Insurance: Balancing the risk

Fleets can reduce their costs by opting for self-insurance ahead of comprehensive cover. But who does it suit and what are the benefits and drawbacks? Ben Rooth reports

Every car has to be insured: it’s one of the certainties of running a fleet, like road tax. However, the price of premiums has risen in recent years while the recent 0.5% rise in the insurance premium tax to 10% has increased this cost burden further.

This will hit the companies which take out fully comprehensive cover the hardest, but for some – and particularly the larger fleets – self-insurance could be a viable way to save money.

The term ‘self-insurance’ can often be misunderstood and mistaken for the scheme which involves placing a £500,000 bond with the Government (see panel, page 30).

Instead, self-insurance can also mean taking out a third-party insurance policy so the fleet takes the risk of any collision damage to its own vehicles.

“Virtually no business on the planet actually completely self-insures – the risks of having to pay a multi-million pound loss are too great for almost any commercial enterprise to bear,” says Peter Blanc, group chief executive of insurance broker Aston Scott Group.

“The term ‘self-insurance’ should really be called ‘risk sharing’ as that is a more accurate description of the arrangement,” Blanc adds.

Paul Holmes, managing director of consultancy Fleet Managers Friend (FMF), agrees.

“Self-insurance is another risk management tool, in which a calculated amount of money is set aside by the organisation itself to compensate for the potential future loss,” Holmes says.

“It is possible for any insurable risk, meaning a risk that is predictable and measurable enough to be able to estimate the amount that needs to be set aside to pay for future uncertain losses.

“This methodology requires a well-defined set of what is covered and how claims can be made and paid.”

Typically, fleets take a straightforward approach to insurance, says Blanc. They pay a premium for fully comprehensive cover and the insurer takes on nearly all of the risk – a fleet needs only to worry about paying the excess of typically £250 to £500 in the event of an at-fault collision.

The insurer picks up the rest of the bill both for repairing a fleet’s vehicle and also for any other vehicle or property involved in the collision, collectively called ‘third parties’.

Crucially, the insurer also pays for any third-party injury claims which are the most expensive part of motor insurance.

“As a company’s fleet gets larger it becomes increasingly logical to increase the excess that it bears and eventually to only insure for losses that it causes to third parties: the maths around this is simple,” says Blanc.

“Third-party risks make up approximately 60% of the premium; own damage makes up approximately 10% and the remaining 30% is typically the costs incurred by its insurer and its insurance broker – covering reinsurance costs, administrative costs, broker’s commission, insurer’s profit margin and Government levies, among other things.

“So if your annual premium per vehicle is, say, £2,000 – for a typical commercial vehicle fleet – it can be seen that the cost of insuring your own damage risks is approximately £200.

“If your vehicles are worth, say, £20,000 each then you know that if you have more than 100 vehicles you would need to be writing off one vehicle per 100 vehicles insured to be better off.

“In other words, if your past track record shows that you only write off a vehicle once every three years and you run a decent-sized fleet then you can do the maths and work out that you would be better off putting the money to one side and paying for your own write-offs.

“You don’t have to pay the excess, you save on insurance premium tax (IPT), which is now a whopping 10%, and if you do suffer a loss you can choose exactly how you replace your vehicle.

“This, in its simplest form, is a type of self-insurance – you simply calculate the risks of losses happening, establish how much premium you are paying to insure against that risk and, if you believe the costs to you of paying your own losses will be lower than the cost of insuring against those losses, then you simply decide not insure against those risks.”

Ian Kemp, product director for commercial motor at insurance company RSA, says that one of the reasons why self-insurance is better suited to larger fleets is because there are “so many different factors” that have to be borne in mind when administering policies in-house.

“Fleets considering a self-insured retention arrangement need an awareness of insurance, claims handling and risk controls required,” he adds.

“Therefore this approach is more suited to larger companies that have the resources and knowledge to manage their claims exposures and funding.”

In the long run, self-insurance will probably be cheaper as fleets are saving insurance premium tax, broker’s commission, insurer’s expenses and profit, adds Blanc.

“If they undertake a risk improvement programme and their claims experience improves, they receive the financial benefit immediately rather than waiting for their insurer to reflect the improvement over time in lower premiums,” he says.

“If they put the money saved to one side, they can build up an insurance fighting fund that may enable them to deploy the savings in further risk improvement techniques: we’re encouraging fleet owners to consider autonomous braking systems.”

Tristar Worldwide Chauffeur Services, which self-insures its fleet of 470 leased and owned Mercedes-Benz vehicles, does adopt technology to minimise the number of collisions it has.

“Over the past few years, we’ve invested in vehicles fitted with advanced driver assistance systems – from lane departure warning systems to automated braking systems and blind spot monitors – to further drive down at-fault collisions,” says Jan Kozlowski, fleet manager at Tristar.

The company had insured its vehicles with comprehensive cover, but in 2002 rising premiums led it to look at other insurance options. It now has a third-party policy in place with a major insurer.

“When we subsequently moved to self-insurance, we decided it was very important to share information about what we were doing and why we were doing it with colleagues,” says Kozlowski.

“This has made them far more conscious of risk, which has brought benefits in terms of improving safety and reducing the number of collisions we have.”

