A RECENT hail storm in Central Victoria has highlighted the risks dealers are taking with adverse weather in their area. This is driving up hail insurance premiums and leading some insurers to encourage dealers to cover their stock with hail nets.

In Central Victoria about 700 cars were damaged. One dealer was forced to quit 175 cars in  a hail and dent sale as a result of the hail storm which struck just a week before work was due to commence erecting hail netting across his stock.

Dealers everywhere are taking calculated risks; balancing up in the prospect of paying huge rises in hail insurance premiums, risking serious financial adversity if they self-insure, or self-insure but reduce their risk by erecting hail nets over their vehicles.

GoAutoNews Premium has been told that over the past 10 years (which is the way they measure such things), insurers have seen so many serious hail events across dealerships that they have paid out more in hail claims than they have gathered in hail premiums. 

Hail claims are hitting $1 billion per event with dealer stock making up large chunks of those claims. One storm in 2019 resulted in smashed windscreens and glass, dented panels and other damage to 95,000 vehicles and a total claim of almost $1.3 billion.

This factor, and an increasing reluctance by reinsurers to take on billions in hail risk an insurer may be holding, means that dealers are faced with ever-increasing premiums to cover their hail exposure.

The result is that hail insurance premiums have risen dramatically and are now typically $250,000 a year to around $1 million a year for some larger dealerships. Some dealerships have seen premiums of $500,000 in 2018 rise to more than $1 million today. Some have seen their hail insurance premium increase by $1 million.

This number comes straight off the bottom line at a time when dealers are searching for ways of lowering their costs.

Where the stock is owned by a finance company, the hail insurance premium is typically packaged up with the interest on the funds in play.  But that number is also rising to reflect the higher insurance premiums being passed through the financier.

Another consideration is that during the past several years of prosperity, many dealers have chosen to fund their own cars – especially used cars – to save on floorplan interest charges.  

Where the finance company owns the cars they are covered for hail damage. But dealers taking on their own stock are now responsible for covering their own hail risk. 

Faced with such large premium increases, hail cover has become a hot topic in dealerships and the eye-watering premiums are tempting many dealers into playing Russian roulette by not insuring stock they are funding themselves and hoping the storm cells pass them by.

The peak hail storm season comes in January to March and with such a relatively narrow window in time, and with the random pathways that these storm cells follow, there is a real temptation for dealers to look at the savings on premiums and elect to self-insure.

But there are pitfalls in doing that. GoAutoNews Premium had been told of a prominent dealer who was agonising over a $1 million hail premium. He eventually decided to pay it. Within a year he had a hail storm across his many dealerships and his claim for $20 million in hail damage was paid.

He told colleagues later that the $20 million restitution by the insurer prevented his company from going under.

Depending on where the dealership is located, the hail element can be the majority of a dealership’s insurance premium and GoAutoNews Premium understands that insurers are encouraging dealers to adopt hail nets to protect their stock as the most cost-effective option to reducing premiums.

Industry analysts point out that hail insurance is not only expensive but exposing insured stock to the elements without netting still leaves the dealership vulnerable because damaged stock has to be repaired or discounted. The dealership additionally loses the opportunity to sell what were pristine cars at a strong margin.  There is also the costly delay of replenishing the damaged vehicles with pristine stock.

Justin Murray, national sales manager, NetPro Commercial Constructions

Justin Murray, national sales manager of NetPro Commercial Constructions said that the most common size coverage requests within the auto industry is between 2000 square metres and 10,000 square metres at a cost varying between $40 and $100 a square metre depending on the size of the canopy and the site conditions.

For example 10,000 square metres would cost about $40 a square metre and a smaller site would be up to $100 a square metre.  Therefore a dealership paying $1 million in hail premiums would recover the netting outlay for 10,000 square metres in around six months.

The view on hail from Pitcher Partners

The lead partner of the Motor Industry Services group at Pitcher Partners Sydney, Steve Bragg, told GoAutoNews Premium: “I have seen a number of my clients in recent years start to do two things that can be a big risk in terms of hail events.

• Some dealers have made the decision that hail insurance is either too expensive or not available, and therefore, taken the risk of not being covered.
• Many dealers have taken the profits of recent years and started to own their used car stock (no floorplan) in a rising interest rate environment.

“But if dealers decide to forgo hail insurance they need to build a provision to buffer the financial impact of the panel repairs cost in a hail event.

Steve Bragg

“In parallel to the provision, dealers need to have processes and procedures to monitor the hail risk and have a plan to move their stock undercover where possible.

“Dealers that own their used car stock will need to remember that the hail insurance that is normally built into the floorplan finance rate no longer applies.  This means they will need to seek out hail insurance coverage or have the processes and procedures to minimise the damage caused in a hail event.

“Ultimately, like any risk, hail risk needs to be monitored and managed by dealers using any means possible.

Dealers need to remember that the interest savings on floorplan can easily be wiped out and then some if their dealership is hit by a hail event,” Mr Bragg said.

By John Mellor