Transporting goods and materials will always come with levels of risk.
Some of these risks stem from foreseeable dangers and obstacles in the infrastructure and transportation systems in the U.S. Others are much more difficult to predict and hinge on factors that are extremely difficult for transportation companies to see, even with great technology. Above all, every transportation company needs a robust process for assessing and managing risk throughout their operations — no matter how they transport goods.
Creating a risk-management program is difficult, as most companies use outdated data collection, storage and analysis systems to come up with risk assessments. But there are new solutions that can help companies collect and aggregate data, often in real-time.
While the problem is daunting, your clients need to think about the most important elements of their risk-management programs and always strive to improve them.
Many people don't fully understand the difficulty of designing an accurate transportation risk-management program. While it needs to be as close to the reality on the ground as possible, it also needs to be flexible to allow for quick changes. Shifts in government regulations, transportation infrastructure and staffing mean your risk can vary dramatically week to week.
Risk management doesn't just govern how much insurance your client's organization will buy. A comprehensive program will help their companies mitigate and adjust their relationship to risk, hopefully reducing the incidence rate of accidents and eventually allowing insurance rates to fall. Great risk management means better safety for everyone and is especially important in the transportation industry.
The Basics
When designing a risk-management program, it's common practice to break the process into steps.
1. Risk Identification
Before your clients can make a plan, the risk factors they're continuously exposed to must be visible to them. You can advise clients to use their past incidents as a model for what their future exposure may look like. If they don't have any data about their past or are simply a brand new company, there's plenty of data readily available online to help them. Finding companies that operate in their area that are of similar size and doing similar work can help them assess their current risk.
2. Risk Assessment
This step of the process is about analyzing the results of your client's risk identification project. There are two main metrics that need to be quantized for each type of danger: likely incidence rate of a type of undesirable outcome and level of impact for the incident. Once you've assessed these two factors for each possible type of risk, you'll be well on your way to finding an overall level of risk and figuring out which parts of the business are the most risky.
3. Risk Mitigation
Risk mitigation involves taking stock of the areas in your transportation business where risk can be reduced with the fewest resources. You'll want to encourage your client to start prioritizing improvement in the places where they will get the best results. Clients should also delegate responsibility for risk at this point in the process, giving a handful of trusted employees the responsibility for controlling certain risk elements of the business. Risk delegation can simplify and compartmentalize the process while also allowing direct lines of communication throughout the organization.
4. Risk Monitoring
Once risk mitigation is done, it's time for your client to outline how they'll keep track of the changing risk factors throughout the lifecycle of the risk-management program. Which metrics do they plan to track most intently moving forward? Are there trigger points for these risk metrics beyond which some element of the risk strategy will change? How will the program change hands if employees leave the company or move in the hierarchy? All these questions need to be answered in the risk-monitoring segment of the risk-management plan.
These four basic steps can lend clients a blueprint for creating a risk-management plan. But the transportation industry also has some universal challenges that greatly influence the specific landscape of risk. While other types of organizations are producing products or handling money, transportation companies are responsible for moving hundreds of thousands of pounds of material and vehicles across the country every day. Changing conditions and routes make the industry unique and the risks extremely varied.
Trucking is often an indicator of what's going on in the economy.
The Main Sources of Risk
While risks in this industry are varied and often unpredictable, some will help your clients be prepared and ensure you're developing the right risk-management program for them.
Poor Infrastructure
The biggest problem facing transportation companies today is the state of U.S. infrastructure. Although our infrastructure used to be considered among the best in the world, years of wear and tear, lack of efficient repair, disproportionate financial care systems and climate change have taken their toll.
Although there are some signs that the government is starting to take infrastructure repair more seriously, things are still pretty bad. In its 2021 infrastructure report card,1 the American Society of Civil Engineers (ASCE) said, "Growing wear and tear on our nation's roads have left 43% of our public roadways in poor or mediocre condition, a number that has remained stagnant over the past several years."
The ASCE gave the U.S. a C-minus for total infrastructure condition and functionality, with the condition of bridges, rail systems and roads prominently featured. Just to fix our road and bridge infrastructure, we would need to spend roughly $786 billion, according to the report.
Climate Change
Climate change is also causing problems for infrastructure across the U.S., and it's clear things will get worse. Median temperature changes across the nation "are estimated to add approximately $19 billion to pavement costs each year by 2040," and increased risks of flooding are likely to challenge already poor road conditions everywhere.
Overall, the problems that our infrastructure faces are both "pervasive and diverse," according to McKinsey & Company.2 While strong risk-management programs have always been important for transportation companies in the U.S., there's no doubt that they'll become essential in the next few decades.
