Broking commercial motor in a hardening market

Things are getting tougher, and brokers need to know some alternatives to protect their clients

Premiums in the commercial motor market are taking a sharp turn upward, and brokers are being faced with an entirely different set of propositions for their clients.

These premium increases are now a reality across most accounts –not just for clients under distress in short-tail classes – and provide brokers with both challenges and opportunities.

Pricing on commercial motor has recently been greatly impacted by the prudential regulator raising concerns about insurers’ underwriting losses. The message of “fix the book or allocate more capital” is very clear.

There have also been significant changes in and to market participants.

The repricing of a couple of insurers’ big motor portfolios that were acquired a few years ago, and the exit of a player adds to the brokers’ current challenges of offering palatable pricing terms to their clients.

It’s a much more difficult conversation to now have to explain a premium increase when for a number of years’ brokers have been able to offer year-on-year rollover or reductions in pricing – even when clients had less than ideal loss histories.

In the soft market, a change of insurers may have been required from time to time, but the same levels of premiums were able to be maintained.

As insurers take action to correct unsatisfactory loss ratios, badly performing accounts are being exposed to increases, restrictions in cover or even, in some cases, declinature of renewal terms.

At the same time, well-performing business is being aggressively fought over as insurers try to maintain market share all while jettisoning what they regard as poorer business.

A lot of premium increases are simply corrections back to sustainable pricing that for various reasons was ignored in the past few years

The reasons for increases may be due to any of the following:

  • Previously under-priced
  • Insurers exiting segments
  • Blowout in claims costs
  • Blowout in claims frequency
  • Increases in fleet size
  • Moving from no-claims bonus rating to fleet rating

Depending on the underlying cause/s of the premium increase, the broker’s strategy to meet the client’s expectations will need to be determined.

When a client faced with a 20-40% premium increase asks, “what else can we do?”, the broker should have a few options available.

Clients usually expect their brokers to undertake marketing exercises to obtain alternative quotes when significant premium increases are tabled. But marketing business to insurers is also now happening in a different environment.

As insurers become inundated with quote requests, the preparation and format of the quotation slip will determine how much attention an account is going to get from a busy underwriter.

A slip with a cumbersome 18-page PDF schedule, for example, will receive a less favourable approach than a slip with usable data provided in an Excel attachment would.

Slips with past underwriters, claims history, fleet size history and details on vehicle usage are more likely to go to the top of the underwriter’s pile.

Utilising fleet questionnaires for distressed accounts will also become more important. In previous years, very competitive terms were often available on very scant and often outdated underwriting information. Today accurate and current exposure profiling is key to gaining the attention of prospective insurers.

Other premium containment options that will help demonstrate a broker’s ability to think outside the box include:

  • Reduce sums insured – but be careful of average clauses in some of the antiquated policies that still have this trap.
  • Reduce to third party only – be careful of financed vehicles.
  • Increase excess – be careful of claim-handling of “just above excess” losses

The broker’s ability to offer and explain different policy structures is vital. Burning Cost and Aggregate Excess polices [see panel] which have not needed to be considered when very competitive full risk transfer flat premiums were available will now become more common.

In the vast majority of cases a traditional flat policy structure, often with the holding insurer although at increased premium rates, is the likely renewal option that clients will take.

If a holder broker doesn’t consider these options, they should be aware that attacking brokers will certainly discuss them with the client.

Burning cost policies:

The client will pay a deposit premium that is then adjusted with 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). This level will vary between insurers based on commissions, costs required returns and the like.

Therefore, whatever the claims amount to, the premium will not be higher than $250,000 or below $150,000.

A good way the broker can explain this arrangement to the client would be to point out that for every $70 in claims the client would pay $100, but no more than $250,000 or less than $150,000 in total.

Putting it another way, due to its variable nature, the client can have some added ownership over this (burning cost) premium and share in the overall cost as compared to a standard flat premium depending on what their claims are like.

Key burning cost buying decisions to consider:

How high is the maximum premium compared to a flat premium? So, what is the worst-case scenario?

How low is the minimum premium compared to a flat premium – In other words, the best-case scenario?

It’s good for clients who have had an unusually bad recent loss history.


The premium could possibly be lower.

There is a clear incentive to minimise claims cost.


The premium could end up being higher, and as it will be generally collected at the end of the policy year it could affect cashflow. Premium funding may also be harder to arrange.

Aggregate excess policies

This is a good option for clients who have the ability to handle losses themselves and have a fairly consistent loss history.

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; the inner deductible (standard excess) is $1,000 per incident.

The client pays the $120,000 premium and then will have claims paid after he has paid $100,000 of his own losses (excluding the excess per incident).


  • Lowered upfront premium.
  • The client has a large incentive to minimise losses.
  • The client has a large incentive to a be key part of the repair /claim process.
  • Repair costs are generally lower if the client deals on a “cash basis” with a repairer.


  • Cashflow if the client has large losses early in the term of the policy.