Are you covered in the event of a catastrophic accident? In spite of the fact that trucks are the bread winners for professional hauliers, up to 70% of trucks operating in South Africa have inadequate or no insurance cover at all.

The past year has been one of misery for many industries. The virtual collapse of the global finance sector has infected almost every facet of commerce and industry. Needless to say, the business of road transport has been severely wounded with many companies, particularly the small to medium size enterprises, either closing down or downsizing their fleets as the demand for their services diminishes. Andrew Parker takes a look at trends in the insurance sector. 

More significant, however, is the reluctance by banks and finance houses to provide credit facilities for commercial vehicles due to high debt to turnover ratios. This means that those fleet operators who do have work are unable to buy trucks to service both current and new clients. 

Be that as it may, as far as commercial vehicle insurance is concerned, insurers are saying 2009 is as tough as it gets. With truck sales down, new insurance policies are decidedly thin on the ground. 

This is borne out by Santam CEO Ian Kirk who, in his address to the Insurance Institute of South Africa’s annual conference in June this year, said the short term insurance sector is facing subdued growth over the next two years while expecting considerable increases in costs and a higher frequency of claims. 

Kirk also noted that many of South Africa’s larger insurance companies have a close resemblance to financial service providers and are not immune to the vagaries of the stock markets. “The local insurance industry does not live in a vacuum,” Kirk emphasised, “and while the fundamentals of South Africa’s larger insurers remain strong, they will feel the pinch as the necessary deleveraging begins on Wall Street and is subsequently felt everywhere.” 

With this in mind, one has to ask the question: Just how resilient are the insurers in the face of the economic meltdown? 

HCV MD Chris Barry believes the general insurance industry, like the banking sector in South Africa, is strong and totally resilient to a recession, as has already been borne out. While there could be some merit in Barry’s reasoning, why then have the banks clamped down on providing finance for commercial vehicles? 

Adopting an equally positive perspective, Elmarie Smith, national manager, sales and marketing at MAN Financial Services, (MFS) says while new business opportunities have declined in line with vehicle sales, the challenge is to look after existing customers and to mitigate risk in view of increasingly difficult trading conditions, customers defaulting on paying their premiums and so on. 

“It is not just doom and gloom,” Smith says. “Insurers must now focus on more efficient delivery and cost structures, improved service levels and greater product innovation which will benefit customers,” 

Insurance companies are becoming more vigilant and will not approve claims on unroadworthy vehicles.

Chris Smit director of Captive Business Consultants (CBC) reiterates that the decline in new truck sales obviously goes hand in hand with a decline for new insurance. “What we have seen is a lot of movement in the market as customers look for better premiums and service options,” he adds. 

Right now truck insurance is a buyer’s market. Fleet operators are shopping around for the best deal and insurance companies are competing with each other to accommodate increasing demands for better service and lower rates from their clients. 

Looking at the scenario above, one would imagine a price war taking place in the local insurance market. While Barry says pricing in the transport industry is sub-economical, Smith describes it as competitive. “Increased competition from direct distribution channels puts pressure on insurers’ pricing strategies but not to the extent of a price war” she says. 

"The economic downturn has made insurance cover extremely price 'sensitive'", says CBC's Chris Smit

CBC’s Smit agrees that the economic downturn has made insurance cover extremely price sensitive. “Clients are relying on their good relationship with their broker/ insurer to keep their premiums and excess costs to a minimum. When times are tough, insurance is usually one of the first expenses to be ‘sliced and diced’, a process where values and cover are both reduced.” 

He adds that insurance brokers have become more flexible than they have been in the past. “Insurance premiums have always been a grudge purchase,” he says. “What many brokers are doing now is getting closer to their clients and customising the insurance packages to suit a client’s specific needs and requirements.” 

This a far cry from the way the market operated just a few years ago when insurance companies focused on managing the risk. Now the focus is on influencing the risk so as to proactively decrease it. 

Smith concurs: “Insurers need to look at their value offering to ensure that customers are being looked after in the best possible way,” she says. “To do this, you need to be well informed of your customer’s needs and the risk premium you levy in exchange for the cover offered. You can only do this if you live close to your customers. 

