Commercial motor premium increases are moving into the fast lane as insurers struggle to cover massive underwriting losses. Is the end of the road in sight for beleaguered consumers? Yvette Essen checks the running.
The commercial motor insurance sector has had its fair share of crashes and bangs over the past decade. A string of massive underwriting losses has led to companies being forced to withdraw from the market and premiums have rocketed by up to 20% in the past two years.
The potential for business is, theoretically, phenomenal, as all British drivers are legally obliged to buy cover.
Under the Road Traffic Acts 1998 and 1991, a motorist must have insurance in respect of legal liability to pay damages arising out of injury to any person or damage to third-party property.
According to the Association of British Insurers (ABI), the commercial fleet business is worth £1.9bn and the private sector £5.1bn.
Yet despite the opportunities to post a profit, insurers are struggling to break even. And rates look set to rise further next year.
The private car market has been at the front of the furore as the general public struggles to cope with dramatic premium hikes. But the commercial motor fleet sector is following closely in its tracks, despite being a radically different market.
Nigel Rolfe of accident management company Claims Plus, which was established in 1994 and looks after 160,000 vehicles a year, explains why: "The incident rate is 54% in the commercial lines sector, compared to 20% for personal lines. This is due to high mileages, more hours spent in the car and the vehicles being generally more expensive. Private individuals are more likely to drive Astras and Focuses than the Mercedes models in commercial claims."
The average repair cost is £800 for a corporate car and £1,200 for a privately owned vehicle. Premiums for the first are calculated on fleets based on claims experience, while the latter is insured according to the car model, area and the driver's history and status.
When it comes to the management of claims, the commercial market also has different motivations to the personal lines sector.
"All a private car owner wants is to get the vehicle fixed, be given a replacement in the meantime, then have their car back looking like new," says Rolfe.
"As far as they are concerned, they put their vehicle with a repairer where they feel comfortable. They are not worried about costs.
"However, corporate customers see a rise in premiums and think `what can I do to stop it?' Every day a car is off the road, it costs them a hire car charge of up to £30, which they have to pay up front."
Corporate cover cuts
As premiums for some corporate fleets have leapt up to 30% in the past six months, commercial clients are increasingly shifting to third-party insurance to cut premiums.
In 1999, 13% of fleets under comprehensive cover with Claims Plus switched to cheaper forms of motor insurance and last year a further 7.5% changed.
Chief executive of Ipswich-based motor claims administrator Town and Country Assistance, Theodore Agnew, says: "The process is a simple one. As motor premiums continue to rise, fleet managers are taking on self-insurance. This not only prevents a rise in premiums but actually reduces them considerably."
In addition, Agnew says an increasing number of brokers, insurers and fleet managers believe that passing on accident claims and call handling to another organisation leads to greater savings.
He believes this prevents "a major administration headache", claiming that outsourcing this work is the obvious option.
Brokers and corporate customers are also working together to help to reduce premiums and the costs of accidents through risk management.
Some insurance companies insist on eye tests for those over 30, or driving training.
Insurance companies now need to make much more money out of the motor market, despite higher business operating costs and the rise in personal injury claims.
Rolfe says they should also concentrate on delivering instant support and help when an accident occurs:
"If they do not call within a day of the incident, insurers risk losing control," he says. "Within 24 hours, they get a good choice of where the vehicle is repaired and prevent escalating personal injury and hire car charges. Then there is a rapid tail-off."
Employers' accountability
Manager of the Churchill Insurance-owned commercial division of NIG, Lyn Carslake, says insurers will also scrutinise employers closer. NIG, which is part of the Churchill Insurance Group, underwrites insurance for small to medium-sized fleets.
"They will want to know if there is any driver training and if the employer checks driving licences every year for convictions and not just when a person joins the company," he explains.
"If the employer calls someone in when there is an accident, this shows interest. Some companies also say the driver should bear some of cost of claim."
In the meantime, it seems premiums will inevitably rise. "The cost of repair will continue to rise because of labour rates and ground rent," says Rolfe. "It is unlikely they will go down."
Carslake is predicting a further rate increase of 10% next year.
"There has been a long period of losses and shareholders are not happy at the moment," he says. "All boards in companies are under increasing pressure to create a profit return.
"The worst of the corrections have occurred, but there is still a need to gently push rates further forward."
Further increases
Dave Murray, technical director of Highway - the UK's largest specialist motor insurance operation - agrees. Last year, his company wrote just over £500,000 of motor business.
"I still anticipate seeing them rising by 1% a month for the rest of the year," he says. "I do not yet see the end of the upturn.
"The industry seems incapable of trying to balance the market, but there will come a point when there is a downturn and it will be the precursor for the private market."
Brian Chapman, head of business development at Crowe Insurance Group syndicate 963, says risk management has helped enormously. He adds: "We have to break this cycle of increasing claims and insurance rate hikes."
Lloyd's analysis
COMPANIES such as Royal & Sunalliance, CGNU and Direct Line have previously been key market players in the motor industry.
But according to the Lloyd's Motor Underwriters Association (LMUA), Lloyd's of London has always been regarded as one of the main providers of motor insurance.
Approximately 14% of the total motor premium income derives from the 300-year-old market. The sector was worth more than £1.1bn to Lloyd's in 1999. Lloyd's now offers cover for private cars, motor cycles, commercial vehicles and motor trade risks.
In 1982, there were 46 syndicates such as Crowe 963, specialising in underwriting motor-only insurance, but this has now dropped to 15.
Crowe has a capacity of £120m, with fleet cover accounting for £70m. Head of business development Brian Chapman believes Lloyd's will continue to be a main provider of commercial fleet insurance.
"For a customer, choice is decreasing rapidly unless they go into Lloyd's, which offers flexibility," he says. "One of the problems of a larger company is that it will use a local office to present a risk.
"If it is beyond a modest level, the firm will have to refer it to a head office so the broker does not get the opportunity to present his case to the person making the ultimate decision. At Lloyd's, a broker can sit with the underwriter and talk about the business and get a decision on the spot. That really makes a big difference."
Chapman believes Norwich Union's decision to pull out of the motor market earlier this year was "the tip of the iceberg" and thinks companies will continue to withdraw from the market, leaving Lloyd's in a stronger position.
"Their attitudes have changed as they are responsible to shareholders and want to see profits and a stable market," he explains. "1997 to 1999 were not good years in the Lloyd's motor market and 1998 was a disaster.
"But we have taken the right remedial action and rates have gone up as the market has hardened. All of the signs are that 2001 will be a profitable year."
Targets from the top
Recent statistics show that 65% of company vehicles are involved in a road accident each year. It is estimated that between 500 and 1,000 people die in accidents involving vehicles being driven for work purposes. As a result, the government has set a target for the reduction of road casualties by 40% in the next ten years.
In the Department of the Environment, Transport and the Regions consultation paper "Tomorrow's Roads: Safer for Everyone - The government's road safety strategy and casualty reduction targets for 2010", an inter-agency task group has been set up with the mandate to:
