Sky-high insurance premiums are unlikely to come down in a hurry, industry leaders suggested last week.
An insurance analyst expects an 18-month wait before any discernible change in premiums, while Financial Services Board (FSB) deputy CEO André Swanepoel reckons current market conditions will continue for another year or so. Mutual and Federal CEO Bruce Campbell says premiums will remain at current levels for “some time to come”.
Santam’s head of finance, Michiel Reyneke, sees a far less volatile market so that when premium growth does turn, it will be less dramatic than in the past.
The reason for this high-level guesswork is that there are two new structural factors at play in the local and international insurance market. The first is the uncertain impact of the September 11 terror attacks on regrowth in global reinsurance capacity. Second is the recent consolidation in the local market, now dominated by four large insurers — Santam, Mutual and Federal, SA Eagle and Hollard — accounting for more than 60% of the local market. The recent concentration of the industry raises competitiveness issues that have already caught the eye of the FSB.
A final consideration is the nervousness of investment markets worldwide. A possible “meltdown” in global equity markets is now being taken seriously.
Conditions in investment markets are critical to short-term insurers because they shape their net asset values, affecting their solvency ratios and ratings in the equity market.
Usually, operational (underwriting) profits act as a buffer against fluctu-ating net asset values due to shortfalls in investment performance. Barnard Jacobs Mellet Securities analyst Wilhelm Nauta suggests investments drive 75% of an insurance company’s valuation.
So what is consumer outlook in this notoriously volatile and cyclical industry? As it is dominated by four players, there is little hope that normal competitiveness gives relief to consumers, whether large corporations, medium to small companies or private individuals.
Campbell disagrees, arguing that brokers keep rates competitive.
There is general agreement that the corporations are keeping clear of 300% premium increases through greater self-insurance. The long-term impact of this exodus of large customers from the local market could be serious if they fail to return when premiums soften.
However, Nauta does not see this as a threat to the size of the South African market. “Corporates self-insure for cost reasons,” he insists. “As soon as it costs less to insure, they will return to insurers.”
Campbell says premium rating structures between 1998 and 2000 were inadequate and that more recently, premiums have reverted to their “correct” levels. He concedes however, that at current premium levels many vehicle owners are opting to keep their vehicles uninsured and fleet owners are self-insuring.
He is adamant that vehicle premium hikes are justified on the basis of claims experience, pointing to poor driving as the culprit for the high incidence of claims and to the rand-driven high cost of vehicle repairs. Campbell suggests one way consumers can hold premiums down is to opt for “higher deductibles” — choosing a higher excess. In other words, self-insure.
A spokesperson for Alexander notes definite price-resistance among individuals, who are insuring their “financed assets like a bonded house, but not the house’s contents”. Individuals are also sacrificing the scope of their insurances on the altar of affordable premiums.
So across the insurance spectrum, large and small consumers are voting with their feet, settling for less or no cover while the short-term industry fattens up on substantial under- writing profits. But there is one exception. A category of insurance where consumers are climbing in despite massive price hikes is professional indemnity insurance. Greater awareness of the need for such cover has arisen in the wake of the Enron and Worldcom debacles in the United States. GlenrandMIB’s Helen Fink attributes premium increases of 40% to the limited capacity in the international market. Fink stresses, however, that local premium increases have been well below those in other countries because of South Africa’s better claims experience.
Swanepoel notes that the recent consolidation through mergers and takeovers in the short-term market results from the lack of large growth potential. Growth by acquisition is virtually the only alternative for the larger insurers. He concedes that the FSB is watching the industry — particularly the solvency ratios of certain insurers. Despite the good underwriting performance of the main players in the domestic short-term insurance market, solvency ratios (free assets as a percentage of the highest premium income in the past two years) are threatened as asset values decline.
A recent FSB report found solvency ratios as low as 15%. Swanepoel says the board starts watching a company when its solvency ratio falls below 30%. To reach equilibrium, the short-term insurance industry needs to look for sustainable underwriting profits. As Nauta puts it: “The industry will optimise its performance when it achieves sustainable underwriting profits at lower margins.”