Last October, 2014, the Federal Motor Carrier Safety Administration (FMCSA) recommended a raise in the basic insurance required of carriers. There are many requirements for carrier insurance as it is, and the impending increase may affect more than one aspect of the industry. The effects of the increase may reverberate through supply chains as well.
The long-standing minimum requirement for financial responsibility on motor carriers has been unchanged since it took effect at the start of the year in 1985. On the other hand, financial security levels took effect on October 2013. As the change is imminent, let’s take a look at five of the effects likely to happen:
1. Higher fees and costs. An increase in financial insurance could likely increase premiums upwards of 25%. This means 25% increase in outright expenses annually. Insurance is one of the most expensive fixed costs a carrier company shoulders. The result could equate to decreased income by as much as 10-20%.
2. Increased costs and less income could lead smaller companies towards bankruptcy. The current $750,000 for freight, $1 million for toxic and hazardous materials, and $1.5 million for “certain hazardous materials” cap is hefty as it is. A 25% surge in these costs can be unprecedented for lesser, smaller companies. This is enough to put these entrepreneurs out of business.
3. Lesser competition. When smaller companies go bankrupt, the industry competition becomes less cutthroat. While having lesser bids and competition can be considered a good outcome, it also trivializes the suffering that some of the companies, and ultimately that companies’ employees go through. The problem with this is that just a handful of big companies can decidedly benefit from lesser competition and influence unnecessarily high rates.
4. The emergence of unnecessary regulation. American Trucking Association (ATA) argues that the increase in insurance does not necessarily translate to lesser load capacity. There have been settlements on court that showed only less than the starting insurance amount was paid, and at least only 1% was settled for more than the required amount. Increasing safety can be done without increasing responsibility or affecting daily productivity rates.
5. Newer rates becoming the standard. When the increased rates pass, they will likely become the new benchmark for base prices in the industry. An increase in 15 – 25% in the base price is incredibly steep, and it will cause product capacity to become less efficient.