Insurance claims have been soaring over the past two years, while premiums have softened. That’s an unsustainable business model, but was facilitated by two factors: the equities bull market that meant that investment returns subsidised premium income and increased competition in the short-term insurance market, which placed downward pressure on premiums if companies wanted to retain their market share in the face of cheaper competition.
One of those factors — high investment returns — no longer exists since the market tumbled in January and economic forecasts have been revised downwards. So what does this mean for premiums?
Nobody wants to be the first to say the market is hardening, but the first telltale signs are incontrovertibly present.
This is particularly true of the personal lines market, where current low rates on motor and property insurance are leaving many insurers with headaches. Motor and property comprise more than 75% of the short-term insurance market and are already highly competitive. The claims experience over recent periods has brought these rates under considerable pressure.
According to Jaco van der Merwe, consulting actuary and head of the general insurance division at Deloitte, claims have been driven up steadily, both in frequency and in severity, by a number of factors. ”The increased number of vehicles on the road, the impact of inflation and exchange rates on repairs and an overall increased level of consumer awareness have seen steadily worsening claims rates. Given the current levels of inflation, this trend is likely to continue,” he says.
Furthermore, the social make-up of the average consumer of short-term insurance is changing. With a rapidly emerging black middle class and a number of insurers setting sights on the low-income markets, the risk profile of the typical policyholder is changing.
”This is challenging the traditional and historical rating frameworks used by many insurers. If risks are not properly rated, the pressure on profitability will only increase as the market grows. Given that the short-term market is expected to grow at nearly 17% per annum for the period 2007 to 2012, this remains a significant risk,” says Van der Merwe.
Some of the large locally owned insurers are having a long, hard look at their underwriting book, with a view to increasing their underwriting profit from, say, between 4% and 6%, to 10%, which requires being more selective about which risks they are willing to take. It is at the point that the market starts to harden.
Denis Ternent, executive general manager, broking services, Glenrand MIB, says premiums are closely linked to what is happening in the investment markets. ”Insurers are typically quite aggressive in growing market share in a bull market, because they want maximum premium income to invest. When markets cool off, they are not quite as aggressive and this leads to a slight hardening of the market.”
But he says this factor cannot be looked at in isolation, as the level of competition also has an impact. And right now there is increased competition as new players enter the market and less conventional business models divide the industry.
Leon Vermaak, CEO of Auto & General, says the company has already been increasing premiums at a rate higher than inflation, about 12%. But because some of its competitors have not followed suit as they seek to win market share, it has experienced a slowdown in the growth of its book and lost some clients.
Vermaak recommends that clients shop around for the best deal they can get, but simultaneously warns that companies not already effecting the appropriate levels of increases in premiums, in this environment of declining investment returns and higher claims experience, are likely to have to do so within six months time.
”It’s a trade-off between charging the right premium income or growing the book — and we favour charging the correct premium, even if we lose some clients. However, the industry is fundamentally sound, so clients should shop around,” he says.
Guy Jameson, executive leader of business development for Alexander Forbes Risk Services, says individuals are taking greater responsibility for their personal safety and property.
”Individuals are really getting into the risk management process, asking us to assist with advice on how to enhance the protection of both homes and cars, as well as their personal protection,” says Jameson. ”It is getting quite sophisticated.”
In one neighbourhood watch, a system has been developed to warn all residents by SMS or email when one house or car has been broken into, or even when a suspicious person is seen loitering.
A personal panic button has also been developed that people carry with them.
A challenging year
Slowing car and house sales, an increase in motor accidents, renewed focus on transformation and BEE, and a slowing economy are just some of the challenges the South African short-term insurance industry will face in 2008.
According to Vermaak, ”The industry certainly has the innovative ability and professionalism to overcome these challenges, but greater cost efficiencies, sophisticated pricing and underwriting as well as skills development is required.”
The short-term insurance industry is a R43-billion industry, of which motor insurance accounts for about R18-billion.
Motor insurance is Auto & General’s area of specialisation, and it is the area that has experienced the greatest increases. Vermaak says that short-term insurers are not as profitable as in recent years. ”Not only has there been an increase in motor vehicle accidents because of the increased number of cars on our roads, the deteriorating infrastructure, high traffic volumes and the large number of new and inexperienced drivers but the cost of insurance claims has increased because a large number of vehicles on our roads are imported and contain advanced and expensive computer systems and sensor monitoring equipment.
The impact this has on the short-term insurance industry is that the parts available to repair these new, technologically advanced vehicles are more expensive, which translates into much higher claims costs for the insurer and increased premium rates for the consumer.
Although the National Roads Agency appears to be aware of how inadequately maintained roads impact on motor vehicles — it has such reports on its website — Vermaak says his focus has been on the crime aspect of claims.
”We believe there has been some success in reducing claims through the growing acceptance of security equipment such as alarms and tracking systems,” he says.
Criminals are also aware of this, and the incidence of theft of insured cars is declining compared to overall car theft statistics.
”This means that a lot of thefts are being thwarted by alarms, and more cars with tracking systems are being recovered,” says Vermaak. Auto & General does not always insist on insured cars having such systems, but in high-risk areas and with high-risk models, it does.
He says that 2008 will be seen as an unexciting time for insurance brokers. ”Due to inflationary pressures, consumers will be tightening their belts in 2008 and there will be fewer entrants into the market. This will have a knock-on effect for insurance brokers. My advice to insurance brokers is that they deal with insurers whose business model allows brokers to do less administrative work so that they can spend their time getting closer to their customers, offering a flawless service.
In addition, insurance brokers are advised to rebalance their portfolios to cover both commercial and personal lines insurance. This would make them less vulnerable in the personal lines arena where channel threats, specifically the aggregator, direct and affinity models, are growing at a rapid pace.”