The client pays a premium that will generally only vary if vehicles are added or sold, throughout the policy period. These are the most common type of policy and are usually the most appropriate for any client spending up to, say, $50,000 premium. Suitable for clients for whom fleet management & vehicle maintenance are not key business management areas.
- client knows exactly what the cost of “capping” his losses is.
- client has little involvement in the claims process.
- client pays the same whether he has claim or not (other than NCB).
Burning Cost Policies
The client will pay a deposit premium that is then adjusted within a minimum & maximum band using an agreed formula, driven by annual overall claims costs.
Maximum premium $250,000
Deposit premium $200,000
Minimum premium $150,000 (Adjustable at 100/70)
This means that whatever the claims are then the premium will be $Claims / 70 *100 but not higher than $250,000 or below $150,000. 100/70 is the same as 142%, so another way of explaining it to the client would be that his premium will be 142% of whatever his claims are, but no higher than $250,000 or less than $150,000. Instead of taking a flat premium policy the client is having a bet on whether they may pay more or less than a flat premium depending on what their claims are.
Key buying decisions on burners are:
- How high (bad) the maximum premium is compared to a flat premium, i.e. what is the worst case scenario.
- How low (good) the minimum is compared to a flat premium, i.e. what is the best case scenario.
- The formula will be determined by the insurance company’s costs, reinsurance, commissions and minimum profit the insurance company expects to make.
- Possible lower premium.
- Possibly higher premium which may impact cash flow as it will be collected generally at the end of the policy year.
- Maybe harder to arrange premium funding for as premium may not be refundable.
- Good for clients who have had an usually bad recent loss history.
Aggregate excess policies
The client pays a lower premium and in turn pays the first agreed amount of losses he has in the policy year. This amount is in addition to the standard excess that applies to every individual loss. Good for clients who have the ability to handle losses themselves & have a fairly consistent loss history.
Aggregate excess $100,000 per policy period
Inner deductible (standard excess). $1,000 per incident
The client pay 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 up front premium.
- Client has large incentive to minimise loses.
- Client has large incentive to be key part of the repair /claim process.
- Repair costs are generally lower if the client deals on a “cash basis” with a repairer.
- Cash flow if the client has large losses early in the policy.
Claims Experience Discounts (CED’s)
The client pays a flat premium and at the end of the year, if the claims have not been above a preagreed figure they will get a partial refund of their premium.
Flat premium $100,000
CED of 50/65 limited to 20% of the premium
This means that the insurance company will refund 50% of the difference between the claims figure & 65% of the premium. So if final claim costs are $40,000 then client is refunded 50% of the difference between ($100,000 x 65% – $40,000) = $12,500. If client has no claims then the refund would be 50% of ($100,000 x 65% – $0) = $32,500 – however the maximum refund of 20%, ie $20,000 would apply. This refund is almost always subject to renewing the policy with same insurer. CEDs are good for all clients if the insurance company will offer them.
Advantages / Disadvantages
- because these refunds are subject to the policy being renewed it can tie the client to the existing insurance company.