Insurance premiums set to rocket

Changes to the Ogden rate in March of this year are driving injury insurance costs higher than ever. Richard Simpson looks at what operators can do to limit the damage.

Coach and bus operators have grown accustomed to operating in a world where the cost of doing business is relatively modest. Despite the worst predictions of the ‘Remain’ lobby, fuel prices have remained low since the Brexit vote and wage increases have been restrained. While the ‘ticket’ price of imported replacement vehicles has gone up, much of the sting has been taken from this by interest rates remaining at an historic low, meaning that the actual cost of vehicle acquisition is still relatively static when finance costs are taken into account.However, there is one major fixed cost which is destined to rise sharply: insurance. For operators, it’s going to be a case not of ‘if’, but ‘when and how bad’ the increases are.[wlm_nonmember][…]

[/wlm_nonmember][wlm_ismember] However, there is one major fixed cost which is destined to rise sharply: insurance. For operators, it’s going to be a case not of ‘if’, but ‘when and how bad’ the increases are.The reason for it is the low interest rates that are keeping vehicle acquisition costs affordable and at least giving consumers the illusion of having more money in their pockets, thus maintaining discretionary spending at a level that is far higher than it would

The reason for it is the low interest rates that are keeping vehicle acquisition costs affordable and at least giving consumers the illusion of having more money in their pockets, thus maintaining discretionary spending at a level that is far higher than it would be were they paying cash out of earnings that remain in many cases at 2008 levels.

The downside, of course, is that interest rates on safely deposited capital are now negligible. This has an impact on the sums that insurers have to pay out when large compensation awards are made for long-term or permanently-disabling injuries.

Typically, such an award will compensate the claimant for loss of future earnings and any long-term care that is required. In the past, under the Ogden formula, the amounts paid were less than the amount awarded: with the argument being that large sums of money invested to give an assured income over many years would actually give a high return on capital. To avoid over-compensating the victim a discount was applied, because the return on investment would make up the difference.

All that has changed in our current, low interest rate, climate. The discount rate was set at 2.5% in 2001: meaning that for every £1,000 awarded, the claimant would actually receive £975, but since March of this year has been changed to 0.75% (turning it from a discount into a premium) meaning that for every £1,000 awarded, £1,007.50 is paid. So in total, every £1,000 awarded against an insurance company now costs the insurer £32.50 more than it would have done before March.

This clearly has an impact on the insurance companies’ exposure to risk.

Compensation for road traffic accidents generally falls into two categories: General Damages and Special Damages.

General Damages are specific to the injury, its severity and the amount of pain and disfigurement caused. Typically, sums range from £350 for mild injuries that cause pain for less than a year to hundreds of thousands of pounds for people left in a permanent vegetative state by brain injury. Possibly the best-known figure is the £3,000 or so that is typically awarded for a whiplash injury.

These sums are only a fraction of what may be paid out in Special Damages, which can cover a wide range of expenses ranging from future and past loss of earnings resulting from the injury, including missed promotions, job opportunities and pensions, medical care, rehabilitation, home adaptation and household assistance. They also include damage to the victim’s vehicle, travel expenses and even prescription costs.

Seriously injure a high-flyer at the start of a potentially lucrative career and you are left with the cost of providing the equivalent of all his future earnings, plus the cost of his/hers suitable housing and care needs for the rest of his/her life, and then an additional 0.75% on top. It’s millions of pounds.

What difference does this make to a coach or bus operator? After all: apart from the very largest fleets which ‘self-insure’ against all but the biggest payouts, settling the bill is the insurance company’s responsibility. It’s what your premium pays for, isn’t it?

Well, yes and no. Contrary to what it may seem when the renewal notice lands in your inbox, commercial fleet insurance is not a licence to print money. In fact, the Association of British Insurers (ABI) says that of recent years, only 2015 has seen the industry make a profit.

Why do insurance companies stay in the business?

One answer is that insurance generates a positive cash flow: the premiums come in before the claims settlements go out, and therefore exiting the sector will hit revenue before it benefits expenditure, plus the cash generated can be invested, and the other is that different insurers are choosing to enter or exit specific business sectors at any given time.

This fluidity drives what is called the insurance cycle. If payouts in a given sector (motor, or shipping, for example) exceed premium income, then some insurers will decide to cut their losses and decline to write any new business in the sector. This allows those insurers continuing to offer cover to the sector the opportunity to increase both their premiums and their business volumes, and more profits are shared out among fewer players.

Then a point is reached where the sector becomes a more attractive one for insurers, more enter the market, and the premiums are driven down again.

