Market: fleet

Overview

Rates in the fleet market could rise by as much as 10% in the coming year. The hike is overdue, writes Ben Cook, as claims inflation has exceeded rate increases, leaving fleet insurers trading at a loss.

But while rates may rise, the market is expected to contract as the number of commercial vehicles insured drops.

“In terms of the economic climate, there are challenges for clients,” says Jon Dye, commercial motor manager at Allianz. “Opportunities to underwrite are likely to contract as new [vehicle] registrations are down.”

Dye points to the decline in house sales as the reason for the dip in sales.

“The value of housing has gone down, which has an impact on estate agents and surveyors. Construction companies have closed – the site managers laid off would have had company cars,” he says. Estate agents with company cars have also lost their jobs.

Businesses are also cutting back on fleet cover to save cash. Biba says some small and medium-sized enterprises are scaling back, downgrading from comprehensive cover to third-party liability.

Few statistics are available, but it is estimated that the fleet market may have contracted by about 4% over the past year. To give a rough idea, the total earned premiums at 31 December 2007 stood at £1.646bn. At the same time in the previous year they stood at £1.649bn.

Dye says rates have been “on a downward spiral over the past few years”, but adds that there was a 5% increase across Allianz’s fleet book in 2008. But he says claims inflation was 7% to 8% over the same period, “so we’re still not keeping pace”.

He says rates could be up by 7% or 8% in the first quarter of this year – “or even double figures, across the market”.

Not everyone agrees that claims inflation has surpassed rate increases. Simon Baker, head of commercial motor at AXA, says rates have increased “in line with claims inflation” in the past 12 months. But he agrees with Dye that last year the erosion of rating levels stopped with increases of up to 7% across the industry.

He says this is in stark contrast to the two or three years after 2003, when rates “increased at less than claims inflation or reduced”. Average market rates fell from £702 per vehicle in 2003 to £616 per vehicle in 2006. He expects rate increases to hit 9% to 11% this year.

Andrew Fletcher, acting head of commercial motor at Groupama, says rates will “have to go up” to match increases in costs.“We will have to carry at least an inflationary increase, if not more – claims inflation will run at 6% so rates will be up 6% to 10% by the end of the year.”

He agrees that the number of fleet vehicles insured is shrinking. “Car sales were down 37% year on year in November, and there are fewer company vehicles on the market,” he says. But he sounds a more optimistic note: “We have not seen a large proportion of fleets going bust.”

Any free spaces? New players in the market

A number of new players have entered the fleet arena in recent years. But Simon Baker, head of commercial motor at AXA, does not expect any major new players in the next year – although he acknowledges that QBE, AIG and Brit have increased their presence recently.

“The majority of insurers that have an immediate appetite have already come in,” he says. “Overall the market size will slightly grow – the shrinkage in vehicles will be counterbalanced by the increase in rates.”

A report released in late December by Advisen, the research consultant, has forecast that the soft market will turn by the fourth quarter of this year or the first quarter of 2010. “Following two years of record profits, losses from both underwriting and investment activities are destroying excess insurance capacity, signalling that the bottom of the commercial insurance pricing cycle is near,” says Dave Bradford, the report’s author.

He believes that rising premiums typically attract new capacity – which, in turn, chokes the hard market.

But he adds: “In the current economic environment, skittish investors, dysfunctional credit markets and de-leveraged hedge funds may mean that much less capital will be available to fund new insurance and reinsurance companies, or for investments in alternative sources of capacity.”

The leading fleet brokers include Towergate, Oval, Jelf, Marsh, Willis, Giles, Aon and SBJ.

Towergate’s brokered premium is about £150m, compared to £125m two years ago. However, Andrew Evans, managing director of the transportation division at Towergate Underwriting, says the fleet market is getting smaller. “Anecdotally, it is contracting by about 15% to 20%,” he says.

He points to the declining construction industry. “If you’re not housebuilding, you don’t need to deliver aggregates and therefore you don’t need tippers.”

On rates, he says: “We’re bouncing along the bottom of the cycle. There is some evidence of hardening, but it’s not consistent.”

He does predict a “slight hardening” this year, however, with increases of up to 4%. But he says the increases will be well behind claims inflation.

“We’ll be lucky to see increases in prices exceeding the retail price index.”

Evans explains this by pointing to the increasingly competitive market, citing the bus and coach fleet sector once dominated by Ensign, Equity, Chaucer, Jubilee and Summit.

In the past 18 months they have been joined by Novae, Newline and Norwich Union.

Reverse auction website

The downturn has not stopped some companies looking for new ways to boost business. Among the innovations is the auction website Direct Fleet Insurance, launched by broker Kerry London. Brokers can use the company’s site to request insurance via reverse auction.

Insurers, including AXA, Allianz, Brit, Carraig, Groupama, HSBC, Highway, NIG, Norwich Union and Zurich, bid as often as they like to secure a contract. Brokers choose the offer that best meets their needs.

Simon Baker, head of commercial motor at AXA, says his company’s membership of the panel is an experiment – albeit one that is going well. “It’s early days ... we’re participating to see if it’s appropriate. It can be a worthwhile platform for some fleets. We have an ongoing [review] process and everyone is happy at the moment.”

Andrew Evans, managing director of the transportation division at Towergate Underwriting, says the Direct Fleet site is winning clients from some large insurers, but questions whether it is the right medium for all fleets. “Insurance is not all about pricing – a lot of work goes into understanding the needs of the client,” he says. “A client that buys via auction is making a statement about their values.”

Kerry London is now receiving about 60 risks per week.

Corporate manslaughter risk

The Corporate Manslaughter and Corporate Homicide Act, which came into force in April last year, is expected to have a significant impact on the way companies manage their motor fleets.

An action for manslaughter can now be brought against a company if health and safety failures result in a person’s death. Previously, charges could be brought only if a senior employee whose actions were legally recognised as being those of the company was identified and prosecuted.

“The underlying impact of the act will feed through to how clients manage fleets in terms of the degree to which they intervene in what their drivers do,” says Simon Baker, head of commercial motor at AXA.

For example, they could ensure that employees do not drive for extended periods, which could lead to tiredness and, as a consequence, accidents.

Andrew Fletcher, acting head of commercial motor at Groupama, says the act has concentrated the minds of fleet managers on managing risk. “If companies are deemed to be negligent, the whole company will be fined,” he says. “For medium to large fleets, there is a reputational risk; they don’t want their name smeared across the newspapers.”