Introduction. Part II: Insurance Structure Optimisation

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2 Introduction This book contains 12 chapters with different areas of benefit realisation; this is not an exhaustive list but provides those options that, in my experience as a consultant to fleet owners, have proven to be most beneficial in practice. The principles of insurance cost savings are divided into 4 sections: Part I: Understanding the current situation and comparison to benchmark of peers This section starts with a breakdown of the value chain (chapter I) and the earnings for each of the participants. As up to 50% of the paid premium does not go towards the injured party, it is of key importance for the fleet owners to understand where their money goes. The next three chapters outline the fundamental building blocks to all insurance savings. Firstly, a documentation of the Commercial Fleet risk profile (chapter II). This risk profile should provide information on the risk to be insured and what type of claims materialises. Part II: Insurance Structure Optimisation This section outlines how to decrease insurance costs with the implementation of alternative risk structures. The first chapter in this section describes the benefits of an Excess of Loss or Deductible structure (chapter V) whereby part of the risk is retained as a deductible for the fleet owner. The advantage is that an Excess of loss structure reduces the premium and thus total costs. Chapter VI on stop loss structure describes the workings and benefits of a similar structure, which has a benefit over the excess of loss structure in that the risk for the fleet owner is capped, whilst premium savings can still be realised. The next chapter elaborates on Own Damage Self Insurance (chapter VII), which is the preferred structure for fleet owners that would like to directly benefit from cost management measures. The final chapter in this section (chapter VIII) Reinsurance Captive solutions, covers risk retention for Comprehensive cover which is the ultimate step for a fleet owner and the one that potentially provides the most significant benefits. Part III: Levers to Manage Damage Costs Chapter III (Claims analysis) outlines the claims analysis set up and discusses in turn how to obtain the right level of insight into the types, severity and frequency of claims and their impact on the premium levels. The final chapter of section One addresses the Insurance benchmark (chapter IV). Frequently, the only benchmark that is performed is a comparison between the current premium level and those offered by the parties involved in the tender process. This benchmark is flawed as it ignores two key elements. The first one being the benchmark of all available options in the market and the second being the benchmark on incurred claims and hidden (process) costs. The chapter on benchmarking describes how to assemble and utilise a comprehensive benchmark when selecting insurance for a specific fleet. This section provides guidelines on how to pay less for incurred claims with a focus on pro-active claims handling (chapter IX) and effective damage recoveries (chapter X). However, negotiations on body repair network agreements to obtain discounts on spare parts and labour costs are out of scope of this book. The section then moves onto how to ensure the number of claims decrease with influencing driver behaviour (chapter XI). Part IV: Insurance procurement This section provides guidelines on the set up of the insurance tender process (chapter XII) Eelco van de Wiel 9

3 Part One Understanding the current situation and comparison to benchmark of peers Eelco van de Wiel 13

4 The issues Whilst companies are searching for cost reduction initiatives relating to mobility costs, it is important to also include fleet insurance. However, up to now and in most markets there are few fleet management companies, brokers or insurers willing to cooperate in a transparent and open manner with fleet owners over insurance costs. Chapter I Value Chain insights I.1 Introduction Fleet owner experiences The cost of fleet insurance tends not to be transparent to the fleet owner. In cases where insurance is bundled into a lease arrangement, the part of the lease instalment related to insurance is even not always disclosed. When a fleet owner purchases fleet insurance directly, often no breakdown is provided into the constituent parts of the premium. Numerous parties are reimbursed by the insurance premium, but to the fleet owner there is no real insight in -or control over- these costs. While typically up to 50% of the insurance premium does not benefit the injured party and insurance makes up 10-15% of vehicle cost of ownership, there is significant scope for cost savings. I.1 - Premium breakdown The solutions Which insurance solution best meets the requirements is dependent on the risk profile, insurance risk policy, driver policy and current terms and conditions. To assess this, generally the first step would be to document the risk profile (including claims performance) and benchmark the current conditions. Then, depending on the policy towards influencing driving behaviour and the policy regarding retaining risk, there is a whole range of options to choose from. These options include: unbundle insurance, unbundle constituent parts of insurance (retain part of the risk), leverage purchasing power (economies of scale) and alternative risk transfer (e.g. stop loss structures). I.2 Fundamentals The auto insurance market is shaped by the following fundamentals: Market size: Auto Insurance is a 630 Billion USD market 2 and makes up approximately 15% of the world wide insurance premiums. This makes auto insurance one of the largest classes of insurance and therefore a focus area for insurance companies. 120% Capital charges I.2 - Market size motor insurance 100% 80% 60% Contribu=ons Motor Insurance bureau Contribu=ons Motor Guarantee fund $6.000 $5.000 $4.000 $4.900 Global premium in % 20% 0% 61% Gross premium incl. taxes Profit Overhead Claim handling fees $3.000 $2.000 $1.000 $0 1 $630 Auto Insurance premium in Eelco van de Wiel 2. Source: OECD report on global insurance markets 15

