TrueNorth explains insurance and financial risks to carriers as they look to grow

As trucking companies get creative to recruit and retain drivers during a persistent driver shortage and high turnover rates, an insurance and financial company specializing in transportation companies is working to mitigate risk for carriers looking to grow their business.

In a recent Transport Topics webinar, TrueNorth executives discussed risk and growth in the trucking and transportation industry. One of the risks to consider when looking to hire drivers is the best states in which an injured driver could recoup the cost of an injury from another motorist as a result of a crash that’s not the driver’s fault, said Dan Cook, principal and director of risk finance for TrueNorth.

Arkansas was listed as one of the five worst states to recoup driver injury costs from another as a result of an incident that’s not the driver’s fault, according to Cook. Colorado, Alabama and Wisconsin were among the five best states to recoup cost. He also showed which states have the most expensive worker compensation rates, and California was at the top of the list. Arkansas, Texas and Kansas were among the 12 states with the least expensive rates. Arkansas and California were favorable for the amount insurance companies pay for claims based on the amount collected in rates. Some of the 10 best states for underwriting results include Oklahoma, Kansas and New Mexico.

Another risk considered was when growing a business with owner-operators. Some of the positive aspects include they don’t require investment in equipment and aren’t company employees, said Bill Zenk, principal and practice leader for TrueNorth. The latter alleviates the company from the burdens of taxes, benefits, worker compensation and employment rules. Also, they are statistically safer operators on the road because they own their equipment, he said.

But an asset-light business model can be difficult to manage as the business constantly evolves, shorter-haul operations often receive greater scrutiny and situations in which an owner-operator can be deemed employee, Zenk said.

Arkansas was among 15 states that were most favorable for carriers when it comes owners-operators challenging for employee status to obtain workers compensation benefits. Least favorable were California, New York, North Carolina and several other states along the East Coast. “As you’re looking at growth opportunities, understanding the national landscape for work comp is important,” Zenk said. Also, Arkansas was among 19 states that were favorable when it came to owner-operator challenges for unemployment and pay. But Oklahoma, Missouri, Kansas and 10 other states were some of the least favorable, with case law suggesting an owner-operator may be deemed an employee.

Some of the fastest growing asset-light business have looked to leasing equipment as a quick way to grow, Zenk said. But capital expenses could be required. Carriers with an external leasing program can defer a lot of expenses to a third party, but companies with an internal leasing program might look to set up another company in states that are favorable for such programs. Arkansas is among 18 states that are unfavorable for internal lease programs. States such as Missouri, Tennessee and seven others are favorable for these programs. In states such as Arkansas, companies may consider only working with third parties, he said.

REDUCING REQUIREMENTS
As a means to find more drivers, carriers have started to look at lowering the minimum age for drivers to less than 23, said Herbert Mayo, vice president of transportation risk solutions for TrueNorth. Some are looking to start hiring at 21, but younger drivers are going to be involved in more crashes. This is expected to impact a carrier’s deductible or out of pocket costs.

Drivers between 21 and 23 years old are three times more likely to be involved in a crash than other drivers. Regardless of age, a driver with one year of experience is three to five times more likely to be involved in a crash than those with two years of experience, he said.

Carriers that reduce the minimum age or experience requirements for drivers can expect to see an impact on their total cost of risk, which takes into account the insurance premium along with the losses within the deductible. In an example, Cook explained risk in terms of operating ratio for a company with a $3.991 million premium and estimated costs within the deducible at $1.108 million. Operating ratio is a company’s operating expenses as a percentage of revenue. At an 8.5% operating ratio per truck, the carrier would need to run between 450 and 1,350 more trucks to make the same margin, based on an increase of losses from reducing the minimum experience requirement for drivers to one year, from 20 months.

“Not a week goes by that motor carriers aren’t wanting to lower their standards to attract more drivers,” Mayo said. “That’s doable. But you’ve got to do it with full visibility for your legal team, your insurance partners.” Second, try lowering standards with a small fleet or segment of the company. Also, carriers need to understand training costs. Training a driver with no experience out of school can cost up to $10,000, and return on investment could be 10 months.

The more new drivers that carriers have, the greater the likelihood of claims. And the higher the turnover, the higher the claims risk. Mayo said the goal is to keep a driver for at least a year. If they can do that, they can usually keep them for three years and longer.

Businesses that succeed in keeping their drivers are focused on the highest retention number that they can achieve, Zenk said. Pay is important, but it’s only a piece of the overall picture. Most carriers focus on a reward rather than a rewarding system for their drivers. The previous is more transactional or goal based, and the latter is value and culture based. A reward system would focus more on pay increases, bonuses and is more reactive than a rewarding system, which focuses on culture and people and mapping out career paths and long-term goals and proactive engagement.

New customers, new markets and new freight can include risks, but they shouldn’t be seen as barriers. They are opportunities, Cook said. Carriers that develop a set of best practices can provide for early indictors of what works.

Some carriers have looked to mergers and acquisitions to grow capacity, he said. Companies should look at the risk related to the company they want to acquire before looking at earnings. Some of the risks to review include the location of owner-operators, employee benefits and failure to audit future costs.

When asked about mergers and acquisitions for average fleets, Cook said the opportunity is better than it’s ever been because of the processes involved and the number of consultants available.