News...
SME
Fleets - Time to Turn?
26/06/2008
POST Magazine, View From The Top
As the credit crunch continues, some commentators believe small fleet rates will increase. However, to avoid heavy price hikes, communication and effective risk management must be employed, reports Stephanie Denton
Fleet insurance for small to medium-sized enterprises is a highly competitive market for brokers and insurers alike, but it is traditionally one of the first insurance lines to see rate increases when the market cycle turns. As the US sub-prime crisis knocks on to the UK and the credit crunch starts to bite, is this sector starting to hurt?
There are conflicting views in the market. Jon Dye, commercial motor manager at Allianz, says: "On SME and generally on motor fleet we are seeing an uplift on rates; this has been happening since last year - by double digits in some cases.
"The main drivers behind this can be seen if you look at the market for the last four or five years. There has been a negative price strength and claims inflation of between 6% and 8% and it has clearly distorted the profitability of books."
Mike Smith, commercial motor technical manager at Norwich Union, agrees: "We have been applying rate increases in fleet in general and for SMEs this has been at around 5% since last November. And we are looking to push more as we have been successful in driving this through."
Others, however, believe rate increases are a myth. Andrew Fletcher, acting head of commercial motor at Groupama, says: "Ratings are still as soft as they have ever been and it is depressing that there is no sign of change. There is a lot of capacity in the market at the moment and it is frustrating to see this as we would like to see the market pulled up. We see the odd green shoot suggesting rates may change but this is then snatched away."
And brokers say they are seeing the odd area of the market affected. Richard Taylor, broking manager to wholesale broker Holman's, says: "There has been an increase in the level of enquiries suggesting that the provincial market is tightening and is not prepared to offer competitive terms to brokers. Areas where it has previously been easy for brokers to place business are starting to change. There have not been big increases but there is a degree of increase."
Dave Smith, SME motor manager at Zurich, explains why some companies are not seeing rates increase: "We continue to rate each case on its merits rather than introduce a standard rate increase. But there is upwards pressure on rates and the market needs premiums to move forward."
However Julie Rodilosso, chief executive officer at broking wholesaler Adding1, believes piecemeal increases are not sustainable for the market: "Unless providers address this issue in a responsible and timely fashion a major market-wide premium increase will eventually come. This carries the risk of confusing and angering clients, causing general instability in the market and creating all the usual headaches for brokers."
Search for stability
And insurers agree that stability is key. Mr Dye explains: "Ideally we
write each risk based on the exposures it has and we don't like to do increases
of 20 or 30%. We try to provide stability through insurance premiums but there
will be cases where there are large increases due to changes in exposure."
NU's Mr Smith supports this: "We are trying to avoid hikes as we don't want to see rates go up as they did many years ago with 20% rises. We aim to drive through smaller increases for the next couple of years because if we don't there will be the knee-jerk reaction of heavy hikes - we are trying to avoid that."
So how aware are SMEs of what is currently happening in the market? And if they have seen rate increases have they come as a surprise? "We have been passing down messages to our brokers and there has been a lot of coverage in the media on why rates need to rise," explains Mr Dye.
Zurich's Mr Smith agrees: "SMEs are seeing premiums rising and as long as these are justified and can be articulated to the brokers and the customer then we believe they are expected and will be accepted."
However, many believe SMEs can help themselves keep premiums down. "The key driver for SMEs should be to manage risks and when they do this they will bring down premiums," explains Mr Dye. "The visibility of risk management is being raised. This is not rocket science, it is often just putting in place a policy for risk management and writing it down."
Although Mr Taylor argues that risk management is not that easy for SMEs as they may not have a dedicated risk manager as large organisations do: "For very small risks it is difficult to get SMEs to take risk management on board, but underwriters are currently much more open to offers on the table for risk management strategies."
But David Blacklock, insurance manager at the Fleet Support Group, argues it is time SMEs took this area seriously and insurers should make sure they do. "Risk management has been a working area where some companies have just paid lip service in the past and driver training was often seen as the solution to everything for a while," he says. "The client has never had any incentive to push this unless there was a direct risk. In the soft market it was easy to get insurance so why take risk seriously if you can get a good deal without it?"
Yet he believes the new Corporate Manslaughter Act will push this up the agenda: "Risk management must be continuous and over the long haul, not just a quick fix. SMEs need to realise that it is not just about driver training, they must also change culture and get everyone to drive in a more responsible way."
