It's hard to be absolutely certain about the arguments that are going to be rolled out when lockdown ends and insurers are faced with settling claims that will inevitably be higher than they expect them to be. However, after 40 years in credit hire, I suspect that even if every CHO agreed to limit their recovery to an intervention rate rather than the basic hire rate, insurers would still demand a further reduction for the period the car was on hire. One of the allegations already being rehearsed is that credit hire companies are deliberately profiting from the COVID 19 crisis. The arguments don't really hold much water but, as a friend once told me at University, neither do I, so let’s consider a few facts instead.
The reality is that there is some tactical positioning taking place. It is evidenced by the outrageous content of some of the press releases and emails being sent to CHOs rehearsing arguments they might deploy later whilst pretending they were based on a mix of reason and weighty reasonable arguments. However, before I get to insurers, can I suggest first that every CHO gets hold of a calculator and does their best to calculate the impact on their profitability from discounting an existing hire transaction to an intervention rate? It sounds a really simple compromise when someone throws it out there as a means of placating an insurer, but then forgets to mention that said insurer would be more likely to throw you a breeze block not than a life belt if you were drowning. When you take a step back and think, offering an intervention rate actually means taking a reduction in revenue of 50% or more on the GTA rate. I don't know any CHO making a 50% profit margin and I suspect, therefore, the impact of halving revenue would be to turn a potentially profitable transaction into one that is entirely unsustainable. Of course, I do get it that making a concession that might persuade an insurer to pony up some quick cash for the charges incurred up to the point the rate is reduced to an intervention rate (and perhaps the cash for afterwards as well), could cover some of the costs of trading. But conscious how much it costs to generate a referral and deliver the service, all I would urge is that CHOs work out the short term profit impact and then think about the long term economic consequences of selling yourself cheap.
It seems reasonably clear from some of the messaging I have seen that insurers want CHOs to take a bath during the Coronavirus epidemic. The logic is simple: If the CHO gives a discount on their hire rate it will help the insurer reduce their costs and that means they also increase their profit. Just for context, and for no particular reason than it was easiest to find online, Admiral made pre tax profits on their motor insurance book of £591m in the year to December 2019. The idea that they need your help at a time when premiums are being paid at broadly the same level as last year and policyholders are recording fewer driven miles means is bizarre. Insurers are facing fewer incurred claim costs which makes their prospects for increased profits during this crisis highly likely.
Now I know there are different views about relationships with insurers and that everyone has a different take on things. However, it’s hard to see why a CHO would agree to suffer such a significant loss across a multitude of hires by discounting revenue by 50% or more so that an insurer can turn a bigger profit. That said, I've been away from the coalface for a year or so and I’m still taking morphine tablets so it may be that it is just me or that things are really different now. However, just reflecting on that last point (not the one about the drugs), and restating the obvious, if a CHO does agree to offer insurers a discount based on the intervention rate instead of seeking to claim the GTA or basic hire rate, they are effectively conceding 50% of recoverable revenue with no real saving in the cost of acquisition, the cost of insurance or any of the costs of being there and delivering the service. Do the sums yourself and then compare the position with the level of concessions currently being given by motor insurers to their policyholders.
Hot on last years motor insurance revenues of £2.45 billion, Admiral was the first UK insurer to advertise that they would give a refund to customers that were not using their cars during the lockdown. In an announcement, which mentioned that the cost of the concession to Admiral would be £110 million (about 4% of annual motor premiums), closer scrutiny revealed it was worth just £25 to each customer irrespective of how long the lockdown lasts. For those without a calculator to hand, £25 sounds like a miserable rebate, although it is better than anything offered elsewhere by any other insurer. In fact, according to confused.com, the aggregator which I think is owned by Admiral Insurance, since the average annual motor insurance premium is currently £809 - see the report online at https://www.confused.com/car-insurance/price-index £25 represents just a 3% rebate, far less than the 50% or more discount that insurers and others would expect CHOs to concede by them switching to an intervention rate. In fairness, Admiral is also prepared to offer to recalculate a premium for existing policyholders if they want to declare a lower annual mileage but, if the policyholder does so by phone, they will also charge a £25 admin fee for doing so, or £9.50 if the policyholder make the same adjustment online.
