Lessons have been learnt and fingers burnt over the past couple of years in the motor trade insurance sector - and the result is a much more sensible market, says Nigel McFarlane.
The past few years have seen the motor trade insurance sector in a state of flux. Claims were spiralling and, in addition, risk management and customer service were sadly lacking.
Insurers got their fingers burnt, leading to a number of companies pulling out of the sector. Today, however, lessons have been learnt and those remaining are optimistic about the future.
"A couple of years ago, nobody was prepared to look too hard at what they were underwriting," says Allianz Cornhill's motor trade manager Peter Lawrence. "Insurers were so keen to get the stuff on the books that they allowed all sorts of loss-leading premiums loose onto the market."
Then large insurers started pulling out of motor trade. "Nobody was surprised when Zurich withdrew from the sector and everybody else followed suit," he says. "The losses being incurred were unsatisfactory by any business standard. There was just no money in it."
What arose from this change of thinking was a new form of insurance policy, a "package" approach, combining road risks, material damage, business interruption and public liability risks.
"It made the insurers look a lot more closely at the products they were offering," says marketing manager of St Paul International Insurance, Peter Elliot. "For years, it had simply been a case of getting as much business as possible on the books - the more it seemed like trophy business, the better. There hadn't been a great deal of thought going into the business being generated, then they suddenly looked at the bottom line and got an almighty shock. As an industry, we looked at what we were doing and sought out a better way, which hopefully didn't affect customer service."
According to Royal and Sunalliance (R&SA), the motor trade sector by its very nature is diverse and complex, ranging from the small mobile mechanic with no premises to the large multi-franchise dealers operating from various sites. In addition, 34% of motor traders have an annual turnover of below £100,000 and only 4% have a turnover exceeding £5m.
Different strokes for different folks
RS&A's motor insurance manager for UK commercial, Neil Clutterbuck, adds: "Each of these segments presents us with different insurance propositions. Often the small motor trader is happy with a "road risks" only policy, with perhaps an element of liability insurance to cover the repair and maintenance aspect. The mid-market sector is likely to prefer the package approach, where not only would the compulsory insurance classes be covered, but the policy would offer insurance of the trader's assets, ranging from material damage and business interruption, to legal liabilities cover.
"On the other hand, the very large motor traders, although limited in numbers, may choose to go down the route of a bespoke arrangement, opting for large deductibles or other unconventional arrangements."
But Clutterbuck stresses that no matter how small or large, complex or simple a risk may be, risk assessment and risk management are vital.
Road Runner's Allison Waters agrees and says theft of vehicles and equipment continues to be a major problem at each end of the motor trade sector. She adds: "Given the increasing specialist nature of tools and equipment needed to service today's hi-tech cars, sum insured levels and inner limits on combined policies have been steadily rising over the past two years.
"Working on the old adage that prevention is better than cure, Road Runner has a customer education programme and regularly advises customers on ways of reducing their risks and their premiums. As part of its strategy, the company is also considering a customer driving standards campaign in an effort to reduce road risks claims and improve driving safety."
Clutterbuck believes risk management needs to be coupled with adequate pricing: "After all, a policyholder is purchasing financial security and the cheapest premium will not necessarily provide the best security for policyholders."
Charge sensibly or suffer
Pricing is something that has slowly started to change in the sector, with companies like MMA saying it has been implementing modest rate increases over a period of time to ensure it maintains its operating ratios. Companies know if they don't charge sensible premiums that take into account the risk they are covering, they will suffer down the line.
Elliot says: "From a business point of view, this shock to the system was the best thing that could have happened. Some learned and some didn't, and the dangers of filling your books with high-profile clients without taking account of the risks is illustrated perfectly by what happened to Independent.
"There is still a good deal of competition within the sector, but it's sensible competition. The new shape of the sector has allowed the insurers to dictate the terms more than they did. The incentive is still there, but now it's tempered with consideration for what you are being asked to cover."
There is a great deal of difference between the risk covered with an under-the-arches body repair shop and a top-line distributor. And now, the industry has given itself the ability to recognise that. The industry's commitment to health and safety in risk management has also improved. Those in the sector did get burned, but it is now on the mend again.