Short-term insurers have performed well this year so=20 far, despite crime and surging claims, reports Karen=20
Short-term insurance companies have reported surging=20 profits for the first half of 1995 but this doesn’t=20 mean premiums will be lowered, or even stabilised.
For the six months ending June 1995, net income=20 reported by SA Eagle was R116-million, Commercial=20 Union’s was R50,7-million, Guardian National’s was=20 R31,6-million and Santam reported a net income of=20
Despite these profits, short-term insurers say premiums=20 will keep rising in line with escalating crime and=20 inflation. However, insurance industry critics argue=20 that the overall profit made by short-term insurance=20 companies should affect their decision to increase=20 premiums. =20
Usually companies base this decision on the=20 underwriting result –which is the premium income minus=20 claims and expenses. Investment income — which is the=20 money made by investing premiums — is not taken into=20 account. Even when insurers report an underwriting loss=20 they still make a substantial profit at the end of the=20 year — because of the investment income.
Total premium income in South Africa amounts to more=20 than R12-billion and the investment income from=20 investing part of that amount is significant. “Huge=20 profits are made by short-term insurers by investing=20 the premiums consumers pay, but the consumer doesn’t=20 benefit from this investment income,” says Prestasi=20 Financial Services managing director Jan Erasmus.
Erasmus believes all income earned by the company –=20 whether it is premium income or investment income –=20 should be combined and brought into the calculation=20 when insurers decide to increase premiums. “Consumers=20 have a right to benefit from this income,” he says.
But short-term insurers are adamant that profits belong=20 to the company and its shareholders and should not be=20 used to stabilise premiums.=20
“Investors need to build up a strong base of reserves=20 to prevent the company from going under,” says SA Eagle=20 managing director Peter Martin. And, he says,=20 “shareholders are entitled to a profit”.
Commercial Union group managing director Roger Wanless=20 says the premiums charged by companies should be=20 sufficient to cover the cost of claims. “To rely on=20 investment income to cancel out losses is not good=20
He says if those insured benefited from investment=20 income “we may as well stop writing insurance and=20 simply invest the cash pile as an investment trust=20
Company secretary Gary Benton says in difficult times=20 some insurers have generated insufficient investment=20 income to cover underwriting losses. “At least 30=20 percent of the direct insurers in South Africa suffered=20 this fate in 1994. It is difficult to argue, therefore,=20 that the consumer has not benefited.”
In 1994, SA Eagle recorded an underwriting loss of=20 R134-million although it reflected a net income of=20 around R36-million. For the first six months of 1995,=20 SA Eagle made an underwriting loss of R22-million and=20 reported investment income of R148-million, to make=20 operating income R126-million. Tax of around R10- million, or eight percent of pre-tax income, left=20 bottomline profit at R126-million=20
Investment research by broking firm Senekal, Mouton Kitshoff indicates that most short-term insurers’=20 effective tax rates are low. It claims that on average=20 70 percent of pre-tax income is investment income, most=20 of which is in the form of tax-free dividends.
Martin says only between 15 to 20 percent of SA Eagle’s=20 investment income is derived from tax-free dividends,=20 although he agrees that pre-tax income is largely=20 derived from investment income. He notes the=20 underwriting loss is set off against the investment=20 income and tax is only paid on the net income with=20 dividend income exempted. “The amount of tax would thus=20 be very small or a tax loss could result.”
He says undue attention is placed on insurance=20 companies’profits. “For example, there is not often=20 comment on the profits made by banks on charges to=20 consumers on their bank accounts.”