Rough Road for Trucking in the New Economy
The insurance industry has a long history for cyclical price adjusting, featuring long periods of marginal to inadequate premiums followed by relatively brief, startling and disruptive upward price corrections. These upward price adjustments have been unnerving for insurance buyers and regulators, but they are the economic salvation for insurance carriers. The next great shock to the premium paying public may well not come from the long predicted hard market price increases, but from the fundamental changes to the economic systems through the developed world.
The direction of the U.S. economy is now moving toward the European model of strong governmental domination. With this model comes high regulation, taxes, living expenses, unemployment and costs of doing business. One final element added to the mix will be a strong dose of high and persistent inflation resulting from record deficit spending in the United States and throughout Europe.
Inflation and Trucking
The rapid onset of severe inflation will be a particular hardship to the trucking business. The high operational costs, even in good economic times will become too much for many businesses to be able to sustain. A particular problem during inflationary times is the lag of revenue behind escalating costs. This is often further burdened by the high cost of borrowing which is available only to those who already have worthy credit.
As in the 1980s, vehicle maintenance may be delayed or neglected endangering the safety of the public and vehicle operators. Vehicle replacement can also be delayed for years increasing the average fleet age and compounding the need for a commitment to an effective maintenance program. Truckers hauling under fixed cost contracts are particularly vulnerable to the onset of rapid inflation.
Depending on the commitment to the adoption of a European model economy and the success of achieving that conversion, transportation and other business costs will be set for a fundamental price escalation. These cost increases will be separate from the debilitating effects of inflation by itself. Of particular concern should be the effect of taxes. Onerous taxes on fuel, for example, have raised the cost of gasoline and diesel to the $6.00 to $8.00 range per gallon in many European countries and recently to $10.00 per gallon in the UK, which ironically is a significant oil producer thanks to the North Sea fields. Energy costs for industry and home heating is likewise impacted by taxes funneling billions of Euros and Pounds out of the private economy into the governmental coffers.
Then there is the Value Added Tax or VAT. Universally the VAT is installed as a modest revenue enhancement for government with introductory levies in the 5 percent range. Rapidly and virtually without exception, the VAT, which is just one of a full range of excise and income taxes in any country where it is in use, grows to parasitic proportions. In Europe, where the VAT rates are the highest, the tax generally runs between 19 percent and 22 percent with Sweden, Denmark, Norway and Hungry leading the way at 25 percent and ever climbing. Certain circles within the U.S. executive and legislative branches are pushing this tax for the nation as a way to fund our out of control deficit spending.
How High Cost Impacts Trucking
How do the costs of $8.00 a gallon diesel along with tires, auto parts, mechanic’s hourly rates and new vehicles that are 25 percent to 50 percent higher than current costs impact America’s trucking businesses? Truckers, large and small, that are not in top financial shape and those that cannot quickly pass on their increased costs may be required to downsize operations or exit the transportation industry all together.
As businesses struggle to survive, corners may well have to be cut by some truckers facing a financial squeeze. For unregulated carriers some of these cost saving changes could involve safety issues including the delay of maintenance of braking systems and tire replacements. Other actions could involve the use of lighter vehicles than the job would call for to save on fuel costs, particularly on empty haul backs. This could also involve using smaller vehicles hauling larger trailers. Overall, fewer vehicles that are more heavily worked and less often replaced should be an expected response for the rapidly escalating cost to continue business operations.
One of the largest costs in any trucking business is insurance. With increasing taxes and inflation combining forces to drive up the cost of doing business, insurance costs will certainly follow along. The problem for any industry in an insurance hard market cycle is not that insurance costs follow some other price leads; it is that insurance costs will lead the way.
To start the hard market cycle, the insurance industry needs some calamity to begin the price rising cycle. This event can be a stock market or real estate market slump like in the early 1980s or the insolvency of major insurers that underpriced their products with disastrous consequences.
Insurance is a highly regulated business and this regulation is a responsibility of the individual state regulating authorities acting in concert through the National Association of Insurance Commissioners (NAIC). Whenever a disruption occurs in insurance, the NAIC works to lessen or eliminate the causes of that disruption and provide for more stability and reliability of the industry. In this effort, state regulation has been quite effective. It has also tended to make insurance market cycles harder to predict, and the trigger for these disruptions come from unforeseen sources.
The Starting Trigger
In an interview on June 12, Arthur Laffer, professor and former economic advisor to the Reagan Administration, expressed his concern for the start of the so-called double-dip recession. The starting trigger could be sharp tax increases on income, inheritance and capital gains that will go into effect on Jan. 1, 2011. This increase would result from the lapse of the President Bush tax cuts. If this is also the trigger for the next insurance hard market, it would be likely to induce a slow but constant upward pressure on insurance premiums and eventually the availability of insurance. Carriers would start to realize the higher cost of claims, tax pressure on profits and the effect of inflation eating away on the value of their accumulated surplus. Finally, the next market cycle would be upon us and insurance companies would do what they have always done in this situation, raise premiums sharply and withdraw from unprofitable segments of their business.
Unfortunately for truckers, the lure of high premiums for insurance has made for a stampede of carriers with limited experience into this market. Adequate pricing of insurance coverage has been elusive, and many of the carriers writing truck insurance will withdraw from the market as soon as better returns can be made in the industries where they have more expertise. Truckers that have been in the business for a few decades will recognize this reaction not as something new, but rather in the now immortal words of Yogi Berra, as being “déjà vu all over again.”
Trucking businesses may well find that they will be best served by doing business with agents, brokers and insurance companies that have always specialized in the trucking business. These are the companies that will be there after the other carriers have fled the market in a panic. There is the attraction of paying the lowest price for coverage, but as is often the case, the latest entry into the market with the lowest price will often be the first to leave abandoning its customers in its rush for the exit when the insurance market tightens.
The overlooked hazard for insurance buyers is that traditional insurance markets may already be at their capacity serving their long term and loyal customers when market conditions change. The business that has shopped its coverage every year or two may find itself in a desperate situation when they receive the non-renewal notice from their cut-rate carrier and no other insurer is willing to take on additional business.