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SMB freight technology platforms and the implications for insurance

A look at how technology will transform the supply chain and insurance industries
Published on Feb 6, 2023
SMB freight technology platforms and the implications for insurance

The supply chain and logistics industry is still facing substantial challenges from the COVID-19 pandemic. The cost of transporting goods skyrocketed during the early days of the pandemic due to port closures, public health restrictions, and driver shortages – combined with a spike in e-commerce and stimulus-driven shipping demand. Conversely, in 2022, the cost of transporting goods began to fall drastically due to waning consumer demand driven by inflation and rising interest rates. These steep declines in shipping prices have resulted in increasing financial pressure on small freight carriers and brokers, who have simultaneously seen falling revenues and inflation-driven increases in operating costs.

To combat these dynamics, carriers, and brokers are increasingly turning toward technology platforms. Digital freight matching and technology-enabled freight factoring platforms have seen growing adoption within the industry as ways to drive operational efficiency gains and cost savings. Beyond the direct benefits they enable for brokers and carriers, these platforms create emerging opportunities for commercial insurers. By partnering with such companies, insurers would not only gain new leveraged distribution channels but also unlock data that could both enable a more granular understanding of commercial freight risk and be used to create differentiated insurance products.

The supply chain seesaw

Over the last three years, the broader supply chain and logistics ecosystem have been characterized by significant upheaval because of COVID-19 and, more importantly, dynamics that have seesawed the industry between extremes. The story of 2020 and 2021 was one of considerable supply disruption due to the pandemic (border closures, labor constraints, etc.) alongside skyrocketing consumer demand from the rise of e-commerce. The result was widespread product shortages, from toilet paper to vehicles to furniture, leading to long wait times for consumers and dramatic increases in the cost of transporting goods. From March 2020 through December 2021, rates for shipping containers increased over 5x. However, 2022 brought an abrupt reversal in the markets. Consumer demand began to fall as the Federal Reserve rapidly increased interest rates to combat inflation, tightening credit and slowing economic growth. As the overall demand for goods dropped, the commensurate demand for transportation services has also fallen, with shipping rates dropping more than 55% since the start of 2022.

For trucking carriers and brokers, this has meant steep revenue declines, often upwards of 50% from 2021 highs. These pressures are further exacerbated for shipping carriers by inflation-driven rises in the cost of operations, from fuel to wages to insurance. While larger firms are often more shielded due to longer-term contracts and negotiated discounts, smaller owner-operator carriers and brokers have been especially hard. These pressures have created an urgent need to adapt, leading these smaller businesses to turn toward technology to increase efficiency and lower operating costs.

SMB freight technology as the solution

While there are no silver bullets to solve these challenges, two solutions have become increasingly prominent and popular with small brokers and carriers to optimize their operations – digital freight matching for brokers and technology-enabled freight factoring for carriers.

Digital freight matching

The logistics industry, particularly the process for booking freight, has historically operated using manual processes (e.g., pen, paper, and phone calls). To identify carriers for specific shipments, brokers often call multiple carriers before finding one willing to accept the job. Not only is this analog process fraught with inefficiency, but it also results in suboptimal rate matching and price discovery for the specific route and load. Paying above-market rates results in reduced profits for the freight broker, while underpayment results in a slow booking process, with multiple carriers rejecting the load. To solve these challenges, brokers are increasingly turning to digital freight matching software that can automate the booking process and leverage data and analytics to identify the optimal market clearing price. Companies like Newtrul, Cargo Chief, and Parade have built software platforms and marketplaces that allow brokers to automatically push out service requests and receive inbound interest from carriers, ultimately removing price mismatches and the need for manual dialing.

Technology-enabled freight factoring

As top-line revenue declines, the ability to receive timely payment becomes increasingly essential for carriers to support business operations. The logistics industry, however, is notorious for delayed payments, which often require 45+ days post-job completion to reach the end carrier’s account due to net 30 payment terms stipulated by large shippers, coupled with long transaction processing times from freight brokers. Freight factoring is a process by which carriers can receive immediate payment less a factoring fee by assigning the receivable to a factoring business. While this solution has existed for many years, the overall experience for carriers has been subpar, with freight factoring companies requiring significant upfront and offline contract negotiations for underwriting and hidden fees being rampant within the industry. Technology-first companies such as BasicBlock and Denim are beginning to modernize the freight factoring space by leveraging data and analytics to automate processing and underwriting. Offering transparent pricing, data-driven insights, and dashboards for carriers to better manage their outstanding loads and payments, these startups are not only removing friction but also gradually becoming trusted financial solution providers for carriers. Many have begun to leverage this to expand and offer additional financial products, from fuel cards to lending.

Implications for the future of insurance

As small freight brokers and carriers begin adopting software solutions like digital freight matching and factoring to streamline their business operations and manage costs, new partnership opportunities are emerging for insurers. Specifically, partnerships with such platforms could unlock unique embedded distribution channels and new product innovation opportunities. With digital freight matching solutions, insurance could not only be sold within the platform but also influence the core matching algorithms. For example, outbound route pricing could incorporate insurance rates that vary dynamically based on the specific load, route, and time of operations, amongst other variables. Insurers could similarly leverage freight factoring platforms as a leveraged distribution channel to acquire customers, with data collected around the load being utilized for underwriting or pricing. Ultimately, the freight industry’s overall shift toward technology platforms like these, beginning with small brokers and carriers, will create opportunities for insurers to offer new insurance products in novel ways.

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