Don't ignore
Page 58
Page 59
If you've noticed an error in this article please click here to report it so we can fix it.
INSURANCE
IA fleet's profitability can be increased by efficient insurance management BY R. W. ROOKE, BA, ACII, Insurance Manager, Bed Ltd.
FEW TRANSPORT MANAGERS consider themselves experts on insurance, and possibly many feel a trifle scared or cynical about it. Provided the law is not broken, claims are paid and premiums are not exorbitant, managers often prefer to leave well alone and devote their time to other subjects. They have plenty—and of increasing complexity.
Yet it often happens that in the absence of a planned approach the hidden costs of administering insurance—in executive time, correspondence and accountancy—amount to a substantial proportion of departmental overheads. Berk Ltd. has subjected these hidden costs to careful scrutiny, and the general approach and conclusions reached are relevant to all operators of fleets numbering 50 vehicles or more.
Berk is a chemical manufacturing company. with a commercial vehicle fleet consisting of all types of vehicle from lOcwt vans to cylindrical acid-carrying tankers. To this must be added the more diverse fleet of its subsidiary, St. Albans Sand and Gravel Co. Ltd., embracing 14 cu.yd. gravel-carriers, large platform vehicles, pick-up rubbish collectors, lime-spreaders, light vans and many shapes in between (excavators, cranes, bulldozers and forklift trucks are insured on a different basis).
To an insurance company, it would hardly appear at first sight an attractive proposition to insure such a fleet. With a large number of heavy, cumbersome vehicles working often in rugged conditions, the risk of damage seems frighteningly high. In fact, an article in an insurance journal recently took it for granted that such a fleet was -undesirable" to an insurer and would inevitably be a loss-maker unless stringent conditions (and presumably high premiums) were applied.
Side by side with this commercial fleet, Berk provides a fleet of saloon cars for the large team of outside representatives available for direct consultation with manufactuers, retailers and other customers, in all parts of the British Isles. Once again, the average mileage per car is quite high, there is much travelling in crowded cities, and often a tight schedule of calls to make. . . factors which cause anxiety to most insurers.
The combined total of commercial vehicles and saloon cars amounts to some 600 vehicles, and a more mixed bag could hardly be imagined.
My predecessor had begun a major reappraisal, but although the largest part of the fleet was insured by one insurance company, there were still many other insurers holding small sections of business, each with different terms and renewal dates. This situation had built up piecemeal through acquisition of smaller companies over the years, for it was often easier to leave their insurance arrangements undisturbed when these companies were integrated into the Berk Group.
Such a position is by no means uncommon in large fleets. Not only can newly acquired fleets bring their insurers with them (especially if policy terms are favourable), but often directors wish to nominate insurers because of other business connections, or scattered fleets are felt to be best divided into self-sufficient units.
Whether justifiable or not, these factors prevent an overall approach and can easily inflate the cost of administration, for more staff may be retained than are strictly necessary. On the other hand, grouping the transport fleet gives the greatest bargaining power in discussions with insurers, for here as in so many other spheres the customer with the largest purse has the best chance of obtaining his own terms. Moreover there is the greater incentive to insurers to streamline their administration to the customer's wishes.
First big decision Our first major decision at Berk was to group all vehicles for insurance purposes into a commercial fleet and a private car fleet, both fleets to be covered by the same insurer. This decision was readily accepted by the senior employees concerned, after an explanation had been given of the new strategy. Some give-andtake was essential, for it was obvious that although parts of the fleet would benefit by lower premiums, others might be called upon to pay somewhat more. It had to be accepted that the new approach looked to the ultimate benefit of the entire company, rather than its sub-divisions. • After some manipulation with renewal dates, we were well placed to attack the overall cost of insurance on two fronts—cost of premium and cost of administration.
Do not expect me in this article to give detailed advice upon the merits of particular insurers and their policy conditions. Broadly speaking, the only sure way of obtaining favourable premium rates is to begin with a good claims record, for insurers will use the amount paid in claims as their starting-off figure and add to it a margin for overheads and profit to arrive at their final premium quotation. Thus calculation is mainly a "cost plus" operation, and the lower the initial amount paid in claims, the lower the ultimate premium.
The crucial factor is thus the number and severity of accidents, and here transport managers have a vital role to play. Thoughtful selection of drivers pays dividends, for the aim should be to build up a task-force of experienced personnel, careful for the safety of their vehicles (and themselves), and knowledgeable in the intricacies of their work. Bonus schemes for accident-free driving often pay for themselves quite handsomely. Vetting repair estimates, possibly by obtaining more than one estimate for a large job, can also achieve a worthwhile saving over a period.
While this is all true and to a large extent a matter of common sense there is another factor which could well be introduced. To appreciate this, we must rid our minds of our natural approach as individual car owners, needing insurance for one particular car. As such, we normally prefer to have the largest extent of cover available (provided the cost is reasonable) and expenses other than maintenance and running costs are borne by the insurer. This is only sensible, for a sudden £50 or £200 accident repair bill would strain or be beyond the resources of most of us if we had to pay it ourselves. We prefer to pay an extra premium rather than have the worry.