5 Part Two Insurance Structure Optimisation Eelco van de Wiel 45

6 For fleet owners working with lease companies, the end of contract damages treatment is frequently an issue. Some lease companies rather than charging the standard deductible, pass on the entire claims cost at end of contract, in those cases where claims have not been notified during the lease period. In order to avoid these costs, fleet owners have considered pre-termination reconditioning in order to avoid deductibles and/or full cost re-charge. Chapter V Deductible structures / Excess of loss V.1 Introduction Fleet owner experiences The traditional insurance structure offered to fleet owners consists of Motor Third party liability without a deductible or stop loss and Own damage offered with a fixed deductible per claim. This is very similar to the insurance structures offered to consumers. However, due to the nature of commercial fleet insurance, an increased deductible (also called Excess of Loss structure) is at times also implemented. In tender negotiations, insurers tend to offer various options of deductibles (e.g. 500 Euro and 1000 Euro per Own damage claims). Increasingly fleet owners are evaluating deductible levels that suit their risk profile and claims experience. Examples of fleet owners opting for a deductible of Euro on Motor Third party liability exist. The issues Setting a deductible that suits the risk profile is not common practice - mostly deductibles are based on established market practices. The resulting deductibles enable a like for like comparison between providers but do not provide a solution for fleets with different claims experiences. A deductible should match both the risk profile and risk appetite, however, deductibles are typically not simulated on impact: the premium is used as the selection criterion whilst the deductibles expressed as Euro amount per vehicle are not taken into consideration. As a result, an insurance offer that seemed attractive on the basis of a lower insurance premium may not turn out to be as advantageous due to the deductible charges from the insurer. The solutions An increased deductible structure is a solution for a fleet owner who would like to participate in the results of improved claims performance and at the same time has a risk appetite to absorb cost rises due to increased frequency of claims below thwe deductible. In cases where a fleet owners focus is on Insurance Premium Tax (IPT) optimisation only, the stop loss structure may be more attractive (see also chapter VI Stop loss structures). Finally, when a fleet owner wants to achieve maximum participation in results and the most IPT efficient structure, the Own damage self insurance structure is the optimal solution (see also chapter VII Own damage self insurance) When considering an excess of loss structure, it is advisable to simulate the total cost for the fleet owner at various deductible amounts. This would include simulation of past years claims levels at different rates of deductibles. The fleet owner can then select the right level of deductible that matches their specific risk profile and claims experience. V.2 Fundamental Principle of a Deductible structure: A deductible is the amount borne by the fleet owner in case of an accident. The insurer indemnifies the fleet owner for the incurred damages, minus the deductible applicable for the specific insured event. The application of a deductible is advantageous both for the insurer and the fleet owner: o Incentive: Passing on the deductible from the fleet owner to the driver is a strong deterrent to the driver discouraging behaviour that will result in claims. Passing on a deductible is an effective approach as the consequence is felt immediately by the driver through a premium increase at insurance renewal to the fleet owner Eelco van de Wiel 47