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28 Nov 17

Insurance in Fleet Management - Chapter 1: the Insurance benchmarking urgency

Insurance is a key element in the cost structure of a vehicle fleet, but the Insurance topic raises many questions. That's why Fleet Europe will dive into the specifics of Vehicle Fleet Insurance, with a series of articles tackling all the facets of the insurance process. 

The article focusing on the insurance part of fleet management contracts is meant to answer different elements such as:
a)    Why would we need to look into insurance now?
b)    What are the basic elements or considerations of fleet insurance?
c)    What are the drivers of insurance costs and how can these be influenced or steered?
d)    How do we know whether we have a good deal in this important cost area? How can we predict whether we will get a premium increase or not and what could be the size of it?

Before entering into the details of all the elements mentioned we have to emphasize that insurance is today a hot topic, that most of the professionals responsible for fleet matters feel less comfortable with the content facets of this topic and that moreover most of the savings can be realized in this area. On top of that an international coordinator of fleet management for different countries cannot be aware of all the specifics and differences between countries and in light of this he will need the help and support of a real experienced insurance specialist.

a) Insurance urgency
There is a wide spread in the cost of insurance between companies with fleets in the same country and even same industry. This difference can be as much as 1,000 Euro per car per year. This difference is expected to increase due to the European wide premium increases.

Significant Europe wide premium increase will have to be faced in a near future as a result of:
1.    More expensive in-car technology and alternative power trains which result in higher own damage claims costs
2.    Increased life expectancy, improvements in medical care combined with governments increasingly burdening society with social security costs , all of which are leading to higher bodily injury claims. This is a major contributor toward third party liability premium increases
3.    New European insurance legislation (Solvency2) requiring insurers to maintain a higher capital buffer – in some cases double the capital required – which reduces return on equity for insurers. As a result, insurers had to increase reserves on prior years (years before 2016). This has triggered some strategy decisions leading to – in some cases – complete withdrawal from the fleet market or significant increases in premiums to maintain the target level of returns, factoring in the increased claims costs and capital requirements. Examples exist of fleet-owners with stable claims experience facing 100% premium increases from the current insurer.

This development has impacted Europe since 2016 where the fleet insurance in some countries already faced significant premium increases for 2017 (Ireland, Poland, Netherlands) and where the rest of Europe is inevitably expected to follow in 2018. The premium increase is expected to continue for the coming years, with (upward) adjustments primarily in countries up till now unaffected Therefore it is essential to gain insight how the current claims and premiums compare to the market benchmark .

There are 4 scenarios possible: 

 
b) Basic principles: what is the coverage and how are costs calculated for fleet-owners

Coverage
Within Europe, fleets are required by law to be insured for third party liability. This covers the damage caused by the vehicle to other traffic participants. Every country determines individually the amount that must be covered by the insurance company. As a result there is a wide spread between and within countries of the cover available: 
•    In Belgium, France and the UK, there is no limit to the amount that should be covered in case of a third party liablity claim. Examples exists of claims up to 50 MLN Euro in a single event.
•    In the Netherlands and Greece the amount that should be covered is below 10 MLN Euro and as a result the maximum claim awards are below this limit.
•    In case a vehicle from the Netherlands causes a claim in Belgium, the Belgian limit applies: the cover amount is defined by the country where the accident occurs.

This is relevant for a fleet-owner for example in case the insurance is bundled in the lease: not all leasecompanies may provide insurance with the same cover amount and when the fleet owner works with multiple fleets, individual drivers/vehicles may be covered for different amounts, even when performing the same function for the same company driving similar vehicles.

Furthermore, there are some optional insurance covers that can be selected by the fleet owner. The most common is own damage, which covers all damages to the vehicle itself. The amount covered varies between countries and could be the purchase price including VAT, book value of the vehicle, market value of the vehicle. Also here there are differences between and within countries.

Costs to fleet-owner
With private insurance, the costs of claims are spread across the entire pool of risks an insurer covers. Even the worst of drivers will never pay an insurance premium anywhere near the total claims costs caused.

In the case of fleets this is different: fleet insurance is more a cashflow management tool that enables the fleet owner to pay the claims costs spread over time rather than as they occur. 

