurance rates, one or more of these factors has to change or rates will likely continue to climb. Although we would all love to see insurance rates decrease for commercial truckers in California, I am not sure any of us would like to see an increase in gas prices to lower the amount of miles driven or a major hike in interest rates. Rather, we would like to see technology advances that might make distracted driving less frequent, or the cost of health care reduced, or the cost of litigation to decrease in the short term. Until we see insurance carriers posting profits in the truck insurance segment for several quarters, we are not going to see any new players in the industry to help drive down rates. We will leave it up to the reader to determine which one is most likely to occur first and when it is most likely to occur.
For those of you that have your commercial truck insurance with The Insurance Store, rest assured that we have access to all the top carriers in California. We work day and night to make sure that we have the most competitive rates with the top carriers in the country. If market conditions change we will know and make adjustments to ensure you have high quality affordable coverage.