Understanding different types of insurance policies

Flat (conventional) premiums

Flat Premiums are the most common type of policy. Flat Premiums are suitable for clients spending up to $50,000 in premiums per year and where fleet management and vehicle maintenance are not key business management areas. The client knows exactly the cost of their premium and any potential losses. In general, flat premiums will change only if vehicles are added or sold throughout the policy period. The key disadvantage is that the client pays the pays the same premium each year regardless of whether they make a claim or not (other than a no-claim bonus) and has little involvement in the claims process.

Burning Cost policies

Burning Cost policies are those were the client pays a deposit premium that is then adjusted within a minimum and maximum band using an agreed formula, driven by the overall claims cost of the policy. For example, the deposit premium is set at $200,000 with a maximum premium of $250,000 and a minimum premium of $150,000 adjustable at, say 100/70. In simple terms, the client pays a minimum of $150,000 per year plus $100 for every $70 in claims, to a maximum of $250,000 per year. This level will vary between insurers based on commissions, costs, required returns and so on. In effect, Burning Cost policies give the client a level of ownership of the size of the premium based on claims. They are attractive for clients who have had an unusually bad loss history and provide a clear incentive to minimise their claims. Conversely, the premium could be higher, adversely affecting cash flow and making it more difficult to arrange premium funding.

Aggregate Excess policies

Aggregate Excess policies are those where the client pays a lower premium but pays the first agreed amount of losses incurred in the policy year. This amount is in addition to the standard excess that applies to each individual loss. For example, the premium is $120,000, the aggregate excess is $100,000 per policy period and the inner deductible (standard excess) is $1000 per incident. Under this arrangement, the client pays a $120,000 premium and the first $100,000 of losses before they can make a claim. Aggregate Excess policies are attractive options for clients who have the ability to handle losses themselves and have a fairly consistent loss history. They offer clients a lower upfront premium, a clear incentive to minimise losses and greater ownership of the repairs / claims process. Conversely, Aggregate Excess policies can adversely affect cash flow if the client suffers large losses early in the term of the policy.

Claims Experience Discounts

Claims Experience Discount policies provide a partial refund of a flat premium at the end of each year provided total claims have not been above a pre-agreed figure. For example, let’s assume a CED of 50/65 is applied to a maximum of 20% of the premium. This means the insurer will refund 50% of the difference between the claim figure and 65% of the premium and capped to a maximum of 20% of the value of the flat premium. If the flat premium is $100,000 and the total claim cost during the year is $40,000, then the client will be refunded $12,500. If the total claim cost during the year is zero, the client will be refunded $20,000. CEDs are good for all clients if the insurance company will offer them. Its major drawback is that the refund is generally subject to renewing the policy with same insurer.

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