Insurability of risk mitigates cost pressures

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 demands a robust, effective risk management programme to ensure the business is able to grow, while maintaining its insurability,” says Andre du Sart, principal broker at insurance brokerage and risk advisor, Aon South Africa.

“Adopting high standards for risk assessment has ongoing benefits across the business by identifying risks before they happen, and thus reducing costs, as well as managing the insurability of your fleet.

“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 Du Sart.

 “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,” he adds.

“For example, aspects such as: regular maintenance, avoiding overloading, use of genuine parts, implementing vehicle tracking and fleet management systems (including telematics), driver training and health checks, and so on, are all important check points.

“They can help to avoid unplanned and increased maintenance, breakdowns, vehicle damage, accidents and thefts – all of which essentially boil down to an insurance issue,” says Du Sart.

Mature risk retention strategies deliver significant financial benefits

• 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.

The client, together with the 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.   

• 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 R100 000, and claims, typically over a period of say three years, are only 60 percent of that premium, they can then arrange to pay a premium deposit of R70 000 (70 percent) and retain the balance in a self-fund.

If claims paid in a 12-month period are less than 65 percent of the deposit amount (for example, R45 500), then the insurer would not call for the balance of the premium of R30 000.

Obviously, if the claims exceed this, then the client would need to pay the balance of the premium of R30 000 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, which is premised on actuarial and scientific analysis of their risk and claims profile,” concludes Du Sart.