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March 26, 2024

The Factors Behind Rising Commercial Auto Costs and How to Control Them

It’s becoming more expensive to insure your company’s vehicles. The Council of Insurance Agents & Brokers (CIAB) says commercial auto insurance rates were up 7.3% in the fourth quarter of 2023. Prices have been rising steadily for a while, meaning small businesses are now feeling the pressure of the cumulative rate hikes. Several factors are behind the price increases. When they understand these root causes, business leaders can take steps to control their risks and costs.

A Surge in Reckless Driving

It’s not your imagination: the roads really have become more dangerous.

The National Highway Traffic Safety Administration (NHTSA) says driving patterns began to change after the declaration of the COVID-19 public health emergency in March 2020. Some drivers have been engaging in riskier behavior, including speeding, driving under the influence of alcohol or drugs, and failing to wear seat belts.

Crash severity has spiked as a result. Research from TransUnion shows that the death rate for motorists has increased by 22% compared to pre-pandemic figures. There has also been a 21% increase in fatal crashes involving a lack of seat belts, an 18% increase in alcohol-related fatal crashes, and a 17% increase in speed-related crashes.

What can businesses do? Businesses can’t control the behavior of other drivers, but they can make sure their own drivers operate safely. In addition to screening and driver training, businesses may like to consider providing tips and lessons in defensive driving.

Rising Repair Costs

Vehicle damage has become more expensive to repair. There are several reasons for this, including a backlog at auto repair shops. CCC says nearly all repair shops have reported significant increases in backlogs, with 85% saying they are scheduling work at least two weeks into the future. The backlogs are driven by issues with parts availability and labor shortages. Newer cars are also more complicated to repair, which can lead to additional delays.

Sophisticated vehicle technology also makes repairs more expensive. New car tech often involves sensors that may need to be recalibrated or replaced after even minor collisions, resulting in higher costs.

As repair times and costs rise, so do commercial auto insurance claims. When insurers have to pay more in claims, they have to adjust their underwriting, which results in higher prices for insureds.

What can businesses do? New vehicle tech improves safety, reduces crashes, and saves lives, making it a good investment. However, when purchasing vehicles, businesses should consider the potential repair costs and factor these expenses into their budgets. Keeping up with regular maintenance will also reduce the risk of collisions caused by poorly maintained vehicles.

Increased Claims Severity

The Insurance Information Institute says auto claims severity has increased by 72% since 2013. Inflation alone does not explain this – the Consumer Price Index has only increased by 27% since 2013. Furthermore, four of the last five years have seen higher than median increases in claims severity, indicating the increase may be accelerating.

The increase in claims severity may be linked to some of the issues discussed above, such as an increase in reckless driving and vehicle repair costs. Social inflation, which refers to rising litigation costs, is another factor. The Insurance Information Institute says social inflation added $30 billion in commercial auto liability claims costs between 2012 and 2021.

According to the National Association of Insurance Commissioners (NAIC), jury verdicts in excess of $10 million – often called nuclear verdicts – are one of the main contributors to social inflation. The rise of third-party litigation funding has also been linked to increased liability costs and higher premiums. According to the U.S. Chamber of Commerce’s Institute for Legal Reform, third-party litigation funding has experienced massive growth recently and may now account for $13 billion in assets under management in the U.S. Criticisms of the practice include that litigation funders are motivated to maximize their return on investment and that agreements are often kept secret.

What can businesses do? A single claim can become a massive loss. Businesses can reduce the risk of a claim by prioritizing safe driving. They can also reduce their liability by installing cameras in vehicles. If a crash occurs, these cameras may provide evidence that helps exonerate the driver.

Control Your Commercial Auto Costs

Some of the factors contributing to rising commercial auto costs are outside of your control. However, business leaders can promote safety and reduce liability within their companies. Heffernan Insurance Brokers can help with insurance and risk management solutions designed for small businesses. Learn more.

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