Competition for a limited market in the short-term insurance industry should mean prices are coming down. But insurers say they can't slash premiums while the country's risk to insure remains so high.
If you're reading this, chances are you have received a phone call or an SMS in the past six months offering you short-term insurance. Billboards and airwaves are filled with the promises of the next big deal.
Consumers are offered no-claim bonuses, cash rewards, loyalty points and premiums that are so low they'll pay you a lump sum if you find a more competitive quote.
According to the South African Insurance Association (Saia), this growing market serves only about 15% to 20% of the population at most.
This should mean good news for the consumer. Fierce competition in a limited market usually means lower prices. But the guarantors say the high risk in South Africa means they simply cannot bring their prices down much more if they are to remain profitable.
The 2012 KPMG South African insurance industry survey shows that competition in the industry is expanding, despite the strength of the traditional insurers.
Industry diversifying and expanding
Four insurance giants dominate the market, which is worth about R73-billion, according to the survey. Based on gross written premiums, Santam took the biggest piece of market share — 23% — in 2011. Mutual and Federal was next with 10.5%. Following it was Hollard, with 8.7%, and Outsurance hot on its heels with 8.1%.
Nevertheless, the industry is diversifying and expanding. Traditional broker models, like those offered by Santam, are being challenged by direct marketing by companies such as Outsurance, Dial Direct and MiWay.
Bancassurance (insurance products offered by retail banks) is also becoming increasingly popular. According to the survey, the most successful bancassurer in 2011 was Absa. Its Absa idirect and Absa Insurance Risk Management Services brands collectively grew the company's share of the market by over 20% in 2011.
The bank now commands just over 6% of the premiums. Nedbank also offers a short-term insurance product to its customers, and one can get a "full suite of products" from both Standard Bank and the once health-only insurance provider, Discovery, according to the Saia chief executive, Barry Scott.
He said the most recent bank to announce its addition to the smorgasbord was FNB. The growing trend of bancassurance was a way that existing brands could promote themselves.
"The groups are saying that getting the client was the hard part," he told the Mail & Guardian. "Now that we've got them, we might as well sell them as many products as we can."
Getting into the market not easy
But even for existing retail banks, getting into the insurance market is not easy, and margins are thin.
"Short-term insurance is a capital-intensive business," said Scott. "A new entrant must have lots of capital, apply for a licence from the financial services board and have a separate intermediary services licence. You have to prove to the financial services board that you have the right resources as well."
In addition, he said, a new short-term insurer had to be prepared to run at a loss for three to five years before turning a profit. He estimated that for every R100 in the industry, only R5 was realised as profit.
Keith Boyle, the head of marketing for FNB Insurance, said that FNB, in addition to working with already tight margins, planned to "give away a chunk of its margin" through a reward scheme to customers.
It was offering 5% of its premium back in eBucks to clients every month (rather than every year) that they don't claim; an additional 5% back after 12 consecutive months for customers who don't claim and have no late payments; and an additional 5% back after 12 consecutive months for customers who qualify for fuel or airtime rewards on the bank's reward platform.
"We are not going on a profit motive here," said Boyle. "We are trying to create an ecosystem for FNB clients."
Targeting low-risk customers
But the bank will make a profit if it sticks to its market plan: targeting low-risk customers. It will offer the product only to existing FNB clients.
According to Johan Nagel, chief executive of FNB Insurance, it will tap into an existing band of "rich" customer data in order to profile the risk of its customers much more accurately than third party insurers could ever do.
"For example, we can see how often you fill up your car with petrol. Then we can match that with your car type to see if you are overusing your car," he said. "We want to 'bucket' risk profiles and then go after the top buckets." Boyle envisages that only about 12% of FNB's customers will qualify for the full 15% cashback rewards.
The FNB product will compete directly with at least two offerings under the FirstRand umbrella — Outsurance and Momentum insurance. Significantly, FNB has chosen to use Mutual & Federal as its administrator, rather than select a partner within the group.
"We looked at everyone's offerings, but Mutual & Federal was just way ahead of the others," Boyle said. That meant that FNB would be sharing the "rich" information gleaned from its banking customers with Mutual & Federal.
Traditional broker-led schemes have also been looking for ways to get creative in this competitive space. Mutual & Federal has developed a direct offering model called iWYZE (a joint-venture with its parent company Old Mutual), and seen a growing portion of its business shifting to underwriting management agencies (UMAs).
"Strategic partnerships"
"The growth in iWYZE relates to the trend towards direct insurance in the mass market and also the strength of the Old Mutual brand," said spokesperson Vuyo Lee. And UMAs allowed for "strategic partnerships".
Lee said the UMAs offered tailor-made products and niche expertise to clients; in turn, Mutual & Federal offered a distribution footprint to its smaller allies. "It's a "winning recipe … for our policyholders."
But, although stiff competition is driving innovation in the market, it is not necessarily driving prices lower. Several of the insurers compete on price in a sector where consumers can access up to 20 competing quotes before making a decision. But they operate within a confined space.
Scott said the industry was committed to trying to find ways to bring cheaper products to the market but it was constrained by the high-risk environment in which it operated. According to Saia, the average insurer pays out R70 for every R100 it receives in premiums.
Scott said that, 15 years ago, 80% of the cost of vehicle insurance claim was due to car theft, and 20% was due to accidents. A decade and a half later, "car theft has decreased significantly — it is about 65% lower". But the number of car accidents had rocketed so dramatically that the numbers had been reversed.
More than 80% of the value of car-related claims today was due to accidents, and about 15% of the cost of claims was due to car theft.
High accident zone
"If you compare South Africa to European companies, you are between five and 10 times more likely to be in an accident here," Scott said.
"The weakness of the rand affects things because a lot of parts are imported. Vehicle insurance is now more expensive here than in other parts of the world."
He said the industry had not come up with a cost-effective solution for lower-income consumers. Generally, insurance of any kind was bought only by those in the living standards measure (LSM) groups 8 to 10.
Only one out of three cars was insured, with vehicle insurance making up about 33% of the short-term insurance market. To make insurance products cheaper, "you've got to bring the claims cost down and the cost of product to market down", Scott said.
"But, if you can't solve the claims cost, you're never going to have a product that is cheap enough for the lower part of the market. As long as there is a high accident rate, motor claims will remain expensive."