Tristar also works with an accident management company to resolve any at-fault collisions. “In addition, it’s written into colleagues’ contracts that they need to let us know as soon as practically possible of a collision occurring and we’ve developed an app that enables them to do this,” says Kozlowski.

“This app conveys information about what’s happened straight to our call centre and our insurers or accident management company are immediately notified so they can begin managing the resolution process without delay.”

In short, fleets that self-insure need to ensure that all drivers are focused on the cost of collisions, preventing them and – in the event that they do occur – reporting them quickly and efficiently so that the third party claims can be handled appropriately.

Roger Ball, director of motor at specialist commercial insurer QBE, says: “I do think that self-insuring sharpens fleets’ attention when it comes to risk management – although this is far from the only reason why those fleets do this.

“But fleets that place a strong emphasis on risk management are more than likely to be the ones that actively consider implementing self-insurance.

“We have noticed an increase in the number of queries from fleets looking to implement self-insurance recently, although the numbers involved are still relatively small in the context of the numbers of conventionally insured fleets.”

Another advantage of self-insurance is that if a collision does occur, then it is up to the fleet to decide how to repair vehicles and what to replace them with, says Blanc.

“Most companies have seen that bodyshops tend to charge ‘insurance rates’ and if you’re a cash buyer you can sometimes get very different rates – as a self-insured customer you benefit from these savings,” he adds.

However, self-insurance also has its downsides. It will undoubtedly mean an increased admin burden for the fleet manager, and just because a fleet has never had a vehicle written off, it doesn’t mean that company won’t have several write-offs in a year which would leave it significantly out of pocket.

“Consequently, the fleet still needs to ensure adequate funding to cover the maximum amount of losses anticipated and needs to recognise that they may incur potentially increased claims costs,” says Kemp.

Blanc adds: “Once you’ve gone self-insured it’s sometimes tricky to persuade insurers to take you back on a fully insured basis as they can be left ‘blind’ to the losses that you’ve suffered.

“Insurers use a market standard claims experience system and that’s how they decide how much to charge – if you’ve been self-insured for any part of your risk then that information has to come from you and insurers can be untrusting about the numbers.”

Implications of going it alone on insurance

An option available to the largest companies is to self-insure entirely on their own without involving insurance companies.

According to the Motor Vehicles (Third Party Risks Deposits) Regulations 1992, a business can place a £500,000 bond with the Government which is subsequently used to pay third-party claims in the event of an at-fault collision.

Those fleets that choose to go down this route meet all Road Traffic Act (RTA) 1988 insurance requirements but still need to pay for repairs to their own vehicles.

Roger Ball, QBE director of motor UK and Ireland, says: “This bond is effectively a surety required to relieve a company from its obligations to obtain cover with an insurer to fulfil RTA requirements.

“They will still need to manage the costs of their liabilities with third parties.

“The purpose of this bond is to provide security if the company cannot meet its legal obligations or if it ceases to operate but still has outstanding claims.

“This will only be an option for very large firms and in my experience is very rare.

“It would only be attractive in a market where it is not possible to obtain competitive terms, the company is cash rich and when the opportunity cost of foregoing £500,000 in terms of lost investment returns is minimal.”

Pros and cons

Pros: 

Potential for immediate cost savings which brings improved cashflow.

Additional savings in the event of a better than expected loss history.

Isolation from    the insurance market cycle.

Incentive for improved fleet risk management culture.

Cons:

Can be more expensive than limiting exposure by transferring risk to an insurer.

Systems need to be put in place to settle and monitor claims and negotiate with third party insurers.

Increased admin burden and impact on management time, costs and resources.

Potentially difficult to get ‘conventional’ insurance again after being removed from the insurance market cycle.

Case study: The Salvation Army

An increase in costs following the introduction of insurance premium tax (IPT) 20 years ago provided the impetus for the Salvation Army to self-insure its fleet.

Despite regularly reviewing all other options, Peter Bonney, fleet controller for the Salvation Army, says self-insurance consistently proves to be the most cost-efficient way of providing cover for its fleet of 800 cars and 200 commercial vehicles.

Having a third-party insurance policy in place with a major insurance company and an additional agreement with an accident management company provides “greater control” over what happens to damaged vehicles to get them back on the road as swiftly as possible, he adds.

“We have a safe driving culture but still experience a significant number of at-fault and no known third party collisions over the course of a year,” says Bonney.

“While it’s difficult to put a precise figure on the savings we make annually by insuring cars in this way, we check regularly through a broker to ensure that this is the most cost-effective option.

“To my mind, we’re simply not paying for a large number of fully-comprehensive policy components we don’t need.”

One of the main benefits of self-insurance is that fleets retain control of what happens to vehicles in the event of a major collision, adds Bonney.

“Being in control of repairs allows us to decide if severely damaged vehicles should be repaired or written off, a route we prefer to take when the financials permit,” he says.

“When a vehicle is being repaired we always take a courtesy car rather than hire, this is a great incentive to the repairer to get our job done quickly and our drivers want to get back in their own cars without delay.

“The only real downside to self-insurance arises when there’s a need to book a colleague this courtesy car.

“Many courtesy car providers want to see evidence of comprehensive insurance which results in us having to send them proof of indemnification stating clearly that we’ll cover their vehicle up to its current market value.”