Accurate forecast
The situation in a large fleet is quite different. In the case of Berk, we could forecast with reasonable accuracy the number and cost of small accidents in any year, from the records kept over a long period. Secondly, we had workshop facilities which could handle the great majority of accident repairs, large or small, to the commercial fleet, and it was reasonable to expect such repair costs to be lower than those of an outside garage. Thirdly, the greater financial resources of a company enable a large repair bill to be more readily met without embarrassment. Fourthly, we suspected that the -knock for knock" agreement between insurers (which without doubt saves a vast amount of expense and time to the general insuring public) was working to our detriment as operators of a large fleet of vehicles.
With these factors in mind, we decided to insure on the basis that we would bear the first £100 of repairs to any vehicle. We would thus retain complete control of the smaller repairs and use to the full any special advantages in completing them more quickly and at less cost. For repairs exceeding £100, we would claim from our insurers the balance of this amount and there was thus a limit to the financial loss we would sustain.
Although we would now be making a payment on every repair, we would also be free to claim reimbursement from other parties where we were convinced that our loss resulted from their negligence. Some at least of these claims would be successful and our net loss from an accident would be nil. In the past, the operation of the "knock for knock" agreement meant that in effect the total cost of all repairs to our vehicles was borne by our insurers. N ow, the total cost would be reduced by the amount of our successful claims on third parties.
In passing, this new "£100 excess" would put to the test all those previous assertions by our employees that the accident was caused by the other driver.
Our insurers would only be paying the balance of repair costs above £100, and their total outlay now becoming much smaller, an appreciable reduction was made in our premium. The crucial question, which could only be answered from future experience, hinged upon whether the reduction in premium exceeded the net cost of claims (allowing for recoveries from third parties), for if it did, we were cutting our costs and contributing towards greater profitability in the company.
Streamline adminstration
There is no point in reducing the overall cost of premiums if, by so doing, you increase the cost of administering insurance to an equal or larger extent. Administration must therefore be as streamlined as possible, not only within the office, but also in dealings with brokers and insurers. Fortunately, both our major decisions—the grouping of fleets and acceptance of the £100 excess—could be made to contribute towards office economy.
In the past, each vehicle had its own insurance certificate with description and registration number defined on it. When a vehicle was replaced, the old certificate had to be destroyed and a correct new one prepared. Therein lay great opportunities for typing mistakes and uncertainty from delay in notification, not to mention the cost of clerical time consumed in maintaining the system.
Instead, blanket certificates could now be prepared, whereby any certificate related to any vehicle in the fleet, and even to hired vehicles, with consequent reduction in the cost of hire. As a side effect, we now knew that cover being automatic, we could never be prosecuted for running a vehicle uninsured.
Changes of vehicle prompted a further reform in the system. In the past, notification of changes to the insurers brought in their wake a detailed calculation of additional or return premiums on a time-on-risk basis. To our mind, the volume of work was out of all proportion to the amounts involved, when allowance was made for all the research, typing and accounting costs.
An entirely new basis was agreed with the insurers for premium calculation. Allowing for our estimate of how the size of the fleet would alter in the coming year, the insurers calculated and charged us a unit premium per vehicle. In our wisdom we chose to have the same premium whatever the vehicle, and accepted among ourselves that the larger vehicles would benefit at the expense of the smaller. Once paid, however, there would be no premium fluctuations in mid-term, even though we agreed to supply details of fleet alterations every three months.
This new basis was welcomed by our budget department, for in their forecasting each year they could now be more sure of the actual cost of running vehicles.
We next took a hard look at procedure following accidents, and it was clear that this followed one of five patterns, depending on the circumstances of the accident. Most correspondence being of a routine nature to which stereotyped wording applied, we were able to define procedures for the majority of accidents and entrust the work to junior staff requiring little supervision.
Appreciable saving
Despite warnings to the contrary, we were pleased to see how much the volume of correspondence decreased as a result of our bearing the £100 excess. It was no longer necessary to consult insurers at every turn, for small repairs could be undertaken at our discretion and only in the larger repairs were we obliged to liaise with insurers. The saving in postage was gratifying, but of far greater importance was the saving in clerical time.
The role of our insurance brokers also came under scrutiny, and it was mutually agreed that although their services were of great value (in fact, indispensable) in arranging the insurance, they contributed but little in claims negotiations, seeing that we preferred to negotiate our own claims against third parties. Direct contact was created with our own insurers, but the advice of the brokers was always available in difficult cases. Our planned approach has earned an appreciable saving in insurance costs. Detailed accident records have been maintained and overall figures for the first two years reveal that we have saved 16 per cent and 19 per cent of the cost of fully comprehensive cover. In cash terms, this would represent a considerable saving for any large-sized fleet of vehicles.
In addition, the total claims outlay of our insurers has declined successively each year, and whereas increasing premiums have been charged in other sectors, we have enjoyed a premium reduction of 9 per cent for commercial vehicles, and reductions of 12 per cent and a further 10 per cent for saloon cars. All these reductions have been made on the initiative of our insurers, as a mark of appreciation for lowered claims cost.
Sales departments may earn publicity for the improved profits they achieve each year, but service departments such as transport and insurance are seldom able to contribute directly. Only by restraining the cost of their operations can they assist, but this indirect assistance can be highly valuable. A reduction of £5,000 in overheads, after all, is equivalent to an increase of £5,000 in net profit from sales.
Our planned approach, to which refinements are being added each year, bears witness to the value of a hard look at all aspects of fleet insurance, yielding reductions in cost and greater ease of administration.