This is illustrated by the way a premium is calculated: 
To determine the insurance premium, insurers will calculate the average annual claims costs based on historical claims statistics of the specific fleet. In some cases, the insurer will disregard the actual claims in excess of 100.000 Euro to arrive at the expected claims costs. In that case the insurer will add a provision for the claims in excess of 100.000 Euro based on their experience in that market.
This average annual claims costs is added with a provision for future inflation, a safety margin, overhead and profit allocation and with insurance premium taxes. Finally, there may be a commercial mark-up or discount, however in the current harsh and aggressive market, commercial discounts have become increasingly unlikely.
 
As a result the basis for the premium are the actual claims that occurred in a specific fleet. This implies also that shopping around for the lowest premium as a strategy to reduce costs may well work in a soft market, but with the current hard market this is not expected to be successful.

c) Influencing insurance costs 
In case a fleet owner procures insurance as a full cover – perhaps with a limited deductible on own damage – the premium is calculated as described in the previous paragraph. 

In that case the premiums can be influenced through negotiation and or claims cost reduction programs. The effectiveness of claims cost reduction programs can be significant, however this does require alignment of interest between all stakeholders involved (HR, finance, risk, fleet, suppliers, drivers). 

There is another way to impact the insurances costs. Although the claims drive the insurance costs, the total insurance costs is not just claims: 40% of the total cost of insurance is not claims related.

This 40% can be influenced by changing the insurance structure. Below we listed a few examples out of many possibilities. Some of the possibilities come with an increased financial risk (upwards and downwards) and others do not change the financial risk to the fleet owner.

1.    Fiscal aspects: Own damage can be offered as an insurance – by insurance companies – or as a service – by lease companies. The financial difference lies in the fact that insurance companies need to add non-deductible insurance premium taxes as high as 27%, whilst lease companies only need to add VAT, which is in many cases deductible for the fleet owner. Also when a fleet owner self-insures no insurance premium taxes are due. There is no incremental financial risk for the fleet owner in procurement of own damage as a service.

2.    Variable costs: a fleet owner can decide to take a deductible on both own damage and third party liability claims costs. In practice there are examples of very high deductibles up to 250.000 Euro each and every claim. The deductible reduces the premium and insurance premium taxes. The financial risk for the fleet owner lies in the number of claims below the deductible.


d) Benchmark: value of benchmark, which metrics can be used and how to benchmark

A benchmark – in any type of benchmark - brings transparency to all parties involved in fleet insurance and does not require significant amounts of knowledge on the subject to be able to judge the current situation. With fleet insurance there are the following metrics that are relevant to determine next steps: 

Insightful metric: 
•    Total claims cost: it is important to have insight in all the claims costs, regardless of which party pays the claims. Once these total claims costs are assessed, it can be determined which party should take what risks (deductible 500 Euro: driver, claims above the deductible up to 1,000 Euro: fleet owner, all remaining claims: insurer). The total claims costs can be objectively compared with peers, regardless of whether one party has no deductible, 1,000 Euro deductible or insures via inhouse captive). 

Confusing metric:
•    Loss ratio: this indicates how much the current insurer earns as a result from the current claims of the fleet, the current premium for the fleet and the current insurance structure and overheads of the current insurer. If it can be assessed that this structure is the most efficient and the processes of the insurer are also the most efficient, than this metric is valid. It does not provide any indication on whether the claims or premium are in line with the market.

Benchmarking starts with maintaining a detailed set of data for all claims that occurred in the past and present. The annual trend of the own fleet is a good starting point and can easily be compared with the overall market trend for car insurance premium and claims. In all European countries insurance statistics are published either by government agencies or the insurance industry itself. In this way the direction of the trend can be benchmarked (if the fleet owner claims costs are increasing and the overall market claims costs are dropping, there may be reason to investigate further).

Promotion for Fleeteurope members: Request a free of charge market benchmark for one country at www.fi-insurance.com using promotion code FE-N17. The current premium and claims information will be compared to a a peer group selected out of the fi insurance database. The fi insurance database that consists of over 3 million vehicles utilized for business purposed in Europe. When participating, fi insurance guarantees data privacy and will sign an NDA document accordinlgy. You can also send a request to benchmark@fi-insurance.com 

Author:  Eelco van de Wiel