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RISKY BUSINESS

28th July 2005, Page 52
28th July 2005
Page 52
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Page 52, 28th July 2005 — RISKY BUSINESS
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Which of the following most accurately describes the problem?

Are you sick of paying insurance premiums?

No problem — tell your broker to go jump and insure yourself. But as Steve Banner reports, this is not a route for the faint-hearted.

If you want to see an operator wince, mention truck insurance. Premiums rip a big chunk out of their bottom line and every transport operator has a story to tell about the insurer who managed to wriggle out of paying a seemingly valid claim.

But there's an alternative. Abandon the idea of insuring your vehicles, save yourself a bundle in insurance premium tax (currently 5%) and cover the risks yourself. Mind you, you'll be required to lodge a £500,000 bond with the Accountant General of the Supreme Court of Judicature as surety against a big claim so this is not a popular option, even among well heeled organisations. And even £500,000 won't go far if someone suffers a serious personal injury, leaving the company to pay the rest of any award if a claim against it is successful.

It's possible to make useful savings by moving some way towards self-insurance without lodging such sureties, and without being a cash-rich multinational." However, your annual motor insurance premium has got to be over £1 m before you can think of looking at it," says Grahame Cook, managing director of Road Haulage Association Insurance Services.

Hefty investment

Roger Ball, commercial motor manager at Allianz Cornhill, puts the figure between £500,000 and Lim but in either case it's a hefty slice of cash.

"What you need to do is set up a fund out of which claims will be paid, and make regular payments into it during the course of the year," says Brian Chapman, managing director of brokers Fleetsure Insurance. "You also require insurance — sometimes referred to as a stop-loss policy — to cover you against any claims you may face once that fund is exhausted."

That's essential because the Road Traffic Act puts no ceiling on liability for personal injury caused by a vehicle, and it requires the operator to have sufficient cover in place. So how big a fund will you need?

"Calculating the figure will involve sitting down with your broker and insurer and analysing your claims record," Chapman explains.-Whcn you're doing so, don't forget to take into account the fact that you may already be paying a lot of the damage claims yourself anyway because of the excess you've got on your vehicles."

Typically the projected fund is likely to amount to 100-150% of the predicted annual cost of claims.

Remember that the insurers will want to set the point at which the stop-loss policy comes into effect at as high a figure as possible to reduce the amount they will have to pay out. Remember too that not all insurers are happy about entering into this kind of arrangement, not least because it eats into their profit margin.

As well as setting a limit on the total amount the fund will disgorge annually before the insurance policy is triggered it might make sense to set a per-claim limit, with the insurers picking up the balance. That way the entire fund won't be gobbled up by one hefty payout.

If the number and size of claims being fielded by your insurer is high you might want to consider setting up a risk management programme to reduce them before going self-insured.

After all, those claims will become your claims if you opt for self-insurance, so it makes sense to minimise them.

Stop reversing Cook explains:"Measures like wherever possible cutting out the need for vehicles to reverse when they're on your premises could save you thousands of pounds in reduced damage costs."

He's keen for operators to adopt the RHA's Icon management system with a view to minimising risks.

If you do plan to opt for self-insurance Chapman suggests you might be well advised to put the funds in an interest bearing account held in the joint names of your own business and your insurer.The insurers will use this money to pay any valid claims as they arise then start to pay claims out of their own resources should the fund be exhausted. But he points out: "You'll have to give them the authority to act on your behalf.

"Using the insurer to handle claims on your fund makes sense because its claims handling teams have the necessary skills and legal knowledge," Chapman adds.

Depending on the volume of business the insurer might consider setting up a dedicated claims handling unit based at your head office.The people who staff it will remain insurance company employees, but they will work on your behalf. If you decide not to use the insurer's claims handlers the insurer will want to approve whoever you choose and audit their activities,says Simon Baker, commercial motor manager at Axa Insurance.This will ensure they're not over generous in settling claims.

If that happens the fund could be depleted more quickly than anticipated, and the insurer will be forced to pay claims earlier than expected.

Healthy saving?

You will also need to recover the cost of repairing damage caused to your trucks by other people.That includes recouping the cost of renting a vehicle if one of your own ends up off the road in a repair shop because someone drove into it.

If the fund doesn't run out, the operator might well find that a healthy saving has been made at the end of the year. But when contemplating that saving remember that personal injury claims can take three or four years to be settled sometimes far longer which means that a saving achieved in year one could be wiped out by a claim settled in year three. The unused money in the fund will be earning interest during that time, but that means that it will be liable to tax."As a consequence it could he worthwhile setting up a captive,says Baker.

