Finessing your underwriting margin back to health

14 September 2023 Gareth Stokes

Santam delivered what it described as “an overall satisfactory financial performance” for the half-year to 30 June 2023. The JSE-listed firm shrugged off hard reinsurance markets; the rising frequency and severity of natural catastrophe loss events; and South Africa’s subdued economic growth to deliver a 7% increase in gross written premium (GWP) from its conventional insurance businesses for the first half of 2023 compared to the first half of the prior year. The underwriting margin improved too, from 3% to 3.8%, but remains below the insurer’s 5-10% target.

From worst of times, to still the worst of times

You could be excused for thinking that 2022 was the worst of times for South Africa’s traditional insurers. The main players were affected by the April 2022 KwaZulu-Natal (KZN) floods which has since been recognised as the largest natural catastrophe loss event in the country’s history. To offer some context, the Aon plc 2023 Weather, Catastrophe and Climate Insight report estimated the economic losses from these flood at USD3.6 billion, with insurers and reinsurers shouldering about half the burden. 

Santam shared a long list of 2022 challenges including low economic growth; rising unemployment; persistent rainfall; and significant increases in crime-, fire-, and power surge-related claims. Inflationary pressures also pushed the total claims ‘bill’ higher. Unfortunately, 2023 promises more of the same. According to Santam, “insurance growth prospects [over the first half of this year] were dampened by persistent weak economic growth and pressure on personal disposable income” as consumers faced high inflation and rising interest rates. 

The first quarter 2023 was characterised by adverse weather conditions and high claims frequencies as the Orange and Vaal Rivers overflowed. And by end-June, insurers were also crunching the claims numbers for widespread flooding in the Western Cape. Claims inflation remained elevated too, largely due to a weakening exchange rate. At the same time, it is costing insurers more to protect their balance sheets from catastrophic losses. “The cost of reinsurance increased substantially following the significant losses experienced globally and in the South African market since 2020,” wrote Santam. 

Insurers feeling the pain of global catastrophe losses

This is an opportune time to remind readers that the rates or premium that global reinsurers charge local insurers for so-called ‘insurance for insurers’ are heavily influenced by the global natural catastrophe claims experience. Case in point, the February 2023 Turkey-Syria Earthquake caused property losses estimated at USD5.5 billion, meaning future reinsurance treaty negotiations for this peril will be that much tougher. PS, as the writer was finalising this article, a 6.8 magnitude earthquake tore into central Morocco. A couple of days after the event, the mainstream media were reporting at least 2 100 deaths with thousands more injured. 

Commercial and personal lines policyholders feeling the effects of the hardening reinsurance market as they carry the brunt of insurers’ cover exclusions; limitations of cover; and premium increases. The extent of insurers’ responses to hardening markets may, however, leave insureds with a couple of questions. First, how do traditional insurers achieve sustainable trading outcomes given the variety of operational and risk challenges they face? And second, how do traditional insurers justify continued improvements in their operating profits in the context of insureds carrying increasing shares of the risk, at a higher cost? Santam was quite open about the steps it has taken to protect its balance sheet and support its operating / underwriting results. 

The first major change was the launch of a new, multi-channel operating model for its intermediated commercial and personal lines business from the start of 2023. It has clearly delineated Client Solutions, to focus on direct interactions with clients; Broker Solutions, for the broker channel; and Partnership Solutions. Overall, the conventional insurance segment is made up of the aforementioned commercial and personal lines business plus MiWay; Specialist Solutions; and Santam Re. “Although at an early stage of implementation, the new operating model provided immediate focus that enabled us to weather the challenges and improve our H1 2023 performance against the comparable period in 2022,” Santam wrote. 

Underwriting at the heart of traditional insurance

Further tweaks that led to small improvements in the underwriting margin include enhanced risk assessments at the underwriting stage; segmented premium increases; changes to excess amounts; and enhanced security requirements for high-risk vehicles. These measures helped Santam to turnaround the profitability in its motor book and halt an out-of-control escalation in power surge losses. Property rates were singled out as one segment that saw significant rate increases, though Santam warned of further hikes and tougher risk mitigation requirements in that space due to its continued poor fire- and weather-related property claims experiences. 

Santam took pains to inform shareholders that prospects for the second half of 2023 remain subdued. “Operating conditions are not expected to improve in the second half of the year … economic growth and employment levels are expected to remain suppressed in South Africa given structural limitations, in particular electricity supply and transport constraints that place severe pressure on economic activity and investor confidence,” they wrote. At the time of publication there was also little prospect of a short-term turnaround in inflation and interest rate pressures, with local consumers having just absorbed 10%-plus increases in diesel and petrol process for September 2023. 

The good news for financial and risk advisers who support businesses and households with their short-term insurance needs, is that Santam is taking steps to reduce the impact of these external pressures. Referring to its new client-facing operating model, the insurer promised “enhanced product innovation, client experiences and efficiencies”. It also noted the potential for cost and revenue improvements through collaboration across the wider Sanlam Group. 

Another interesting development is the recent acquisition of the MTN device book, which the insurer reckons will be a key driver to gain market share in previously untapped market segments. The MTN device book plus the recent Sanlam Allianz JV further strengthen the diversified product and solution offering that has served the group well over many years. 

Some final words on climate, data and technology

Technology has a role to play too, as illustrated by Santam’s recently formed data strategy team. This team is exploring ways to improve data-related use cases across the business. Data is already proving essential in limiting exposure to risk and setting appropriate premium. For example, a new geo-coding initiative ensures a comprehensive risk-based view of property locations across South Africa, with impressive benefits at underwriting stage. Going forward, you and your clients can expect tough assessments of on-the-ground fire and flood risk, and costlier-to-implement risk mitigation requirements, whether renewing cover or writing new business. 

The trading update contained the mandatory comment on climate change too. “Climate change poses a key risk to the group, potentially threatening the insurability of various risks where losses become increasingly prevalent,” Santam wrote. “In this regard, we continue to address the climate-related risks and the implications for the business in line with the Taskforce on Climate-related Financial Disclosure (TCFD) recommendations … we continuously seek ways to actively manage climate-related risks and contribute towards the low carbon economy, which will also impact our underwriting strategy”. 

Writer’s thoughts:

One often hears brokers complain about insurers’ tough underwriting and risk mitigation decisions. Unfortunately, a soft approach to onboarding risk can contribute to a disappointing claims experience. Are insurers getting the risk mitigation versus risk transfer balance right? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts




Added by Ntjapeli Hlaatsane, 06 Nov 2023
The war between Izrael and Palestine's is going to bring another huge impact to your insurance financial performance, Bricks is also affecting US dollars on the other hand, and for the fact that JSC performance is linked to the performance of US Dolars, we are likely to see a drop in 2023 till 2024 in our reinsurer and insurance performance.
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