Motor Insurance IRM 103

Fleet insurance: Rating & Underwriting Considerations

1. Fleet Risks
Fleet rating applies where the insured has a certain number of vehicles. The minimum number of
vehicles considered to form a fleet varies from insurer to insurer.

Advantages of fleet rating

- Savings of administration to insurer, insured and intermediary
- The non-specified basis (which is subject to an annual declaration and premium adjustment)
avoids the risk that additional or placement vehicles might be overlooked and remain uninsured.
- The range of cover offered in the fleet market may be greater than would be available elsewhere
- A good claims experience should be reflected in the premium charged.
- Favourable premium terms may be negotiated for very large fleets

Disadvantages of fleet rating

- Poor claims experience may bring about larger premium increases than would be the case with a
general rate increase over an entire portfolio.
- The smaller the number of vehicles, the less the spread of risk. There may also be less
geographical spread.
- One or two large losses can upset the results of a fleet, whereas an individually rated basis, the
no claim rebates for only those particular vehicles are affected.

2 Rating of fleets
In general motor insurance is based on the fund concept, whereby owners contribute to a common
fund and those who suffer losses can be compensated.

In motor fleets premiums are assessed annually on the claims experience of the individual fleet.

The fleet’s claims experience for at least the previous three years is taken into consideration the
reason being that any bad period will be averaged out.

2.1 Examples of Rate Calculations

(a) Vehicle years

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 During the course of the year, fleet operators may buy new and sell their older vehicles. A vehicle
year is the exposure of one vehicle for a policy year.

Permanent Fleet Vehicle years

100 vehicles for full 12 months 100
3 vehicles sold 3 months after renewal 9/12
10 vehicles purchased 6 months before renewal 5
Total vehicle years 105.75

(b) Claims history

Information on the total number of claims must be separated into amounts paid and outstanding
reserves.

(c) Claims cost per vehicle – The claims cost per vehicle (i.e. total claims divided by vehicle years)
must be adjusted for inflation.

Year 2005 2004 2003

Amounts are Z$ millions
Opening claims 70 60 70
Opening IBNR 60 60 70
New claims paid 250 200 220
Totals 380 320 360
Less: Closing claims 50 60 60
Less: Closing IBNR 50 70 60
Totals 280 190 240
Inflation 30% 20% 10%
Add inflation loading 364 228 264
Exposed vehicle years 21 22 25
Claims cost per vehicle 17.33 10.36 10.56

Average claims per vehicle for the three years

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= $ (17.33 + 10.36 + 10.56) million
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= $ 12.75 million

This is called the “burning cost” to which must be added an allowance for commission, expenses and
hopefully a profit margin. The burning cost is the “pure” cost of anticipated claims.

Most insurers run an overall expense ratio of around 30%, but a lower figure may be possible for
motor fleets, because:-

- Motor commission is lower when compared to other classes of business.

- A fleet policy needs proportionately less administration than a schedule of individual vehicles.
- The broker might absorb part of the cost of claims administration.

The premium rate per vehicle per annum is calculated by multiplying the “burning cost” by the
desired claims ratio, e.g.

$ 12.75 million x 100/70 = $ 18.22 million.

(d) Other considerations

1) Claims frequency – Is the total number of claims divided by total vehicle years. If 5 claims
occur per annum in a fleet of 20 vehicles the claims frequency will be 25 percent (i.e. one in
every four vehicles has had a claim). The premium charged may be loaded if the claims
frequency is higher than that of the whole motor portfolio.

2) Run-off figures – insureds of large fleets and their intermediaries usually compare total claims
figures to the original estimates over a period of say 5 years. This gives them the future trend.
Future pricing is determined by the difference between the portfolio and the fleet itself.

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