This is just one reason why it is a mistake to just blindly renew insurance without seeking alternative quotes. The market is a constantly changing one, and unless you are prepared to challenge your insurance providers to do better you may find that the only changes you ever see are the ones where premium prices increase.

Against this background, insurers will also examine general and specific risks. These can include factors ranging from geographic location to the type of work undertaken, distances covered, vehicle types operated etc. Insurance companies construct risk profiles based on all these factors and more.

One of the most critical factors that insurers take into account is claims history. Clearly a major claim running into tens or thousands of pounds is a major black mark, but what is less widely realised is that insurers are acutely aware that an operation where there are a lot of little accidents is at far greater risk of having a much more serious crash than one where there are no claims at all.

Perhaps a little less fairly, insurers also rate ‘no fault’ accidents as being indicative of a potential increase in risk: an indication perhaps that really good drivers are able to both avoid making mistakes and anticipate and mitigate the mistakes made by other drivers.

The one sure way to keep insurance costs under control has traditionally been to avoid making claims of any kind; whether off your own policy or anyone else’s, and that still holds true.

Increasingly, insurance providers are active participants in this process. The provision of ‘black boxes’ to monitor the driving of (young) car drivers never really took off because the cost of wiring up the cars exceeded any saving in claims cost (for the insurer) or premium (for the insured).

That hurdle is not present to such a great extent in the world of commercial fleet operation, where most vehicles are delivered telematics-enabled, if not with telematics installed.

Increasingly, insurers are judging risks, not just by looking at past events, but also by assessing current behaviour by telematics. Operators are being asked to produce evidence gathered by telematics systems and cameras of how drivers are behaving, and, more significantly than that, what they are doing to address habits and behaviours which fall short of acceptable before they result in accidents.

After accidents happen, the evidence gathered can also be of vital importance when events are disputed. The use of camera and telematics data settles issues of speed and direction, but may also provide vital evidence where completely spurious claims are made: when for example ‘injured’ parties were not even in the vehicle concerned, or when the vehicle alleged to have been at fault was not at the location at the time of the accident.

The speedy examination and production of incontrovertible evidence can kill many spurious claims stone dead at far less cost to the defendant than fighting the claim in court.

On a broader front, analysis of telematics data allows the operator to build up a risk profile which can be specific to individual drivers, vehicle types or routes. Frequent instances of harsh braking or cornering often indicate either an overly-aggressive driver or one that does not pay enough attention to what’s going on around them until it is almost too late. These deficiencies may be down to the individual employee, or external factors such as unrealistic scheduling or using the wrong vehicle for the job. In either case, they are potential ‘accidents waiting to happen’.

Drivers can be coached out of bad habits that can lead to accidents before habits become too engrained. However, it is important that complacency does not set in after one period of driver training yields a year of safer driving and lower claims.
Zurich Insurance points out that operating motor vehicles on public roads is an inherently risky business: exposing the asset and employee to far greater risk of sustaining or doing harm than would be allowed in an office or factory setting. Its own research and experience indicates that a one-off driver training campaign will have only a temporary impact on accident rates and within 12 to 18 months they will have reverted to the pre-training norm.

It cautions that for training to be effective, it has to be appropriate and sustained, that the vehicle operator must ensure that the driving environment is made as safe as possible (with no undue pressure from unrealistic schedules, for instance) and that the drivers themselves must be open to training and genuinely want to improve their driving.

Zurich asserts that this means there must be an appropriate company culture, where drivers and managers are prepared to listen to and act upon input from each other.

A wise operator will by now be looking at ways of limiting the damage caused by Ogden before any notice of renewal is received.

Initiatives including introducing telematics (or allowing the insurer access to existing telematics data), installing dashcam systems that record incidents or near-misses, and selecting a driver-training programme that the insurer believes to be effective can all help.

So too can shouldering a greater proportion of the risk, by negotiating a higher excess on claims in exchange for a reduction in premium. In fact, many in the industry believe that insurance should only cover the losses that the business cannot afford to pay, and that taking minor scrapes costing only a few £100 or £1,000s to put right pays off in the end through a lower claims history. One insider confided to Coach & Bus Week that he had taken this approach pre-Ogden, after noticing that every year he made a claim the next year’s premium would go up by at least that amount.

“It’s not actually cost us any more overall,” he said. “And it encourages everyone to take a bit more care with the vehicles.” It should be noted, however, that small claims for short-term injury or vehicle damage fall outside the scope of Ogden.
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