The goal for a back-to-basics approach to a commercial automobile insurance plan is to create a broad program at a reasonable cost.
Protecting a corporate auto fleet through a comprehensive insurance program is a major expense for many companies. With the expected growth of the economy through the year 2005, both exposures and costs of commercial automobile insurance will increase. For risk managers, controlling the company's fleet costs during this growth period is therefore essential.
No matter what size or type of fleet a company operates, the ability to minimize losses and control costs is a 12-month job - not just something to be done at the yearly renewal of the company's insurance program. Applying a "back-to-basics" approach to the insurance program can be an effective way to manage commercial automobile costs. There are three critical issues risk managers should address to avoid being run over by commercial automobile losses: coverage, claims management and fleet safety.
The Critical Issue of Coverage
The back-to-basics approach begins with a thorough review of the important business issues that could affect the company's commercial automobile program. The goal is to design a broad program at a reasonable cost. The result will be a detailed plan of coverage, funding arrangements, retention levels and excess insurance to fit the corporation's needs while avoiding costly gaps or duplications. The limits of liability and retentions the risk manager chooses should lead to confidence that the corporate assets are protected.
Each year, a company's fleet exposures may change. Therefore, the risk manager should ensure that up-to-date records are kept on information such as the number of vehicles the company has, the age of the vehicles, maintenance records, the number of drivers the company employs and their levels of experience, the time of day they drive and the types of roads they use to reach their destinations.
There are three questions risk managers should ask regarding the coverage portion of the commercial automobile program. The answers to these questions will help to design the program, as well as to allow the best opportunity to control costs.
The first question is how much risk the company wants to assume and how much it will decide to transfer to the insurance carrier. The type of rating plan or program the risk manager selects will depend on the answer to this question. Many firms choose high retentions through large dollar deductible/retention programs or traditional retrospective rating (incurred or paid loss) programs. Others choose self-insurance, although the process to qualify and remain self-insured can be difficult due to various state requirements.
The second question is what type of collateral the company wants to use to secure its cash flow program. Posting some form of security is required for a loss-sensitive cash flow program for the unpaid portion of loss. Options used most often include: a letter of credit; a surety bond (usually more expensive than a letter of credit) and cash (via an annual premium fund controlled by the insurer and managed for an investment yield that will be credited to the account).
Finally, the third question is whether the selected retention adequately protects the corporation's assets. Regardless of the collateral program used, the retained limit of loss should be a dollar value that does not cause a constant problem regarding the protection of corporate assets. The amounts above that level constitute the true insurance protection - that is, the risk being transferred to the insurance carrier. The trade-off for higher risk assumption is lower insurance costs from the carrier.
The risk manager will want to ensure that all claims are managed and not simply paid. Forming a partnership with the provider's claims professionals is the most effective and efficient way to control the losses and reduce the expenses associated with the operation of commercial vehicles. …