Self insurance or external insurance – which route to go?

ROB HANDFIELD-JONES ran some numbers out of curiosity a while back and was quite interested in the results – the cost-effectiveness of self-insuring your fleet is a vexing one

A large number of companies still self-insure their fleets and the question of the cost-effectiveness of going this route is a vexing one. I ran some numbers out of curiosity a while back and was quite interested in the results. My basic assumptions were for a fleet of 200 bakkies, at an average insurable value of R120 000. I assumed an average vehicle age of two years, annual mileage of 60 000 km, and that the fleet’s annual crash rate was 20%.

After some research, my view is that a premium of R900 per vehicle or so is probably in the ballpark. A 20% annual crash rate means 40 crashes per year, of which probably one-third will be write-offs, with the balance as “damage only” collisions, averaging R20 000 each. A company that self-insures will thus be paying for about 15 write-off and 25 damage-only vehicles per year. My hypothetical 2009 bakkie, although insured for R120 000, will cost closer to R170 000 to replace with a new model, meaning that the self-insurer’s 15 write-offs cost R2 550 000. Add to this the damage-onlys, at R500 000, and you have a grand total of R3 050 000, for which you are your own insurer.

Now let’s look at the fleet that uses external insurance. At R900 per month for the 200 vehicles in your fleet, your annual insurance bill will be R2 160 000. On each of the 40 crashes, you would be paying excess of, let’s say, R6000 per crash. This adds R240 000 to the bill. To this must be added the difference between the insured value of R120 000 and the list price of R170 000 of new vehicles, roughly R50 000 per vehicle for each of the 15 write-offs. This cost adds an extra R750 000 to your fleet bill, for a total of R3 150 000 in insurance and insurance-related costs.

On paper, this example shows that it’s about R100 000 cheaper to self-insure than to use external underwriters. So then, one must ask, why does a market for corporate vehicle insurance still exist? The answers are numerous. The most obvious answer is that the premiums I’ve used here might be discounted far more aggressively than in my example. Another is that having an external underwriter creates greater pressure on fleets to keep control of crashes and thereby minimise premium increases, as well as promoting good corporate governance. (As a slightly ironic aside, self-insured fleets have more to gain from tight fleet management, because they aren’t cushioned from the financial knocks of crashes.)

But perhaps the most important benefit of using external insurers is that far higher limits of liability are possible. Imagine a multi-car crash where the company driver was at fault and the bill was R12 million. For a company using an external underwriter, this problem becomes someone else’s. For a company which self-insures, it could be a major financial setback.

To summarise, self-insurance favours fleets which are prepared to take aggressive measures to cut crashes and control vehicle use in order to keep their claims to a minimum. External insurance is suited to companies which would prefer to externalise the effects of huge accident claims up to agreed limits of liability per claim and are prepared to take the knock when it comes to premium increases. It’s also a better route for companies who don’t have well-developed internal fleet management capacity.

Probably the best solution is the one opted for by many companies: a combination of self-insurance and top-up cover with an external underwriter. The point is – what is the state of play of your company’s fleet insurance? Could you survive a massive crash claim without slashing your bottom line? Or is your search for peace of mind costing you dearly in excessive premiums?

Rob Handfield-Jones has spent 20 years indulging his three passions: vehicles, road safety and writing. He heads up driving.co.za, a company which offers training in economical and safe driving.