Motor Fleet Underwriting

Monday, June 10th, 2024
Author: Hubert Said, ACII – Chartered Insurance Practitioner

Newsletter Q3, 2024

What is motor fleet insurance all about? Put simply, when a group of vehicles owned by a company or an individual are insured together as a fleet, the premium is mainly determined by the level of risk of that group of vehicles, instead of by the insurer’s overall experience with its motor account. This may mean lower premiums especially when one also considers the savings that an insurer can make on administrative costs as it is less costly to process group of vehicles belonging to one owner as opposed to each one having separate ownership. Very often in fact only one policy and one “blanket” certificate of motor insurance is issued.

It is common that fleets in countries larger than Malta, like the UK, are made up of hundreds of vehicles, and thus the rating methods for fleets described in insurance textbooks, are designed for such fleets. One can therefore legitimately question whether these methods are also suitable for the much smaller fleets we tend to have in Malta.

As we all know insurance is based on the “law of large numbers”. This basically means that the larger the number of similar risks that are insured together, the more accurate the claims predictions become, enabling more accurate rating. This is where the issue of fleet size arises. What is a large enough number of vehicles that is able to provide data that is suitable for accurate rating?

There is no specific answer to this question, however it is likely that no fleet in Malta is sizable enough to adopt the flat-rate per vehicle method used by many UK insurers. The insurer calculates the expected cost of claims using the “burning cost” method and adds to these operational costs plus a profit element. The result will be the total premium required for the fleet and a flat premium per vehicle is obtained by dividing it by the number of vehicles. In actual fact, it is divided by the number of “vehicle years” since the size of a large fleet is likely to be constantly changing during the period of insurance as vehicles are added and removed. A vehicle year represents the actual exposure of each vehicle, indicating how long each one was part of the fleet over the course of a year. With this approach, the premium collected will reflect the changing size of the fleet and is administratively less costly to operate since there is no need to calculate the premium to be charged separately for each vehicle. In fact, there is no need for the insured to notify the insurer of each vehicle in the fleet, as a declaration listing them would be submitted periodically, say every quarter or every six months.

So, can we take anything from this approach to use with smaller sized fleers? The answer is that yes, we can use quite a lot of it. To start with, using the burning cost method to calculate the expected claims cost for the coming year is a good approach. However, with smaller fleets one needs to be careful about the impact that one or two high value claims may have on the total result. It would make sense to try and smoothen these out. Smoothing is a statistical technique for the removal of irregularities in a time-series data by reducing the financial impact of large losses which are distributed over more than one year.

There is then a choice as to how to charge the premium per vehicle. Most underwriters would work out the premium per vehicle using the standard rates then add up these together to get the total premium and compare that to the expected cost. The difference would be expressed as the fleet discount that is to be allowed on the basic premium. If the fleet is sizeable and homogenous enough, one could consider banding the vehicles in groups (for instance by value or by engine power or even insurance groupings) and charge a premium per band. This makes the process less burdensome administratively.

When underwriting fleets, pricing them correctly is very important but so also is the risk management part. Quite often commercial pressures to keep the fleet premium low apply especially since fleet owners tend to have other commercial business placed or about to be placed with the insurer. This may limit the ability of the motor underwriter to price the fleet at the correct level. One must also remember that it is better if losses can be prevented, than having to pay the claims that result from not having the risk well-managed, as the old adage goes “prevention is better than cure”. Thus, working with the insured to identify the specific risks that can give rise to claims, and to take measures to minimize them, can help the fleet remain profitable. Measures need not be only prescriptive but could also be in the form of incentives awarding drivers with a good claims record, or additional training in how to drive more safely.

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