The transportation industry is considered a barometer of the U.S. economy. If freight is trending up, so too is the U.S. economy. But capacity constraints for trucking - including a shortage of qualified drivers, low truck supply and the rising costs of doing business - are squeezing trucking firms.

Also, a Supreme Court case ruled in favor of a driver could put the transportation sector in a further bind.

According to the American Trucking Associations' President and CEO Chris Spear, the trucking industry is undergoing the fastest growth in 20 years. In a late October meeting, he cited tax reform, increases in truck tonnage, employment, manufacturing and equipment orders as drivers of the industry's growth.

The positive trend-- a rapid increase in the demand for trucking-- is being undermined by a driver shortage in a tight labor market.

"Right now, the economy is very strong, freight levels are up, but there's actually not enough drivers and trucks out there to handle the current freight loads," said Pete Feeney, regional director of SCU Transportation, a CRC Group Company.

While the high demand has pushed up the freight rates for truckers, a lack of drivers is holding back some growth. "The driver shortage is a big issue," Feeney said.

Laura Ann Howell, chief operating officer of Reliance Partners, says that the "quick and steep growth trajectory" trucking firms face today is exacerbating the sector's need for qualified drivers even further.

"There is so much freight to move right now and because of that we've seen most of our clients grow and add equipment month over month," says the executive from Reliance, an independent agency in Chattanooga, Tenn., that specializes in transportation.

The rising costs of doing business is another constraint on trucking firms.

"The cost of a truck today is unbelievably high compared to just five years ago," Howell said, especially when the costs of safety-related technology are added. "The industry is seeing the cost of some technologies - smart phones and required electronic logging devices (ELD) that are compatible with an app - come down but it's still very expensive to run a trucking company and their margins are tight."

Insurance Costs

The cost to insure a trucking company continues to rise as well.

Rates skyrocketed over the last couple of years, according to Brad Allen, executive vice president of AmWINS' Transportation Underwriters. "I'd say in the last quarter or two, they've come down a little bit but they're still high; everybody is averaging rate increases and flat renewals are a thing of the past," he said.

The trucking industry, especially the small-to-mid-sized fleets, is having to scrutinize every aspect of their operation to cost-save in today's market, according to Mark Sullivan, transportation underwriter at Midlands a managing general agency and wholesale broker based in Oklahoma City. "They have to do that to pretty much keep their doors open and the cost of insurance plays a huge part in that," he says.

Tom Powell, CEO of Cal Valley Insurance Services, an independent agency based in Fresno, Calif., that has specialized in the trucking industry since opening its doors in 1984, says the trucking industry to some degree has paralleled the experience in the overall commercial auto market.

"We're seeing rate increases in both physical damage as well as in the auto liability piece across the board," Powell said. "Underwriting has tightened up and there are more demands being asked of the client, in terms of what they're doing from a safety standpoint." Powell said underwriters are paying closer attention to hiring practices for employee drivers. There are a lot more requirements on the motor carrier today, he added.

Powell doesn't expect insurance rates to decline anytime soon either. "We didn't see the rates go down in 2018 and I'm pretty sure that the rates are going to stay where they are at and maybe even potentially grow a little more in 2019," he said. But Powell remains optimistic.

By 2020, Powell believes the trucking insurance market will become a little more competitive. "It'll take insurance carriers about two-and-a-half years to go through the process of rate increases to get enough dollars where they finally see some kind of profits," he said. "When those profits start to occur, carriers will reduce rates to get what they consider quality risks."

New Ventures and Small Fleets

Despite its challenges, the trucking sector presents opportunities for insurance specialists, especially in the small fleet (0-10 units) and new venture space. "New trucking companies are coming online every single day," Howell said. "As a result, we've seen the appetite for new ventures change a little bit because new trucking companies keep popping up."

AmWINS' Allen shares one question he hears often from retail agents seeking coverage: "Is a new venture going to be something you can handle?" While new ventures are growing, finding the right insurance company, at the right price, can be difficult, he said.

"There is a little bit of a gap right now in the marketplace to write new ventures," he said. There are plenty of new trucking firms in the marketplace, including drivers who have experience with another trucking company and try to start up their own shop with one or two units, or new truck owners who don't have experience under their own DOT numbers. However, these new ventures are a challenge to insure.

"That 'new venture' is looking at a pretty high premium for the uncertainty from an underwriting prospective," he said. Carriers willing to write these accounts are few and far between.

Another constraint, especially for the smaller trucking fleets, is the growth itself, says Feeney.

"For example, if you have a small trucking firm, with two units, but they've been in business for three years and are looking to pick up another contract and add two more units - that's easier said than done," Feeney said. "That's a challenge because a lot of insurance carriers have strict guidelines on growth."

According to Feeney, in today's growing trucking sector, smaller fleet accounts, as well as large fleets, are looking to add more units/trucks. "So, if you're fortunate enough to be able to find a driver and you pick up that contract and then all of a sudden you turn around and say to your agent, add on this unit, the insurer might not go for that," he said.

There are good reasons from an underwriting perspective. "Carrier data shows that when small accounts have X amount of growth, the loss ratios on those accounts tend to jump up. So, that becomes a challenge for those smaller insureds." If a small trucking firm grows too quickly it may be forced to move to another insurance carrier, and that could be a 50 percent jump in premium, Feeney said.

Small trucking firms simply don't have the infrastructure to grow at a fast-pace, Sullivan added. "If growth is slow and organic that's OK. But there can be problems when an operation starts out with two or three units and tries to grow to 15 their first year - they may be adding more revenue for more loads, but they are not investing that back into their company in safety and risk management."