While Congress has shown new interest in passing bills such as the Inflation Reduction Act3 — a bill that contains billions of dollars in infrastructure money and provisions to reduce the effects of climate change over the long term — we don't know how much this bill will help. Climate change has already had a huge impact on the transportation industry and is likely to have a lot more in the future.
Insurance is about predictability. The better we can predict likely outcomes, the more accurate coverage we can provide for everyone. But as climate change causes weather patterns to become more extreme, there's good evidence that destructive and unpredictable weather events4 will occur more frequently.
In a nutshell, costs will almost certainly rise in the transportation insurance industry in the next few decades because transportation as a whole will likely become riskier. Unfortunately, there's no getting around this prediction.
If you're meeting with a client who you expect to be working with for years or even decades, it can be useful to talk with them about climate change5 and how it will impact insurance in the future.
Key Considerations When Creating Transportation Risk-Management programs
When developing a risk-management program, you want to ensure you've covered these key elements.
Total Risk Assessment
Some risks are more visible than others. For example, some routes across the country necessitate the use of rural roads that may be in disrepair, while others are simply interstate driving. The risks of using certain routes over others are often visible and have been well managed by more traditional road-management systems. However, weather patterns and likely changes to road conditions are better captured by more modern forms of risk-assessment software and hardware, allowing the company to get real-time updates on evolving situations.
Whatever kind of transportation company your clients work with, it's probably most important to focus on getting the widest possible view. Companies are increasingly doing this through the use of algorithmic analysis and using automatic data collection systems to track information from multiple credible sources. But not every transportation company will want an automated system running its risk analysis. Some prefer an in-house expert, while others may ask you to take the reins.
Depending on the size and resources of your client's company, they may want to consider hiring a full-time risk management professional or team, or spend more time going over risks with you. Smaller trucking companies rely on a good relationship with their insurance agent to calculate risk.
As an industry professional, it's your job to work with your clients to the best of your knowledge and ability to pin down risk analyses and coverage amounts. This type of relationship is what keeps people coming back.
Integration
No system works if it can't communicate with itself. A comprehensive risk-management system needs to communicate internally and flag analytic results for employees to see. This approach is the only way people can make decisions based on the data your risk-management program collects.
It's important for clients to understand that improving on a single part of their risk-management program can leave other parts of collection and analysis behind — and potentially unable to communicate fully with the updated parts. When changing a transportation risk-management program, having a full integration plan for how all these new parts will fit together is useful.
When dealing with smaller companies, you can stress to your clients the importance of internal communication between employees who have received risk-based responsibilities. After your client has delegated risk factors to their most trusted workers, they need a fully fleshed-out system to communicate what is going on. This process must be able to continue long term as risk factors change and evolve.
People often overlook this part of the process of creating a risk-management program, but it's one of the most essential pieces. Fully integrated communication can mean the difference between a program that quickly becomes ineffective and one that works for many years. For owner-operator companies, the risk-management team might just consist of you and your client, but it's important to have that conversation.
Analysis and Machine Learning
After possible risks become incidents in the real world, they then become data points your management system can process. As climate change continues to mold the transportation world, companies with the highest level of understanding of how past patterns translate into future events will be able to make the best predictions. Because of this, clients who work in transportation need programs that will learn from both their successes and their mistakes, slowly building a complete database over time.
Those with the best predictive technology will be able to hit their insurance costs more efficiently, saving money for everybody. It's in your best interest as an agent to help them do that. This technology doesn't have to be fancy — small companies can get by at the beginning by just taking the time to chart data points from past incidents. This effort can make a huge difference in the way they look at their risk-management program.
The key is to introduce the concept of a risk-management program to your clients and help them see that such an approach can easily save them money. Commercial transportation insurance isn't as simple as many people think, and looking at it from a planning and preparation point of view can grab clients' interest.
Transportation risk management is due for some critical disruptions in the coming years, but with the right approach and the right systems, transportation companies will come out ahead. People will still need goods delivered across the U.S., and trucking companies will still rely on commercial insurance to help them as conditions deteriorate.
The most important thing you can do as an agent is prove to your clients that you're on their side. Developing a risk-management program with your client is an excellent way to do this. When talking to clients about the best ways for them to develop their risk-management programs, be sure to touch on some of these critical components.
Sources
1"2021 Report Card for America's Infrastructure," ASCE, 2021.
2Woetzel, Jonathan et al. "Will Infrastructure bend or break under climate stress?,"McKinsey Global Institute, 19 Aug 2020.
3"Inflation Reduction Act of 2022," 117th Congress, 12 Aug 2022.
4"Climate Change Indicators: Weather and Climate," EPA, 1 Aug 2022.
5"Code Red: The Impact of Climate Change on the Insurance Industry," RPS, 10 Jan 2023.
