Mature risk retention strategies deliver significant financial benefits

The transport industry is languishing under some of the toughest economic conditions in recent years with soaring fuel costs, e-tolls, lowered turnover in the retail and manufacturing sectors and shrinking profit margins.  In such an environment, managing fleets to reduce operational costs and exposure to avoidable risks becomes paramount.

“Reducing operational costs and managing exposure to risks demand a robust, effective risk management programme to ensure the business is able to grow, while maintaining its insurability, whether you run a handful of cars or a complex network of thousands of trucks and buses.  Adopting high standards for risk assessment has ongoing benefits across the business by identifying risks before they happen and thus reducing costs - both financial and human – as well as managing the insurability and the cost thereof for your fleet,” says Andre du Sart, Principal Broker at insurance brokerage and risk advisors, Aon South Africa.

“Given the tough economic climate, the reality is that the insurability of commercial fleets is no longer a simple ‘given’ as underwriters have become increasingly risk selective and expect clients to have a proper plan in place to minimise and mitigate risks.  The emphasis right now must be on the preparation of a scientifically grounded insurance proposition for transport operators and their assets, premised on structured risk management interventions and risk retention,” explains Andre.

From the outset of an insurance application and even at renewal time, a thorough risk audit that identifies and addresses weak links in the insurability of a fleet or business is essential in order to prepare a case for the underwriters.  This also provides a basis from which to evaluate the risk financing options available which may include elements of self-funding of the risk (ie own cash resources) as well as insurance to manage and recover any losses should they occur.  

“Assessments may differ from case-to-case depending on the nature of the business and the associated risks, but there are common elements.  Not all of them are necessarily directly insurance related, but as a collective they contribute towards the insurability of the fleet.  For example aspects such as regular maintenance, avoiding overloading, use of genuine parts, implementation of vehicle tracking and fleet management systems including telematics, driver training and health checks and so on are all important check points that can help avoid unplanned and increased maintenance, breakdowns, vehicle damage, accidents, thefts and so on – all of which essentially boils down to an insurance issue at the end of the day,” says Andre.

“Effective claims management is important as well, in that control of a claim from the scene of an accident or incident and taking ownership of the repair process helps with the cost of each and every claim, which, in turn, generates a good claims history that underwriters acknowledge.  These and many other interventions generate economies that can be used across the business to improve the bottom line directly and indeed allow the business to grow and expand.”

Most crucially though, having such a mature risk management approach in place provides invaluable actuarial and statistical information in terms of risk patterns and trends, which in turn will inform the nature of the risk retention structures to be implemented such as an aggregate fund or premium deposit burner.   

An aggregate fund and premium deposit burner are mechanisms aimed at fleet owners who better manage their risk and insurance costs, all of which are premised on having a mature and scientific risk retention strategy in place from the outset.  These mechanisms work as follows:

• Aggregate Fund

This involves a measure of self-insurance whereby the business sets aside a portion of the premium funds, usually off balance sheet, and often in a self-fund.  This fund would cover any specified claims events up to a specified limit (called a stop loss) while the insurer would pick up any claims over and above that limit.

To illustrate, if the total annual premium for a fleet is R2million, this could be split on say a basis of R1m which goes into an aggregate fund which would cover claims for own damage, windscreens and so on up to the specified limit.  The insurer would still cover any ‘catastrophic loss’ as well as the balance of any claims that are above the stop loss limit, or if the fund is depleted.  Let’s say the stop loss limit is R250k.  For any claims under this amount, the cost would be covered by the aggregate fund.  But if the claim value is say R350k, the aggregate fund would cover the first R250k, while the insurer would pick up the balance of R100k.

The client in conjunction with their broker would define up front what the aggregate fund would cover, for example own damage, assessor’s fees and so on.  Aon usually advises clients not to include third party claims in the aggregate fund as the quantum on these claims is usually quite large and can rapidly deplete the fund.  

The stop loss limit is determined by how much risk the client is able to take on in terms of a financial quantum, and at what point they would want to transfer that risk to the insurer. 

The aggregate fund still forms part of the contract with the insurer and in this regard claims to the fund get treated like any other and would still get assessed and documented by the insurer.  In this regard the guidance and advice is invaluable in managing, processing and documenting all claims whether through the fund or insurer.

The key benefit of an aggregate fund for client is the ability to manage their claims better so that should they have money left in their aggregrate fund, they can put this towards their insurance premiums for the following year.  It’s an ideal solution for fleets from around 30 vehicles and where there is a mature risk assessment strategy in place.  

• Premium Deposit Burner

A premium deposit burner is typically put in place where a client’s claims trend shows a consistently ‘lower-than-premium paid’ trend.  For example, if a client’s annual premium is R100k, and claims typically over a period of say three years are only 60% of that premium, they can then arrange to pay a premium deposit of R70k (70%) and retain the balance in a self-fund.  If claims paid in a 12-month period are less than 65% of the deposit amount (ie R45 500), then the insurer would not call for the balance of the premium of R30k.  Obviously if the claims exceed this, then the client would need to pay the balance of the premium of R30k to the insurer.  A premium deposit burner can be put in place on a stand-alone basis or in conjunction with the aggregate fund.

“Providing clients with a choice of product tailored to their business objectives is the ultimate outcome of the needs analysis undertaken by the broker for the client, ensuring that cover is tailor-made and cost effective without exposing them to undue risk.  For any fleet owner, there are significant financial benefits to be derived from having a mature risk management and retention strategy in place that is premised on actuarial and scientific analysis of their risk and claims profile,” concludes Andre.