Sullivan knows firsthand the risks. "We were writing a fair amount of new ventures last year but now we've slowed down this year because it's about a 50-50 case that the violation scores will be tremendously horrible or do really well. It's really just a lack of control when it comes to smaller fleets and their growth," he said.

Sullivan still writes a fair amount of new ventures but reviews the accounts about every six months with a plan in place to monitor the trucking firm's growth.

Driver Shortage Continues

The ATA estimated the U.S. truck driver shortage at a deficit of 51,000 drivers at the end of 2017; that's up from a shortage of 36,000 in 2016. The problem is expected to continue into 2019, according to the ATA.

Jerry Gillikin, executive vice president of HUB's transportation practice, says even the promise of higher pay isn't helping.

Transportation firms are raising driver wages and it's still not enough to fulfil the industry's needs, he says. Private fleet drivers saw their pay rise to more than $86,000 from $73,000 or a gain of nearly 18 percent since 2013, according to a survey by the ATA.

"Every trucking company that we talk to could probably increase their business between 10 and 25 percent overnight if they could find the drivers to fill their trucks," said Steve Bojan, HUB's Risk Services Transportation Practice Leader.

While hiring drivers is by itself a difficult task, hiring drivers that insurers will approve is another challenge.

Trucking companies are trying to cast a wide net when hiring drivers, but their insurers are restricting their applicant pool. "That's a big part of the challenge," according to Bojan.

Insurers have strict guidelines. "They have limits in terms of driver age, in terms of experience. We have clients that would like to hire drivers with one year of experience, but their insurance carrier says you can't ... they want a minimum of two years of experience," Bojan said.

Most insurance companies want drivers who are at least 21 years old with two years of driving experience, according to Feeney. "And that begs the question, who's going to insure them for the first two years? And what about people under 21 years old? We've got to figure a way to attract more drivers to the industry and then we have to find a way to insure them," he said.

At this point, insurance carriers haven't really come up with a game plan for how to go about doing that, Feeney said.

Independent Contractors vs. Employees

If rising costs, risky new ventures and a shortage of experienced drivers are not enough for transportation executives and their insurance agents to worry about, there is also a pending U.S. Supreme Court decision -- New Prime Inc. vs. Oliveira -- involving the trucking industry's use of independent contractors that could increase the pressure on the transportation industry and insurance market.

"We absolutely have our eye on this case," Bojan said. "The biggest area of growth for truck drivers today is independent contractors."

On Oct. 3, 2018, Supreme Court justices heard the case of Dominic Oliveira, a long-haul truck driver who filed a suit against the transportation firm New Prime three years ago, alleging that the company failed to pay him minimum wage and, at times, even charged him for working. In January, the court ruled in favor of the driver.

The case questioned the use of the "independent contractor" designation to reduce pay and benefits for workers who perform identical work duties as employees of the firm. As the battle over issues surrounding independent contractors vs. employees continues, the court's decision could end up affecting nearly every sector of the U.S. workforce.

"The case turns on whether Oliveira was properly categorized as an independent contractor, and, if so, whether he is entitled to a court hearing on his claims or if he must submit to arbitration," according to David Fierro, in an article published on the National Independent Truckers Insurance Co.'s website in early October. "Arbitration is generally preferred by employers as a more efficient dispute resolution mechanism, although critics say it can serve as a shield for unfair corporate practices."

According to Fierro, at issue in the case is the meaning of the nearly 100-year-old Federal Arbitration Act (FAA), which exempted certain types of transportation workers from mandatory arbitration agreements. "Specifically, the law exempts 'contracts of employment.' Much of the battle being waged is whether, in 1925, that phrase would have included independent contractors or only employees."

"Where we see growth in companies, big growth, is in these owner-operator fleets, especially in urban areas," Borjan said. "A lot of folks see this as their entree into entrepreneurship. ... This case has the potential to fundamentally change the way that owner operators are treated or looked at, depending on how the ruling goes and how specific it is."

Several states have also been addressing the issue. Recent state Supreme Court rulings in New Jersey and California have limited the definition of an independent contractor. Massachusetts and Illinois have also cracked down on the definition.

The 2018 California Supreme Court ruling in the Dynamex case created what is called an ABC test. Under the ABC test, workers are presumed to be employees and hiring businesses can designate a worker as independent contractors only if they can show three criteria:

A) "that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work; and

B) "that the worker performs work that is outside the usual course of the hiring entity's business; and

C) "that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed."

Right now, the court ruling in California is specifically for the trucking industry.

However, it could soon move into other industries, such as ride share services (e.g., Uber and Lyft), beauty salons, real estate and insurance agencies, according to Bill Schoeffler and Catherine Oak of Oak & Associates, authors of Insurance Journal's "Minding Your Business" column.

Bojan says the Dynamex decision already has made it difficult in California to run an owner-operator fleet because of the requirements in the ABC test. "From an insurance standpoint, it has a huge potential both to affect workers' compensation and employment practices liability," he said. "We could see a huge spike in claims if this were to move in a negative direction from the trucking industry standpoint." There's a lot on the line, he says.

Whatever happens, Gillikin says the insurance industry will find a way to make it work. "We've got smart insurance people, and we've got smart motor carriers, and we'll figure out a way to make it keep working for the economy. There's always something you can do."

This article was originally published in the Insurance Journal Magazine in November, 2018