Routes to profit

There are a number of factors at play when insurers talk about fleets. As in other markets, there is potential for good quality advice and underwriting to justify the premiums customers pay. So what are the strengths and weaknesses of the fleet market and what is the outlook?

Mark Bacon, chief underwriting officer for corporate motor at Zurich, sums up the present position: “Premium levels for the UK motor market have been declining for at least the past three years. Allowing for the effects of inflation, premium levels are something like 14% lower in real terms than they were three years ago.

“This situation is not sustainable and will inevitably lead to a correction in pricing.”

At the same time that premiums have been in decline, costs have risen, particularly third party costs. Fleets suffer more third party costs possibly because individuals see corporations as rich and unlikely to contest reasonable claims. But it is more likely that fleet customers may well self-insure non-third party risks, or accept a high excess on non-third party losses.

Then there is the cost of regulation and factors such as ambulance costs being charged to insurers, all putting upward pressure on costs. While larger players may be protecting their books, this will not be at any cost. And the increasing use of management information is enabling insurers to more carefully match cost and premium to the risk.

Also good use of management information is enabling smaller players to find profit in the market, even if they may not have great experience. There is a general acceptance that premium increases are on the way. But at the same time it is recognised that insurers and advisers will need to differentiate themselves through the quality of service they offer and the value they bring to their customers’ businesses.

That said, while some may start to increase premiums this year, most will likely wait until 2008 to implement any changes. ‘

‘ Some insurers may have used surpluses from previous years to prop up this year’s results. While this could flatter the current position, it does run the risk of depleting reserves so that future results may have to allow for rebuilding adequate prior year reserves.

Current data suggests that up to 14% of current premium may have been allocated from previous years’ surpluses and that had this not taken place the market would have run a fairly unhealthy 111% combined operating ratio.

The prospective hardening of the market and increase in premiums is seen in many quarters as presenting an opportunity for service quality and value improvements. It should also provide an opportunity for fleet owners to look at the way they run their fleets and manage risks.

Tim Rankin, managing director of WNS Assistance, says: “Fleet owners are getting more switched on to managing their fleets in a way that could reduce their premiums. They are training drivers and, with help from their insurers and claims managers, are using third party capture to manage the third party claims for which they are liable.”

Insurers must ensure that they continue to underwrite based on material risk factors and not simply apply blanket rating increases.

They should avoid disaffecting good customers by applying excessive and unjustified increases, while setting premium costs at an appropriate level for customers whose claims history may not be so good – just to keep that business profitable.

Brokers have an important part to play in this process by ensuring that they provide insurers with as much information as possible to assess the risk and an appropriate cost.

“In this hardening market, some players may take underwriting risks, concentrating on price rather than service or risk

Alan Horemans, Arista

The UK economy remains strong which means that the fleet market continues to grow. Increasing regulation means that fleet owners are thinking more carefully about health and safety and risk issues. And they need to.

The trade and fleet markets still have some scope to improve the speed with which they populate the . This could prove costly as the police increase their use of this database to identify and take off the road apparently ‘uninsured’ vehicles.

Also, next year when the Corporate Manslaughter Act comes into force, in the event of an accident, a fleet owner will need to be able to prove that the driver was not under scheduling pressure or working excessive hours, either of which could have contributed to the accident.

The floods suffered in parts of the UK earlier on this year did have an impact on the motor fleet market although not in an obvious way. Unless an entire fleet was kept in one of the flood areas, it is unlikely that losses will have significantly altered claim rates.

But, the changing weather patterns may have a longer term impact. Roger Ball, head of commercial motor and motor trade at Allianz Insurance, says: “Incessant rain for six weeks created driving conditions that had adversely affected accident claims.

“Not only were the roads wet for more of the time, but also sudden rain often caught drivers unawares.”

The UK market is efficient compared with other European markets partly because, by insuring the group and then the vehicles, cover for several thousand vehicles can be incorporated into one policy.

There are some weaknesses. A lot of fleet business is still conducted in a traditional manner and not all insurers have up-to-date management information on which to base costs and premiums.

Also claims backlogs mean that some costs will not yet have been crystallised and therefore might not be taken into account when setting future rates.

Alan Horemans, head of motor underwriting at Arista Insurance, explains: “In this hardening market, some players may take underwriting risks, concentrating on price rather than service or risk.”

It is so important to ensure that where prices have to rise, customers can match those increased costs with perceived increased services and value. And this is an area where brokers can be of particular help, offering the kind of traditional relationship-based advice on which their appeal in the market has been built.

Not only can brokers advise on insurance issues such as what type of cover is appropriate and what levels of excess best suits a client, but they can explain the reasoning behind whatever premiums are offered.

They can also advise customers on the steps they can take to manage the risks in their fleet better, their position regarding the law and the kind of management information that will best serve those ends.