As a result, she says, insurers are becoming more innovative in looking at their insurance distribution networks and channels and more customer-centric by improving customer education and offering a menu of solutions that are able to cater for the current economic climate. 

Asked what hauliers must do to ensure they get the right type of insurance cover, Smith says proper fact finding is the key. 

“The lowest premium does not necessarily mean the best cover. Read through the policy wording and compare apples with apples,” she advises. “Ask as many questions as possible to ensure you understand exactly what you are buying and most importantly, obtain references on the company you intend dealing with to ensure that service levels are of high standard and won't result in unnecessary downtime in your business.” 

Fleet operators often have unrealistic expectations and understanding of what their insurance cover is all about  Chris Barry,  CEO of HCV

HCV’s Chris Barry comments that hauliers must fully understand what commercial vehicle insurance is and consult with recognised professional brokers. 

“Fleet owners should draw up a mandate for the broker to engage with strong professional insurers only,” he says. “Operators must build an understanding of the responsibilities of both the roles of the insurer and the client. They must also read and understand the finer details of their insurance cover in order to avoid having a big shock when it comes to making a claim. 

He admits that many transport companies are forced to cut costs in the current climate but warns that they do so at their own peril. 

“The need for a professional, licensed intermediary who provides proper advice, guidance and services is paramount to preserving wealth and protecting assets during tough times and to ensure that risks are insured with a reputable insurance company.” 

Checks and balances 

Smit says insurance companies are also being more circumspect when it comes to approving claims. In addition to having checks made on the claims history, selective asset inspections are becoming increasingly important to ensure that there is value in what gets insured – and especially so when used vehicles are insured. 

“Knowing your customer and their business is very important in order to make sure that the right type of cover is offered and that cover is priced appropriately,” Smith comments, adding that when customers default on their premiums, it is important to determine the cause for default and to make sure that measures are put in place to obtain payment so that customers do not forfeit their cover. 

Clients also need to demonstrate to insurers their commitment towards risk management, as insurers are hesitant to take on any perceived "bad risks." There is also an increase in the cancellation of contracts of clients with poor claims experience, in an attempt to improve the quality of the business. 

Common problems 

When it comes to road transport, the biggest single problem is not looking after policy holders but the fact that around 70% of commercial vehicles on the road have inadequate or no insurance cover at all. 

It is also not getting any better as in the current economic environment, a growing number of operators are defaulting on insurance premiums thinking that if they can at least carry on paying for their finance, they will be OK. This is definitely not the case as this poses a huge risk not only to the customer but also to the financial institution that financed the vehicle. 

Then there are those operators who tend to go for the lowest premiums in order to ensure they at least have cover. This might not always prove to be the right decision, unless they have sufficient cash flow to afford the normally higher excesses that goes with lower premiums. This is particularly pertinent among the smaller operators who tend to go for the most competitively priced premiums and high excess structures. 

Barry adds that a common problem is that operators have unrealistic expectations and understanding of what their insurance is all about.

Fraud

Smith says, although to the best of her knowledge MAN has not experienced any cases of insurance fraud, insurers need to be wide awake as this could easily happen as companies start running short on cash flow and embark on creative ideas on how to ‘con’ insurers. 

Barry says in tough economic times such as we have at present, the prospect of fraud increases exponentially. “In addition,” he says, “one finds that in claims, repair quotes can be full refurbishments. In other words, the clients are simply exploiting the insurance cover for everything they can.” 

Opportunities

There is an old saying that every cloud has a silver lining. If you think about it for a moment, this could be true of the current financial crisis as it represents huge opportunities for the insurance industry to showcase its role as a provider of professional risk management. 

“This is something we should be doing continuously, not just when times are tough,” Barry comments. 

Smith says the current economic crisis has forced MAN Financial Services to look at its insurance portfolio with new eyes and consider additional risk mitigants in order to protect customers and the insurers underwriting the business - all aimed at managing risk within acceptable levels. 

At the same time, Smith says there is a focused hardening of insurers' attitudes when it comes to accounts with negative loss history risk profiles and companies that are unable to implement structured risk management programs. 

“Careful consideration of all the aspects of an enterprise-wide risk management program needs to be made by both intermediaries and the risk management divisions of insurers.”