Your short-term insurance clients should brace for premium hikes

Gareth Stokes, FAnews Online Editor

On 14 August 2012 South Africa’s leading short-term insurer published a rather downbeat trading update. It warned that both earnings and headline earnings per share for the half-year to 30 June 2012 would be between 25% and 35% lower than the correspondin

To find out more about the insurer’s half-year performance and its outlook for FY2012 we attended a media presentation with Santam chief executive Ian Kirk. “The earnings are down, but the pre-tax profit is up,” says Kirk. “Our growth is good relative to the market and our margin is within our target range, so we are very pleased with the overall result”. He warned however that there were a number of factors affecting insurance rates, which would impact on client premiums going forward. It seems local insurers are gearing up to break the soft rate cycle that has been in place for a number of years. To date Santam has responded to the competitive short-term environment by refraining from general rate increases and only passing on risk-rated increases where applicable – but the position will change as margins come under further pressure.

A four-pronged threat to insurance margins

“We will be selectively increasing insurance rates over the next year or two,” says Kirk, before expanding upon the main cost drivers affecting the insurer. Rising reinsurance costs top the list following a record year for global catastrophes in 2011. Although South Africa was not directly affected by these disasters (Australian flooding, Japanese tsunami and New Zealand earthquakes to name a few) it could not escape the reinsurance aftermath. Global re-insurers had to re-rate all of their reinsurance treaties in order to retain their credit ratings, with the result Santam soaked up 40% increases at the top-end of its catastrophe insurance rates. These increases filter through to policies in the commercial space.

The short-term insurer’s motor book is also driving costs higher. Claims frequencies increased across the board, rising between 1% and 2% over the period, particularly in rural areas. It seems the fantastic benefits accruing to the short-term motor sector thanks to reductions in hijacking and vehicle theft have been undone by road infrastructure neglect. Kirk mentioned a R46000 claim for “pothole damage” to a Mercedes Benz to illustrate the problem – though thankfully the average pothole claim is significantly smaller. Another cost blow for the insurer is that the average claims cost is up by 8% across the personal lines and commercial motor books. Santam has managed to absorb this increase and is still holding rates.

“We have experienced a great deal of flooding too,” says Kirk. “We had floods in Limpopo and Mpumalanga at the beginning of the year and two flood events in the Western Cape since”. Insurance brokers and their clients can expect their rates to rise as these cost drivers take effect. The insurer promises that rate increase will be gradual – and that good risks will still get good rates. Premiums for so-called poorer risks will come under pressure.

The future of short-term motor insurance

“The risk on the ground in South Africa remains too high and our insurance rates remain high by international standards,” says Kirk. In the motor book this risk is reflected by the fact only 35% of the motor pool is insured. When asked whether National Treasury would assist the industry by making some form of motor insurance mandatory, Kirk responded: “My sense is that compulsory third party cover is not among Treasury’s priorities at present. It is as if they are calling on the insurance industry to address the product issue – and saying – once there are appropriate products for the wider market they will consider the compulsory nature of those products”.

Industry research suggests that the number of uninsured vehicle owners would only decrease if providers could offer “proper” motor insurance at around R250 per month. But designing a cover in this premium category is extremely problematic. A possible solution could be to introduce a solution for older (out of manufacturer warranty) vehicles where certified aftermarket parts are used instead of expensive Original Equipment (OE) parts.

Addressing “risk on the ground” in the property space

Returning to the risk issue, Kirk noted that “on the ground risk” in the property insurance space was massively impacted by the performance of local municipalities. There is poor adherence to building codes; fire protection systems are not installed, maintained or inspected; and emergency services are often ill equipped and understaffed. “We have a huge number of local authorities on the critical care list and things are not where they need to be,” he says. “For insurers the risk on the ground is dictated by these and other shortcomings. I can add poor building maintenance, buildings placed too close to neighbouring structures, and buildings located on flood plains or unstable terrain to the list – to name a few”.

Examples of “on the ground risk” due to poor local authorities are endless. In recent weeks reports have circulated about logistics companies refusing to pick up or deliver goods due to the poor state of roads in the North West and other provinces – while Santam mentioned a case where fire services responded to a fire without working fire hoses! Santam has taken five municipalities under its wing in an attempt to improve the situation. “The focus of the projects will be on mitigation and adaptation around fire, flood and storm water risk within municipalities,” notes Santam. “We will plan with people on the ground and try to build blue-prints for these municipalities – and then we will get more industries involved – because it is not just insurers that suffer – everybody suffers,” concludes Kirk.

Editor’s thoughts: The battle for short-term insurer profitability seems to have shifted from vehicle crime to infrastructure. If South Africa’s roads are properly maintained we should see a huge decline in motor accident claims. Likewise, if municipalities run as they should, the number of fire and flooding claims should decline. Until improvements are made insurers will have to transfer these risks to their personal lines and commercial policyholders. Have you noticed upward pressure on the insurance premium quotations that you obtain for your clients in recent months? Please add your comment below, or send it to gareth@fanews.co.za