Motor Insurance IRM 103
Fleet insurance: Rating & Underwriting Considerations
1. Fleet Risks
Fleet rating applies where the insured has a certain number of vehicles. The minimum number of vehicles considered to form a fleet varies from insurer to insurer.
Advantages of fleet rating
-Savings of administration to insurer, insured and intermediary
-The non-specified basis (which is subject to an annual declaration and premium adjustment) avoids the risk that additional or placement vehicles might be overlooked and remain uninsured.
-The range of cover offered in the fleet market may be greater than would be available elsewhere
-A good claims experience should be reflected in the premium charged.
-Favourable premium terms may be negotiated for very large fleets
Disadvantages of fleet rating
-Poor claims experience may bring about larger premium increases than would be the case with a general rate increase over an entire portfolio.
-The smaller the number of vehicles, the less the spread of risk. There may also be less geographical spread.
-One or two large losses can upset the results of a fleet, whereas an individually rated basis, the no claim rebates for only those particular vehicles are affected.
2 Rating of fleets
In general motor insurance is based on the fund concept, whereby owners contribute to a common fund and those who suffer losses can be compensated.
In motor fleets premiums are assessed annually on the claims experience of the individual fleet.
The fleet’s claims experience for at least the previous three years is taken into consideration the reason being that any bad period will be averaged out.
2.1 Examples of Rate Calculations
(a) Vehicle years
During the course of the year, fleet operators may buy new and sell their older vehicles. A vehicle year is the exposure of one vehicle for a policy year.
Permanent FleetVehicle years
100 vehicles for full 12 months100
3 vehicles sold 3 months after renewal9/12
10 vehicles purchased 6 months before renewal5
Total vehicle years105.75
(b) Claims history
Information on the total number of claims must be separated into amounts paid and outstanding reserves.
(c) Claims cost per vehicle – The claims cost per vehicle (i.e. total claims divided by vehicle years) must be adjusted for inflation.
Year / 2005 / 2004 / 2003Amounts are Z$ millions
Opening claims / 70 / 60 / 70
Opening IBNR / 60 / 60 / 70
New claims paid / 250 / 200 / 220
Totals / 380 / 320 / 360
Less: Closing claims / 50 / 60 / 60
Less: Closing IBNR / 50 / 70 / 60
Totals / 280 / 190 / 240
Inflation / 30% / 20% / 10%
Add inflation loading / 364 / 228 / 264
Exposed vehicle years / 21 / 22 / 25
Claims cost per vehicle / 17.33 / 10.36 / 10.56
Average claims per vehicle for the three years
= $ (17.33 + 10.36 + 10.56) million
3
= $ 12.75 million
This is called the “burning cost” to which must be added an allowance for commission, expenses and hopefully a profit margin. The burning cost is the “pure” cost of anticipated claims.
Most insurers run an overall expense ratio of around 30%, but a lower figure may be possible for motor fleets, because:-
-Motor commission is lower when compared to other classes of business.
-A fleet policy needs proportionately less administration than a schedule of individual vehicles.
-The broker might absorb part of the cost of claims administration.
The premium rate per vehicle per annum is calculated by multiplying the “burning cost” by the desired claims ratio, e.g.
$ 12.75 million x 100/70 = $ 18.22 million.
(d) Other considerations
1)Claims frequency – Is the total number of claims divided by total vehicle years. If 5 claims occur per annum in a fleet of 20 vehicles the claims frequency will be 25 percent (i.e. one in every four vehicles has had a claim). The premium charged may be loaded if the claims frequency is higher than that of the whole motor portfolio.
2)Run-off figures – insureds of large fleets and their intermediaries usually compare total claims figures to the original estimates over a period of say 5 years. This gives them the future trend. Future pricing is determined by the difference between the portfolio and the fleet itself.
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