The motor fleet insurance market has historically proved challenging for both insurers and buyers. For providers, profitability has come under pressure as prices have declined over time and margins have been squeezed relentlessly.

This has led to a number of insurers opting to cut their losses and exit the market, diminishing choice for buyers for what is a compulsory purchase and a significant expenditure; after depreciation and fuel, insurance is the biggest element in the total cost of fleet ownership. Against the backdrop of a hardening market for commercial auto insurance across Europe, cover has become increasingly difficult or expensive to buy. Meanwhile, the industry is being reshaped by the forces of technology.

Technological developments

From telematics to driver assistance systems – such as lane assist, adaptive cruise control and autonomous emergency braking – we are reaching new levels of connectivity that can enable comprehensive data gathering and reporting. This offers an increased level of monitoring that can influence driver behaviour. The old adage that ‘prevention is better than cure’ has never been truer in this context and driver safety programmes focused on active prevention are being widely implemented.

On the claims side, insurers have been able to offer an enhanced service to motor fleet customers by harnessing cloud-based technology. Policy holders can upload files directly to the cloud, such as photos and video footage from any internet enabled device including smartphones, laptops and dashcams, where insurers can access them instantly. This eliminates the risk of footage being lost in transit, supports early resolution of liability and speeds up response times, which ultimately assists in driving down the cost of claims. 

Looking ahead, technology – in combination with changes in mobility consumption patterns – is only going to transform the industry further. Cars on demand is the next big thing. The subscription-based Car as a Service (CaaS) approach is rising in popularity and costs depend on how a vehicle is used, in terms of mileage, location and driver. With millennials shifting their preferences from ownership to usership we will see a surge in new mo¬bility business models.  Fleet business will likely gain importance in terms of both its rela¬tive market share and its profitability.

From telematics to driver assistance systems – such as lane assist, adaptive cruise control and autonomous emergency braking – we are reaching new levels of connectivity that can enable comprehensive data gathering and reporting.

Innovate now

Insurers need to prepare for these developments but while they wait for them to take hold and become embedded in business-as-usual they still need to work with their clients to create innovative, unique and bespoke solutions that help to address the issues that they face today. This means looking at all the tools at their disposal – not just technology. One important way that larger insurers can do this is by drawing on their wealth of claims data and experience to develop alternative products that focus on the structure and level of risk retention by the client, rather than just the insurance premium. 

Companies like AIG have the ability to predict the volume and value of losses by leveraging the data they hold on high-frequency claims for large fleet sizes in excess of 5000 vehicles, conducting specific activities such as transportation of goods or passengers or rental of cars, vans, trucks or forklifts. This has led to an inventive way for clients to retain risk and benefit directly from the predictability of their own risk, that brings significant financial, cash flow and management benefits. 

The key is in a layered structure, an example of which could be as follows. The policy holder self-insures around 80% of the motor third party liability frequency layer at a local level. The second layer of cover has the parent assuming the severity and lower predictability risks that the local entities’ balance sheet cannot accommodate by using a captive or protected cell, while on the third layer the insurer takes the remaining severity risk and manages the programme in terms of documentation, certificates, claims handling and financial flows etc.

Companies like AIG have the ability to predict the volume and value of losses by leveraging the data they hold on high-frequency claims for large fleet sizes in excess of 5000 vehicles...

Significant benefits

This solution brings significant benefits to fleet operators. At the most basic level, it means that they can meet compulsory legislation is respect of vehicle insurance so they can continue operating. There is an immediate financial benefit as the insurance premium will often represent less than 10% of the total cost of the risk. The insured gets to keep the premium it would have spent, providing investment opportunities and a positive impact on the balance sheet.   

These arrangements are also a balancing act around cash-flow, credit instruments and fees. Understanding options to maximise liquidity is a huge benefit to fleet operators. As this goes beyond insurance to a financial play between cost and credit, it arouses interest at board level. It requires the heavy involvement of the CFO, benefitting the risk management function by increasing its involvement and raising its profile.

In times of heightened market uncertainty and unexpected contraction of demand, this structure can be invaluable in helping fleet operators survive a difficult operating environment. If the insured is operating fewer vehicles, it will automatically be paying out less in premium. In addition, on the self-insured layer, fewer vehicles will mean fewer claims. This gives the policy holder an advantage over competitors who have fully transferred their risk and paid an annual premium upfront. 

To date, this product has been predominantly delivered to the hire-car industry, car-sharing and other sectors exposed to high frequency risks, such as delivery of goods in cities or public transportation of passengers. However, any fleet that generates sufficient claims volume to deliver predictability can benefit from it. As they eye the future, and the opportunities it should bring, insurers need to look to innovate wherever they can to offer value-added services. 

    By Stephen Morton & Stéphane Robin 

    This article first appeared in Insurance Day