A captive is a legal entity. typically established in the Channel Islands, the Isle of Man, Gibraltar. Bermuda or one of the Caribbean islands. It allows a company to hold funds that might be needed to pay future claims without attracting tax.

"You can go the 'rent-a-captive' route which means buying the services of a captive from your insurer -rather than set one up yourself," says Mark Bacon, chief motor underwriting officer for Zurich's corporate European business, "That makes sense for a business that's uncertain about how far it will benefit from using a captive."

Once every quarter the operator should sit down with his broker and insurer, review the self-insurance scheme's performance and analyse the claims.

If a lot of damage claims are being filed because of, say, reversing accidents, it might make sense for any driver training pro gramme that's in place to concentrate more heavily on improving reversing skills.

So, down to the nitty gritty: how much can be saved?

"If your annual motor insurance premium amounts to over Dm you could enjoy a saving of at least 1150,000, or around 5% a year," says Chapman.

But Baker warns:"Bear in mind that whoever is providing your stop-loss policy is likely to require a letter of credit from you in case you go bust, your fund evaporates, and it ends up having to pay claims that you would otherwise have met." Such a letter will be required to cover each accounting year, and the amount will vary according to the scale of the insurer's liability. Consequential loss You must also make sure you know exactly what the stop-loss policy covers. It might,for example, exclude consequential losses.

That could prove awkward if one of your trucks hits a railway bridge, the rail service running over it is halted for several days while the bridge is repaired, and the railway company makes a claim against you for loss of revenue. Such a claim could be huge.

"Note too that as far as most policies are concerned the standard third-party damage claim limit is £5m," says one well established broker."That won't go very far if one of your trucks collides with something in a chemical plant which ends up being destroyed in the subsequent fire. Higher limits can be purchased, but they'll need to be stipulated when the policy is taken out."

Self-insurance isn't solely applicable to vehicles. "It's also applicable to property risks such as warehousing, for example," says Cook.

Buildings stay put, so self-insuring them isn't as complicated as self-insuring trucks because they don't attract as many claims.

And if you don't have the resources to selfinsure it might at least be worth considering taking a higher voluntary excess.

"Somebody running a fleet of 200 trucks or more could consider taking £10.000-15,000," says Cook.

That only makes sense if your fleet doesn't suffer too much self-inflicted damage with consequential repair bills. Unfortunately that also means that the insurance company won't make much of a saving because it won't be seeing many claims anyway, so your premium might not fall as much as you'd hoped.

Another way of shouldering some of the risk yourself is to insure some of your trucksprobably the older ones only against thirdparty, fire, and theft risks rather than taking out comprehensive cover. But if trucks are supplied under a contract-hire agreement the lessor will usually insist that they are insured comprehensively.

Self-insurance helps operators avoid the cyclical pattern of rises and falls in insurance costs that makes the size of premiums so hard to predict from one year to the next.

However, self-insurance and taking a higher excess become less attractive in a market where premiums are falling, and that's what's happening at present,according to Baker:"Most businesses with a good claims record have seen reductions of 5-10% over the past two years.

"That's despite the fact that the rising cost of settling claims means that they should be increasing by 6-10%."

Cyclical markets

Some firms with a good claims experience are seeing premiums fall by as much as 15%," says Cook. And Chris Curson, fleet insurance broker at Wrightsure,says:"So far as insurance is concerned it's a buyer's market, no question about it."

Ball is more cautious, suggesting that premiums for low-risk operators are falling by more like 2-3%.

But everyone seem.s to agree that they are falling, which is a welcome change And the reason for this is not hard to find, according to Baker:"Because of the intense competition in the car insurance market more and more insurers are moving into commercial vehicle insurance. Premiums are being driven downwards as a result."

Sadly, this doesn't mean that you can allow the number of claims you make to drift upwards, safe in the knowledge that your premium will continue to tumble.

"Rates are at the bottom of the cycle at present, but we're pretty close to seeing them move back up again," according to Nigel Frost, underwriting manager, fleets, at Norwich Union.

Baker agrees with that assessment:-A soft market can be treated as an excuse not to manage risks, but soft markets harden sooner or later."

And when that happens firms with a poor claims record will see insurance costs soar as insurers eagerly claw back their tosses. As always, what goes around comes around. •


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