Broker service
And brokers can help their clients too. NU's Mr Smith explains: "There
is a tendency to treat small fleet as simple with no underwriting, but really
this class of business is similar to big fleet; customers need to make sure
brokers are properly presenting risk and how they manage the risk to insurers.
If they are just giving the name, address and schedule of the fleet then they
are not going to get the best product."
Ms Rodilosso agrees: "There is still too much business placed purely on a lowest premium basis. Brokers will not truly be serving their clients best interests until they take more account of product benefits and added value services, such as risk management and health and safety surveys."
And technology can also help lower premiums. Graeme Trudgill, technical and corporate affairs executive at the British Insurance Brokers' Association, says: "Placing fleet business has always been long-winded and quite old-fashioned but now there are systems online and you can forward the claims experience on later. We are seeing technology move things up a gear and insurers are starting to move with the times too."
Mr Fletcher supports this: "The expenses ratio is attractive with technology as it is more efficient for many brokers. I expect more fleet business to be managed in a similar way in the next three to four years, especially as it took personal motor about that long so it is the way the market is going.
"More brokers are looking at quote engine facilities where they collate data and then get insurers to agree quicker times on turnaround of quotes; these are similar to comparison sites for clients. This online method is cheaper and quicker - and, although the main driver is still cheap premiums, time saved can sometimes be more valuable than money."
And Ms Rodilosso believes insurers going direct will soon make brokers wake up to technology anyway: "Brokers that focus simply on price could see their position undermined by technology-based systems driving price-based commoditisation. The recent entry of Direct Line into the SME market underlines the potential threat here."
So with all these changes is this market still attractive for insurers or will there be firms leaving the arena soon? "This is still a challenging market but whether insurers stay or not depends on their strategy," explains Mr Dye. "We have seen new insurers enter the market and they need to decide if they will stay long term. There may be some shareholders that decide fleet is not where they want to be and they may sell or pull out."
However, Mr Fletcher argues this is a long way off yet: "Capacity is the main problem as we see more providers entering the market. The firms that have been in the market for some time know that rates need to change, but new entrants don't have a history and are keeping it depressed. "This is not a big enough sector to see bigger players drop out. Losses are not out of control and premiums are not so low that firms can't continue - and there is no real danger of it reaching this stage."
Despite this, according to Mr Fletcher, the market is not seeing a period of innovation as insurers and brokers try to hold onto customers, although some insurers have added legal costs since the introduction of the Corporate Manslaughter Act. "We are not really seeing any of our competition doing anything we want to be replicating. We have pretty much exhausted innovation in this area and it is difficult to see how this will change with the current technology," he remarks.
However, Mr Taylor argues there is still space for inventiveness: "What we would like to see is finance offered in-house at preferential terms as finance is taking a hike at the moment. Also policies that automatically include things like vehicle breakdown is good."
Zurich's Mr Smith adds that demand from brokers is often down to service rather than product innovation: "Brokers are telling us they want excellent service levels, fair premiums and good commissions, but they also want to be able to talk to skilled underwriters who can make decisions on the ground and have the power to negotiate."
So is the market likely to continue seeing small rate increases with little innovation for the foreseeable future? Mr Dye believes little and often is the way forward: "Insurers have a responsibility in terms of premiums and volatility and you have to ask if raising premiums by 30% is being responsible and managing the risk portfolio properly. Insurers need to have adequate monitoring in place to realistically know the performance of their books. It is all about the customer: if there is no customer then there is no business."
Fewer turns
He continues: "I don't see there being the peaks and troughs that we
saw with the last cycle; I think it will be a flatter cycle this time around."
Mr Taylor supports this as large rate increases are feared: "There is a fear that bigger players can't underwrite for individual firms so there might be increases across the board that don't look at the risks. Some firms may do 10% increases regardless of risk and we are starting to see signs of that."
Ms Rodilosso sums up the market's feeling: "For the good of the sector we need to see some kind of premium increase but hopefully not the kind of dramatic knee-jerk hike that brokers struggle to explain to their clients.
"I would normally have expected to see some
kind of hardening in the fleet market by now but - with the global economy
in its current condition and rationalisation and credit management rising
up financial services organisations' agendas on every side - maybe the time
has come for providers to address the need for pricing adjustment proactively
and responsibly."
