Market watch - commercial motor: Has commercial motor gone flat?

The economic turmoil of the last few years has created many challenges for the insurance industry and the commercial motor sector has been no exception. Customers have tightened their seatbelts, premium income has continued to crash and insurers and brokers have felt the impact. Can the commercial motor sector find top gear again?

Customers are still cautious about costs, says Matthew Collett, marketing director at Romford based broker Grove & Dean: "Businesses are not employing as many people. They need to keep their costs to a minimum, so they are not going to have any surplus vehicles. If the need for a vehicle is borderline, they just won't insure it."

Mike Smith, commercial motor manager at Aviva, agrees: "Some companies have reduced their fleets and are keeping older vehicles rather than replacing them." The effects have been significant, as he emphasises: "The recession has had a serious impact on the market."

David Bennett, motor fleet account executive at Higos Insurance Services in Bristol, reveals the depth of the damage: "Some of our clients in the building and associated trades sectors have halved the sizes of their fleets. The result is decreased premiums for insurers and decreased commission for us."

Reducing the size of the fleet might provide customers with financial breathing space but it could come at a price as Roger Ball, head of commercial motor and motor trade at Allianz, points out: "The remaining vehicles in the fleet are being used more heavily, which can lead to more claims."

This is a risk that clients must focus on, warns Mark Amos, business development manager at brokers GS Insurance Services in Perth: "Changing vehicles less often means older vehicles on the road, increasing the importance of servicing and maintenance.

"It is vital to impress on clients the importance of risk management and to emphasise that their claims histories could be adversely affected as a result of any poorly maintained vehicles on the road.

"They also need to be fully aware of their accountability under the Corporate Manslaughter and Corporate Homicide Act (2007)."

Customers
Businesses are not just reducing fleet sizes and changing vehicles less often to save money, they are looking very closely at the cost of premiums too, as Smith confirms: "Many customers are looking at price first and foremost in terms of what they want from their commercial motor insurance."

Bennett agrees that budget is top of the agenda: "We find price is the biggest factor for our clients, although personal service is important to them. They won't move from their local brokers simply to secure cheaper premiums if their broker is doing a good job."

Some are turning to the internet to keep costs down, as Collett highlights: "Quite a few have headed towards comparison sites to research prices."

There are other considerations though, as he explains: "While price is very important to customers, value for money is an even higher priority. They want as many benefits for their money as possible, for instance breakdown and legal cover."

Despite the strong focus on price and value for money, it is possible for brokers to maintain competitive advantage in other ways, says Phil Barton, chief executive officer at Jelf: "The real challenge for brokers is to add value to their customer relationships, through their claims service and by providing a holistic overview of risk management."

Customers' cost cutting is not the only factor to have affected insurers; the recession has had an impact in other ways. Ball says: "Insurers' investment returns on premiums have reduced significantly.

"It used to be that insurers could afford to write business with an underwriting loss but, due to low interest rates, insurers are now being forced to deliver an underwriting profit because they can't rely on investment returns on premiums anymore. Some insurers have been unable to do so and have exited the fleet market."

Aviva's Smith agrees that the pressure has been on: "Many insurers have tried to maintain income levels from commercial motor but less business in the sector and [high levels of] competition keep rates low. The recession has prolonged the soft market and, so far, 2010 feels very similar to 2009."

According to Ball, changes are on the way: "Rates are edging up and I believe they will increase further over the course of the year." Other insurers also anticipate a rise. "There are challenges around rates and rate changes," acknowledges John Briggs, head of motor technical underwriting at Zurich. "Though there is an expectation of 6-8% rate increases."

Some brokers remain unconvinced that increases are imminent: "Some insurers are talking a good game about rates going up," says Stephen Stormonth, account executive at Edinburgh-based A H Bell, "but I don't see any evidence of that."

Fraud and theft
The economic downturn has had an impact on claims too. Ensuring that remaining vehicles are well maintained is not enough; businesses have other risks to beware of, as Mike Smith explains: "We've seen the average cost of theft rising due to the recession. Vehicles are more secure nowadays, so criminals are targeting keys and stealing the whole vehicle rather than breaking in for the radio, as in the past."

Cases of fraud are also on the up, according to Ball: "There's been a lot of talk about fraud having increased during the recession. It's not being perpetrated by policyholders but against them, for example by people creating collisions in order to pursue injury claims.

"Incidences of this activity are higher than they have ever been before but we are getting better at detecting this. In fact, all insurers are getting smarter at seeing the signs."

The impact of snow and ice, however, remains less easy to control, as Ball confirms: "Due to the weather we experienced at the start of the year, the frequency of accidents increased, with the result that claims increased too. The tough winter has had a significant impact on motor insurers' results."

While both insurers and brokers remain under recessionary pressure, some relish the challenges and are enthusiastic about the opportunities, as Collett comments: "Commercial motor is still an attractive sector of the market for us and we want to increase our presence."

He adds: "We like writing it: renewal retention in commercial motor is better than on personal vehicle policies. It's a competitive market though and becoming more so because a number of brokers have the same idea."

Insurers such as Aviva are also positive about the future of the sector, as Smith highlights: "We still view commercial motor as an attractive market. Although some fleets have been reduced, I believe this is now bottoming out. There are some signs of green shoots, with vehicle sales improving."

David Smith, SME motor manager at Zurich, agrees: "The commercial motor sector is active and competitive. Many insurers, including Zurich, are able and willing to write commercial motor business. We have the appetite for it and plan to be a long-term player in this market."

Growth
New business is there for the taking. Although the recession has shrunk the market in some ways, it has also generated opportunities, as Stormonth says: "A number of those made redundant from the construction sector have set up in business as builders and handymen; they need vans, which has created demand for insurance.

"One of my clients, a tradesman, says he has never been so busy, despite the recession. The logical next step for many of these businesses is to grow further and add another van."

This potential source of new business has not gone unnoticed by insurers. Barton observes: "The small van market is being attacked aggressively at the moment as insurers seek to exploit the opportunities available."

Source: Professional Broking – July/August 2010