February 29, 2024

Why do insurance rates vary by state?

Insurance is one of the top expenses for a carrier, behind fuel and maintenance. Premiums for each carrier vary wildly based on a number of factors, such as years of experience, average cost of goods hauled, driving record, etc. One of the factors carriers can’t control is insurance rates that are based on the state where they are domiciled.

Carrier insurance is regulated at the state level. The Federal Motor Carrier Safety Administration requires that all carriers have liability insurance, and there are some commonalities in the rules across all states.

Reliance Partners Executive Vice President of Sales, Jackson Alexander, explained the three requirements that must be met for insurance companies’ rates to be approved.

“First, rates must be adequate, meaning insurance companies have to charge enough to collect enough premium in order to be able to pay out claims,” Alexander said. “Second, rates must not be excessive, meaning rates can’t be too high to where insurance carriers are earning excessive profits. Finally, rates cannot be unfairly discriminatory, meaning you cannot charge higher rates based on race, gender, etc.”

But beyond those basic similarities lie stark differences in rules and regulations from state to state. Those differences include the impact on rates based on where a carrier is domiciled.

Most recently a law has been enacted in New Jersey requiring at least $1.5 million of liability insurance for motor carriers domiciled there. The New Jersey law and laws in other states raising coverage minimums can cause those states’ insurance rates to rise significantly, increasing disparities.

In fact, the question of where a carrier is domiciled can be a key factor in whether a state has relatively higher or lower insurance premiums for motor carriers. 

Moreover, courts in plaintiff-friendly states like California, New York and Louisiana often award much larger payouts in lawsuits related to trucking than other states do. Because of this, insurance commissioners in these states force insurance companies to file higher rates to make sure they collect enough premium to be able to pay claims, according to Alexander.

Still, there are areas where carriers can take steps to mitigate rising costs, which vary widely even among carriers within a given state despite regulation by state insurance departments.

“Individual loss data for the motor carrier is arguably the most important factor when insurance carriers determine how much they are going to charge,” Alexander said. “CSA [compliance, safety, and accountability] scores is another one that is extremely important. Each ‘alert’ a motor carrier has in one of the seven BASICs [Behavior Analysis and Safety Improvement Categories] can cost on average an additional $500-1,000 in insurance premium per truck per year.”

It boils down to hiring the right drivers, having the right equipment and technology in the trucks, such as telematics, cameras, etc., and emphasizing safety to hold down potential increases in rates. Motor carriers can also choose to increase deductibles to reduce premiums as more of the risk is now on them versus the insurance carrier when deductibles are raised.

Meanwhile, the future of insurance rates will continue to rely in significant part on what each state’s lawmakers and regulatory agencies decide. It’s likely that more states will go the route of New Jersey and require carriers to increase liability coverage to $1.5 million. At the federal level, the FMCSA minimum remains $750,000. 

Should additional states take New Jersey’s approach, it could increase the exit of motor carriers from an even more cost-prohibitive market.

Click here to learn more about Reliance Partners.

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