Going back to basics to increase financial soundness

The recent deterioration of the Rand against major currencies is creating a tough environment for short-term insurers as the costs of repairing vehicles increases dramatically. While this environment looks to be a predominant force for the immediate future, there are insurers who are able to find growth in tough conditions

Santam recently released its results for the period ending June 2015, and the company showed that going back to traditional values of adopting a disciplined approach to insurance is a good way to enable growth. FAnews spoke to Santam CEO Lizé Lambrechts to get her insight into the results.

Growing a healthy cash flow

Despite the restrictive market conditions, Santam achieved an eight percent growth in premiums. Lambrechts points out that this is largely attributable to the 17% Gross Written Premium growth reported by MiWay which contributed to the growth in the motor class of business. She added that the property class reported low growth due to market pressures in the specialist corporate property market in particular. The liability class reported growth of 8%, while the engineering and transportation classes reported no growth over this period.

The company also managed to record a cash generation of R1.2 billion over the period. “Santam’s increase in cash in June 2015 - up from the R930 million reported in June 2014 - was largely attributed to our improved underwriting results in a favourable claims environment. These results were achieved through the implementation of corrective underwriting actions in the period under review with the view to improving profitability ratios,” says Lambrechts.

Disciplined actions

A recurring statement throughout the announcement of the results was that the company worked towards disciplined underwriting actions. When we asked Lambrechts to discuss this, it was clear that the company simply avoided doing anything fancy in this department.

“Disciplined underwriting actions primarily involve taking a more focused approach to how we evaluate and manage risk and how we class and rate such risks. This includes taking a more thorough review of the risks we cover and the premiums levelled against such risks. It is an area in which Santam will continue to focus on in the future,” says Lambrechts.

While this seems like a good approach to adopt, there is still the challenge of doing this in a market which is being driven by rising costs; particularly in the motor sector. “We believe that we have become far more disciplined in the evaluation of risk in general. Better efficiencies in procurement and claims value chains have also assisted us in realising savings and furthermore helped to counter the negative impact of the weakening rand.”

The dark cloud

While these results are good and are an indication that Santam has taken deliberate actions to overcome a largely challenging operating environment, one cannot look past the deterioration of the Rand and the effect it is having on the industry.

These effects are perhaps exacerbated by the fact that the South African motor industry is a replacement industry rather than a repair industry. While this is problematic, it would not be critically bad if South Africa manufactured certain parts in the country. However, we do not and we have to import all of our parts. This puts us at the mercy of the exchange rate.

“The deterioration in the currency impacts the insurance sector through an increase in the cost of repairs. This in turn has an impact on the consumer by way of higher premiums.  Any further devaluation of the rand will continue to have a knock-on effect when it comes to the repair and settlement of vehicle accident claims as the price of imported car parts continues to increase.”

The Eskom non-factor

While Eskom has been a thorn in the side for consumers, another positive that one can take out of Santam’s results is the fact that load shedding did not affect the company during the six month reporting period.

“Load shedding has certainly been a game changer in the local risk management environment.  To date we have not had any significant claims against load shedding incidents. We are encouraging our policyholders as well as South Africans in general to take the necessary precautions to prevent damage from load shedding in their lives or their businesses through our intermediaries and our social media channels.”

Editor’s Thoughts:
While Santam does have the size advantage over some insurers, the disciplined actions described by Lambrechts is something companies usually do; this is a major contributor to the healthy state of the short-term insurance industry. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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