In an economic climate that demands strict financial and cost control, finding ways to save on your short-term insurance premiums should be the focus of every insured. Steve Cornelius, senior consultant, logistics and transportation at OLEA South Africa, addresses ways in which a transporter can take the existing conventional motor policy and, by using alternative structuring, save up to 40% on premium spend.
Certain underlying principles and practices must be followed when compiling the conventional policy. Only then can alternative structuring be available to the transporter be discussed.
Important elements to consider, but are not limited to:
- Not insuring against risks that are predictable and non-catastrophic. Insurance is a costly finance mechanism.
- Ensuring vehicles are correctly valued. There is no point in paying premiums on a sum insured that is greater than your indemnity will be.
- Providing the insurer with all applicable Risk Management information. This invariably allows for certain discounted premiums.
- Ensuring that you adhere to all the terms, conditions and warranties contained in the policy wording. Non-compliance of these terms and conditions may lead to claims repudiation.
- Full and honest disclosure of the information in the proposal is essential to ensure claims are settled timeously and without complications.
Once the underlying policy is in place, there are different ways that the policy can be structured, to save the transporter money on premium payments. The correct choice of structure will depend on various aspects of the client’s business. These aspects include:
- Fleet size
- Claims’ history
- Balance sheet strength
- Risk appetite and shareholder influence. The smaller operators (1– 20 vehicles) do not have as many opportunities as the larger fleets but can still negotiate certain terms with the insurer.
Alternative insurance structures
- Low claims’ bonus
The insurer will agree to pay the transporter an incentive, based on a predetermined loss ratio formula. For example, an insurer may agree to pay the insured 50% of all premiums, below a loss ratio of 65%. The loss ratio is determined by taking all claims as a percentage of the total premium received would exclude broker commission and SSRIA premiums. This calculation is done in the 13th month of the life of the policy. - Funds
A fund arrangement is where the Insurer agrees to take a certain percentage of the premium and put it into a fund. As long as the insured maintains a loss ratio below a predetermined level, they will be paid the accumulated value of the fund. If the insured goes over the loss ratio threshold, the fund is used to ‘top up’ the premium, back to the desired threshold. Any surplus in the fund after 12 months gets paid to the insured. - Deposit premium
This is a method of premium payment, where the insurer agrees to allow the insured to pay only a percentage of the premium, say 60%. As long as the insured is able to maintain the loss ratio below an agreed percentage, say 65% of the 60%, then nothing further is payable. The insured saves 40% of the premium. If the threshold is reached, then the balance of the premium becomes payable. So, the client will never be worse off than the conventional premium at the outset but can save 40% if they manage their risk effectively. - Premium finance
Larger Fleets can request to pay their premium annually up front. Many insurers will consider a discount on the premium if it is paid upfront. The insured also gets a cash flow injection through the annual claiming of the VAT credit up front. - Self-insurance options – Aggregate Excess
Large Fleets - 100 and more vehicles - can begin to consider a level of self-insurance. This is possible where the client has detailed history of incidents and can determine accurately what level of claims are likely to incur in a 12-month period. Instead of paying an insurer expensive premium to transfer this risk, they carry the risk themselves. The level of risk the insured is prepared to accept, will depend on the financial strength of the client, as well as their ability to control and mitigate the risk. Protection can be built in to ensure that the insured is not exposed to a high accumulation of claims or high severity of once-off claims.
The above are just some of the more frequently used methods, to try and save the transporter money on their insurance premium. These structures also have a benefit in that they encourage the transporter to manage risk better. This comes with many other benefits, including less downtime, happier clients and higher staff morale. Often brokers are not keen to discuss alternative structures for their clients, as these methods generally result in less income for the broker. Insurers will also not always offer these structures, unless specifically asked to do so by the broker or the insured.
In conclusion, the question the insured needs to ask themselves is: “Is my current insurance structured in the most cost-efficient way?”