Looking for similar evidence of largesse elsewhere, other insurers are also relying on their policyholders taking the initiative. They expect them to have the knowledge that there might be a benefit from approaching their insurer to discuss ways of reducing their current premium. I tried it with LV= last week; they insure both mine and my wife’s car and I thought it was worth a call. I waited 20 minutes to speak to a human but gave up when I realised that, like most other businesses, they were not offering their normal high levels of customer service. Getting some of the excess cost back is perhaps harder than it might at first sound. Direct Line, Esure, Aviva, LV= and Hastings (if you can get through) all say that they are prepared to offer discounts if their customers think they are likely to cover a lower annual mileage than the mileage that the original premium was calculated on. However, they have not made much noise about this opportunity or, if they have, I haven’t seen it anywhere other than in the trade press. Two insurers, LV= and Hastings, have waived the admin fee in relation to mid-term adjustments during the Cornoavirus lockdown and Aviva will not charge for any change to a policy which relates to a declared reduction in the annual mileage. These discounts amount to around £25 per change which, again, doesn't really sound overly generous compared to an average premium of £809. Having said that, Esure is still charging a £26 fee.
Those of you with an eagle eye will have noted that £25 appears to be the level of concession offered to keep policyholders happy. Whether that is the value of the rebate or the cost of the waived admin fee, it is a far step away from refunding a meaningful percentage of that £809 average premium to reflect the two or three months loss of normal daily use of their car that most policyholders will suffer. Direct Line are following a similar line to others. They are inviting their telepathic customers to contact them if they are not using their vehicles. I suspect, and I say this for all of those offering similar concessions, it is to head off any later allegation that they profiteered from the crisis. Zurich Insurance, like most other insurers have extended their cover allowing essential workers to use their car for commuting or volunterring at no extra cost and will consider requoting policyholders who expect to cover fewer miles because of the Covid crisis. They will not, however, entertain a refund for any period that a car is not used and nor have they offered a general refund to all of their customers. The same applies for More Than and others. So, what to make of all of that?
The most significant thing is for the credit hire industry, and individual CHOs more specifically, to look at the figures and to at least be aware of the wide disparity between the concessions they are being invited or encouraged to make by insurers compared with the skimpy measures that those same insurers are taking to support their policyholders. That does not mean that I think a CHO should miss the opportunity to accelerate their cash collection if the deal they can make with an insurer makes commercial and economic sense for them. However, they should think carefully and consider the implications. By accepting a discount of 50% or more to the GTA rate during the current crisis, a CHO will risk putting themselves on a slippery slope, a slope which will be hard to climb back off when the Coronavirus lockdown ends. If you can accept a 50% discount today then insurers will assume you can do the same tomorrow and that will reinforce their misplaced perception that you are making hyper profits, that GTA rates are too high and that litigating claims and making unrealistically low interim payments is a reasonable strategy.
By the same token, thinking carefully does not mean that CHOs should want to fight every unsettled claim for every last penny and be prepared to fight to the death. The risk of that strategy and the sheer inconvenience of waiting two years for a court date makes such an all or nothing approach an infeasible strategy. Making an offer, perhaps after taking legal advice to ensure the offer bites in respect of costs, is a reasonable approach to explore depending on who the insurer is and on the relationship that a CHO has with them. It is the reason why it not only makes sense, but is critical to understand the profit per claim and how far to go with any offer knowing that the insurer will not settle without a haggle. Jumping from a GTA rate to an intervention rate makes no sense in a negotiation. And finally, in recognition of the difficulties that this crisis might cause, if any CHO has a particular cash flow challenge that they feel might benefit from some short term funding assistance, I can report that the Credit Hire Forum does have access to a couple of organisations that have an ability to purchase credit hire debt at a discount, subject to diligence. If you think you need help as the lockdown continues, please feel free to reach out to me in confidence at email@example.com.