A coachload of concern

Earlier this year 50 bus and coach companies responsible for more than 27,000 vehicles took part in a survey to identify the key issues facing their industry.

The Bus and Coach Risk Management Survey, undertaken by Moffat Associates on behalf of Lloyd's insurer Ensign and the Confederation of Passenger Transport, gave operators a stark reminder of the tough environment in which they are currently trading.

Respondents all agreed that employers' liability and third party personal injury claims will continue to grow, both in frequency and cost. They also cited insurance as a key factor in rising operational costs. Some 90% of operators had seen motor insurance premiums increase, 81% saw a rise in EL premiums and 96% expected insurance premiums to soar during the next year.

The issues facing insurers are well documented. A hostile claims environment with an emerging US-style claims culture, diminishing stock market returns, increased fraud and worldwide catastrophes have all had a huge impact on the insurance market.

Premiums look set to rise still further in future, given the UK's current attitude to litigation. And Datamonitor predicted in 2002 that personal injury claims costs are increasing by 12% - 18% per annum, with underwriters putting the figure nearer to 25% per annum. Added to that, new issues are emerging on a regular basis. For example, who could have foretold five years ago that passengers on long journeys were at risk of deep vein thrombosis?

Operator loyalty

During the past few year, all forms of liability insurance have been hit hard and many insurers have turned their backs on the coach and bus industry. Lloyd's is the only market consistently willing to underwrite bus and coach operators. Continuity of provider is vital in this market but over the years numerous players have dipped in and out. Arguably, if the market had seen greater stability and experienced better risk management and loyalty from operators, it would be at a more advanced stage now.

The operators have seen prices dive as insurers have come into the market and then soar when the market has contracted and this lack of consistency and stability has made them cynical. The operators feel badly treated, their focus on risk management is diluted and insurers that dip in and out of the market get their fingers burnt.

Bus and coach companies operate in a highly litigious market and only a few insurers have continued to provide cover to the market through difficult times. The bus and coach survey revealed that 80% of accidents now result in claims and only a small minority of operators expect to see their claims go down. Regional operators are faced with a difficult market and this certainly contributes to the 27% that expect profits to fall by 2006.

And with fewer providers shouldering more and more claims, premiums will continue to escalate. Ultimately, operators will go out of business, unable to sustain the hike in claims and premiums.

Clearly, operators need to take greater responsibility for risk management but brokers and insurers could also do more to help. Operators currently believe they will be charged the same amount whatever the risk management.

Clearer discrimination between those that have followed a robust risk management strategy and those that have not might proactively encourage operators to take action. And a proactive approach could halt the downward spiral of increasing claims and premiums.

Brokers, in turn, could support operators and help them design risk management programmes. Brokers need to give operators feedback on the steps taken and influence insurers and the premiums they offer. The shorter the chain of communication between clients and insurers, the more effective this will be. Essentially, the market needs a tripartite partnership between operators, brokers and insurers.

Cost control

As the survey showed, operators are acutely aware of the issues they are facing and this is making them increasingly receptive to guidance from brokers. By implementing some simple solutions operators can better control their costs and help halt this downward spiral. Once an operator has confidence in its claims prevention and mitigation strategies (including health and safety, driver awareness, scene of accident training and effective accident report writing) it can place greater emphasis on negotiating premiums.

A single company cannot address and resolve the liability issues facing the market. Operators, brokers and insurers need to combine their expertise and work proactively to make inroads into the problem. And really, this should be a natural progression for insurers and interested parties.

Operators should consider greater self-insurance and insurers should consider greater recognition and rewards, not just for those that take on self-insurance elements but for those that can demonstrate they have adopted robust risk management strategies. And if claims handlers and brokers provide and share detailed claims information, the risk management specialists will be able to implement remedial measures.

One emerging problem is the question of security for funded arrangements.

Some operators have taken their attritional risk in-house and set up a fund that covers certain accidents. The fund usually sits with the insurance provider and pays out when claims costs fall below a pre-agreed sum, for example, below £25,000 per event. The fund requirements, which are calculated on the predicted annual aggregated claims costs, vary dramatically from insurer to insurer but all are increasing.

Fund security

Where a cash fund is not established with insurance providers, insurers are understandably seeking security for the fund in the event of an operator's insolvency. Historically, operators have been able to arrange credit insurance policies but the capacity in this market has now dried up, leaving letters of credit or cash as the only really viable alternatives.

However, letters of credit will not provide a long-term solution to this problem. Few operators have significant tangible assets to provide surety for the banks issuing these letters and they often tie up valuable capital in the operator's business. The amounts involved are increasing year upon year, as a result of the stacking of annual funds, until such time that the claims are fully run off. This can be some years down the road.

In a bid to help tackle these issues, the Confederation of Passenger Transport has created the Confederation of Passenger Transport Insurance and Risk Solutions. Set up in 2002, CPTIRS provides operators with a collective voice in the insurance industry and an opportunity for insurers to speak more directly to operators.

CPTIRS believes that when the positive features of an individual operator are made known and are understood by underwriters, all parties win. Insurers are able to make a reasonable profit and operators gain stable, competitive premiums. Integral to the success of this approach is the operators' commitment to demonstrable risk management policies and long-term relationships with insurers and brokers. One-off cheap premiums do not help, as the exit of numerous insurers in recent years has demonstrated.

This approach has already had an effect, with the CPTIRS recently invited to discuss road safety and behaviour with the Health and Safety Executive's Work Related Road Safety Policy Unit. Indeed, the government is proactively trying to encourage a better approach to road safety. Last year, for example, the Department for Education and Skills launched guidelines - Standards for Local Education Authorities in Overseeing Educational Visits - calling for governors and head teachers to ensure that coaches and buses are hired from reputable companies.

Criteria evidence

The guidelines focus on health and safety issues and require evidence from the transport operator that specific criteria are met. This comprises 29 standards, of which 24 are mandatory, covering four principal areas, setting standards for the age of the fleet, driver training, breakdown cover, and customer complaints. There is no doubt about the objective of these standards. The DfES, in conjunction with local education authorities, is striving to ensure that operators not meeting these guidelines are not appointed as school transport providers.

The bus and coach industry is a fiercely competitive market in which any price increases hit hard. Further premium increases for well-managed businesses, supported by good claims experience, are unwarranted but this does not mean operators can blame insurers. They must work in partnership with the insurance industry to address the claims issues driving the problem.

Achieving this will not only lend weight to negotiations with existing insurers, it could even bring new players to the table.

HOW OPERATORS SHOULD HANDLE CLAIMS

- claims prevention and mitigation - including driver training, health and safety risk assessment, vehicle maintenance, accident reporting and documentation, drugs and alcohol awareness and testing

- operational management - analysing claims, assessing areas of continuous improvement and implementing changes

- claims management - appointing specialist claims handlers to avoid legal fees building up. Claims handlers will settle genuine claims quickly and deal with opportunist ones appropriately.