Motor Fleet - Pressure is mounting over rate rise

A growing number of motor fleet insurers and brokers are predicting a rise in premiums by the end of the year. But, will they have the courage to follow through their convictions?

The market remains fiercely competitive and existing providers have been joined by newcomers including AIG, Catlin and Brit. It is also said that most insurers have been plundering their reserves from previous years to keep their fleet accounts looking healthy – but this is a dangerous strategy.

Norwich Union has to date been most vocal about the need to increase rates and others are now saying the current soft market cannot continue.

Kevin Edwards, head of commercial motor underwriting for Norwich Union, says: “Claims inflation has continued to eat away at rating adequacy. We have seen small incremental rate improvements through 2006 continue into 2007 which we believe are the green shoots of recovery beginning to emerge.

“However, current rates continue to be unsustainable and rate increases need to gather pace, if they are to achieve a level that might deliver a return to profit in a couple of year’s time.”

Roger Ball, head of commercial motor and motor trade for Allianz Commercial says: “No one needs reminding that this is a very competitive market but for the past four years, ABI data shows there have been no rate increases. And, for last year, there was a seven per cent reduction in a single year.

“At the same time, we are seeing a rise in the cost of claims in areas such as personal injury and loss of earnings. We have no plans to dip in and out of the market, so I would support Norwich Union in saying rates must go up.”

Ball adds the recent case of Sarwar v Ali &MIB has made many fleet insurers realise that further rate reductions are too risky. And, since this was a case involving the Motor Insurance Bureau, it hit all insurers’ pockets.

Waseem Sarwar, who was a17 year old student at the time, was left a quadriplegic following a car crash. He won compensation of £9.5m – a record for a personal injury case. He was being driven by his friend Kamran Ali in a car being taken on a test drive in 2001 – consequently, Ali was not insured to drive the vehicle.

Sarwar was not wearing a seatbelt and as a result of this, his award was reduced by 25%, although he will still receive in excess of £7.1m for round the clock care.

The case was also the first to deal with indexation in relation to future loss of earnings.

Rising pressures

Andy Hawkes, managing director of broker THB Risk Solutions, says: “I would concur that we need to see rate increases. I am aware of one newcomer which has no minimum premium for new business so it is not surprising the market has continued to slide.”

But, he says there are clear pressures which make rises by the end of the year likely. “I think loss ratios will be a problem for some insurers when you get the half year results in September. If there has been a deterioration in performance – which I am convinced there will be – then the major insurers in particular will impose increases.”

He adds beyond rising personal injury claims, insurers are also increasingly concerned about duty of care legislation and the impact of the Road Safety Act. “You have the Atkinson Kitchens and Bedrooms case which attracted a lot of attention and in the Road Safety Act there is a penalty for causing a driver to have an accident. We are going to see more motorways closed to gather forensic evidence.”

In the case of Michael Eyres v Atkinson Kitchens and Bedrooms it was found employers can be held vicariously responsible for negligent acts of employees while driving at work.

The Court of Appeal accepted a degree of contributory negligence by the employee but stated the employer had a duty of care to ensure the 20-year-old driver was not tired and so liable to fall asleep at the wheel while driving.

Eyres, a kitchen fitter, sustained severe spinal injuries and was paralysed following the accident. He was flung from the vehicle when breaking suddenly – he was driving on the M1. He had been awake for 19 hours when the accident took place and it was believed he fell into a microsleep.

Sitting alongside him in the van was Craig Atkinson, the 28 year old managing director of the Bradford-based firm. He was sleeping.

It was claimed the company had a long hours culture. The judge said: “Mr Atkinson’s saying ‘eating’s cheating’ and ‘you can sleep when you’re dead’ summed up the company’s philosophy.”

He should receive damages of around £1m although the final award will be reduced by 33% because he was not wearing a seat beat – agreed to be contributory negligence.

The Court of Appeal overturned the earlier trial decision that said Eyres was not entitled to compensation, citing use of his mobile phone as the cause of the accident.

Hawkes adds: “More underwriters and fleet managers are taking risk management seriously and the challenge is putting rates up while making sure the good ones are incentivised.

Meanwhile, Phil Cunningham, managing director of insurer Carraig Insurance says: “You are always going to have some companies who are not interested in risk management. The problem is in the current soft market, too many have been willing to take on the dreadful risks.

“Underwriters must do their homework – there are too many directors winding up companies then coming to the market under a new name with appalling track records, but still obtaining cover as new businesses.”

As an insurer based in Gibraltar, he explains he is “eight points better off than when we were at Lloyd’s”. But, he emphasises: “As a smaller insurer we are extremely selective and are already putting in small increases. Norwich Union, because of its size, will to some extent dictate the market, but I welcome its stand.”

And so does Matthew Crane, underwriting director for Ensign, QBE’s commercial motor division. “The market is being held back because there is still too much capacity. But, if I am being optimistic, I would like to see a 3% rise by the end of the year and 10% next year. The market is in a poor situation – as bad as I’ve seen it – and pressures are mounting.”

He adds that reinsurers are both raising the cost of their cover and imposing stricter terms and conditions. This is combined with rising claims inflation and costs for insurers and brokers. This is because of interest rate rises and regulatory costs and so numerous factors are adding to the impetus. “We need to see this rate increase and even though it may be less than I hope for, I do see it happening.”

Andy Keane, motor underwriting manager for Norwich Union says: “This is a more difficult class of business to make profits in because there are smaller margins than many other classes combined with high claims.

“But, let’s not be too negative about the situation. Pricing is moving upwards and insurers have made advances in terms of their risk management offerings and training. This has come a long way and I see telematics having a bit part to play in helping the switched on fleet manager control their risks in the future.”