Economic headwinds usher in challenging climate for fleets

This post is part of a series sponsored by IAT Insurance Group.

Historically high inflation, a looming recession and serious supply chain struggles continue to plague fleet owners and owner-operators who are the backbone of our economy, moving 72% of the nation’s freight.

Consumer spending is showing signs of slowing and an economic downturn or full-scale recession would significantly impact freight demand and margins.[1] Although that lower demand could help alleviate some of the pressure of the fleet driver shortage, smaller fleets are likely to feel more pain.

While larger fleets, with shipper contracts, will typically weather the economic storm, some will be forced to park trucks and reduce staff. With an estimated driver shortage of 80,000,[2] some fleets will have an opportunity to expand as there will be less competition for quality drivers.

While significant, these strong economic headwinds represent only of a few of the challenges facing the industry as we move into 2023. Fleet carriers should be aware of the following four trends as well:

1. California Assembly Bill 5 (AB 5)

California’s passage of AB 5 changed the game for many industries, threatening to re-categorize drivers across the state from independent contractors (ICs) to employees. Unfortunately for commercial fleets and moving and storage companies, California is just the first state to adopt such legislation. The National Labor Relations Board backed this rule, and therefore, other states are considering similar laws.[3] While the potential outcomes aren’t ideal, fleet operators need to understand the law and adapt their business model to comply with the new law.

Take Action! Fleets of all sizes and moving and storage operators need to keep abreast of changes happening at the federal and state level and anticipate changes. Joining your state trucking or moving and storage associations is a great way to stay on the pulse and challenge any legislation that surfaces. Operators who want to retain an IC model should consult with a knowledgeable attorney to discuss options.

2. Continued rising cost of claims

Personal injury attorneys continue to attack the trucking industry, as antagonizing advertisements everywhere attempt to convince injured persons to litigate, particularly against commercial fleets. Juries are siding with plaintiffs at skyrocketing levels, with average verdicts soaring from approximately $2.3 million in 2010 to $22.3 million in 2018.[4] The severity of the tort environment has led to higher insurance costs as well.

Inflation will continue to apply pressure to commodity costs, third-party property damage, labor and repair costs, estimators and medical costs, which in turn drives up premium rates. In addition, equipment theft remains a growing threat, costing fleets money and time to repair or replace telematics or other equipment taken from cabs left in sketchy locations on risky routes.

Take Action! Emerging technology can help fleets submit claims more quickly and provide evidence and data in the event of an incident. Cameras and telematics have had a positive impact on the speed at which claims are settled and on outcomes to determine who is responsible for causing the accident.

However, fleets shouldn’t simply put a camera in the truck and let it record. They need to routinely analyze the data and use it to coach drivers on poor behavior and even incentivize high-quality drivers to engage and retain them. In addition, route management can be sharpened to keep drivers and equipment safe and in the fleet’s possession.

3. Tight market for new and used equipment

Operators should not expect any relief from the tight market for new and used fleet equipment. California’s truck emissions regulations will hit this portion of the industry again on Jan. 1, 2023, when any heavy equipment weighing 26,000 pounds or more with an engine model year of 2007-2009 will need to have their engines upgraded to a 2010 or newer model to remain in compliance.

Meanwhile, the used vehicle market still is reeling from the pandemic, when fewer vehicles were manufactured. A recession could extend an equipment supply shortage, and even when the economy returns to better times, the market is expected to remain tight due to fewer used vehicles available for purchase.

Take Action! Stay on top of maintenance to extend your equipment’s life span. Protect the trucks, trailers and moving and storage equipment on hand, as losing any vehicles or equipment could be much more costly to repair or replace than it has been in the past.

Also, check your coverages and be sure that equipment is insured to current values to protect against those losses. Should the recession cause fleet cutbacks, operators could see a strong seller’s market and get good sales value for used vehicles.

4. Maintaining safety in light of financial belt tightening

Safety should always be a priority, regardless of economic trends. However, when margins are compressed and cash flow is tighter, fleets may be tempted to cut or reduce safety programs, training, maintenance, and the like. The pressure to run harder and faster to earn revenue pushes hard against staying safe, but there are long-term implications if you’re considered an unsafe carrier.

Take Action! Take the long view and maintain safety programs and measures despite economic pressures. Shippers and brokers shun carriers that don’t have good safety records, and that leads to lost revenue. Plaintiff attorneys will leverage publicly available inspection data against a trucking company in court. Forgoing safety during hard times will affect a fleet’s ability to earn business and lead to hidden, higher costs.

Looking to the future

The evolution of autonomous vehicles and development of electric trucks are two fantastical ideas that aren’t as far over the horizon as some might think. Questions around insurance pricing for autonomous trucks will be a big hurdle to overcome down the road. Should the industry reach the point where fully automated, driverless trucks are on the road, there are insurance coverage and exposure issues that will need to be addressed. For example, if an accident were to occur, who is responsible for the accident since no driver is involved? Will the trucking company be liable if the navigation system fails and causes and accident? The use of electric trucks also has many hurdles to overcome before they hit the road. Battery life and reliability in cold climates stand as one interesting roadblock currently being analyzed.

Nevertheless, these future trends should be on the long-term radar for any fleet operator who wants to stay ahead of the ever-changing economy and combat the headwinds blowing the industry into more challenging times in 2023.
For guidance on how to manage your fleet’s risk in 2023, reach out to IAT Insurance.

By Peter Matthews and Tom MacCallum

[1] Reuters, “Analysis: U.S. trucking downturn foreshadows possible economic gloom,” April 25, 2022

[2] ATA, “ATA Chief Economist pegs driver shortage at all-time high,” October 2022.

[3] Motor Transport Association of Connecticut “Proposed state bills classifying gig workers as employees can affect the way independent contracting works in trucking industry,” March 3, 2022.

[4] American Transportation Research Institute “Understanding the Impact of Nuclear Verdicts on the Trucking Industry,” June 2020.