A mid-year snapshot of the short-term insurance industry

22 September 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

South Africa’s short-term insurers are back on the front foot. The latest results from Santam Limited confirm an improvement in the group’s underwriting margins from 8% last year to 8.4% in the first half of 2011. To find out more about the industry we turn to the Financial Services Board (FSB) Report on results of the short-term industry to 30 June 2011, as distributed with the South African Insurance Association (SAIA) August 2011 newsletter. As always the report is dividend into categories including typical insurers, cell captive insurers, captive insurers, niche insurers and re-insurers.

Steady premium growth for typical insurers

Typical insurers are the dominant category in the local insurance market. Midway through 2011 there were 29 insurers who fit the “those insurers who offer most types of policies to, mostly, the general public” definition. Net premiums in this category surged from R19.987 billion in the first half of 2010 to R22.787 billion this year – a 14% increase. It looks like an extremely profitable half year given that underwriting profits improved, from R1.486 billion to R2.210 billion, while claims as a percentage of earned premiums declined significantly, from 63% to 57%

One can draw a similar profit conclusion by taking a look at the long-term graph of operating and underwriting results as a percentage of net premiums. Each of these measures has improved over the past three years. For typical insurers the underwriting profit was pegged at 4% in the 2009 calendar year, climbing to 9% in 2010 and 10% for the latest half-year. Operating margins climbed from 12% to 16% over the same period. As a result only six of 29 typical insurers reported an underwriting loss for the first six months of 2011, versus 12 who were “in the red” for the first quarter of the year. And only four companies reported an operating loss to 30 June.

Statutory surplus asset ratios are an indication of the financial strength of the 29 typical insurers. According to the FSB the bulk of these insurers boast a statutory solvency ratio of between 30% and 40%... And an impressive 24 of the total (or 82.7% of all typical insurers) boast solvency ratios of 30% or better. There is a single insurer in the 20% to 25% category with four in the 25% to 30% range. Overall the typical insurers appear in good financial health – certainly offering a better “spread” of solvency than in previous years.

Cell captives on the front foot too

Cell captive insurers are described as “those insurers who offer insurance structures on a cell ownership basis for first and third party cell owners…” This segment of the market is also on the front foot. Net premiums written in this sector of the market have increased every full-year going back to 2006. And it seems the momentum will continue, with first half 2011 net premiums trumping the comparable 2010 period by 12.62%. Net premiums jumped from R3.454 billion to R3.890 billion. Underwriting profit surged from R467 million to R719 million, with claims as a percentage of earned premium plummeting from 50% to just 39%. It certainly seems as if cell captives have found the recipe to reduce claims versus premiums received!

It came as no surprise that the 10 operational cell captive insurers achieved significant improvements in underwriting and operating results. Operating results as a percentage of net written premiums increased to 26%, the highest percentage ever. And the underwriting result improved to 18%, beating the previous high of 16% set in 2010. Despite the positive market conditions three of the 10 cell captives reported an underwriting loss for the first half of 2011. None reported an operating loss.

Half of the cell captive insurers reported statutory solvency ratios of 50% or better – four were in the 25% to 40% range – and one was lagging in the 15% to 20% window.

Niche insurers buck the trend

A quick look at the top line result for niche insurers – those insurers who offer specialised cover to certain niche markets – would raise alarm bells. This sector of the insurance industry was one of a few to show a decline in net premiums. Net premiums received for the first half of 2011 came in at R3.420 billion versus R3.703 billion in 2010 – a decline of 7.6%. But the shrinking value of new business had absolutely no affect on the bottom line. A massive improvement in claims as a percentage of earned premiums, from 41% to 31%, resulted in underwriting profit surging from R533 million to R1.289 billion.

Underwriting and operating results as a percentage of net premiums surged to 38% and 49% respectively – a marked improvement from the 35% and 16% reported for 2010. The last time operating results were this good was in 2008 when the number came in at 57%, though the underwriting result was only 30% at the time. Seven of the 29 niche insurers reported underwriting losses for the half-year and five operational losses. Solvency ratios, meanwhile, are the most scattered of all the categories. An impressive 14 insurers in this category reported solvency ratios of 100% or better, with nine in the 30% to 100% band. A further four insures languished in the 25% to 30% measure, with two achieving 15% to 20%.

Solid industry performance

Overall it seems short-term insurers are on track for an impressive 2011. Concerns over underwriting margins in the industry have been addressed – with most insurers across all categories trading profitably. And when we consider that the various initiatives thought up during the “bad” years are only now coming on stream, we can expect a few more good years for the industry going forward.

Editor’s thoughts: Short-term insures seem to have improved their profits by clamping down on claims… Have you noticed the short-term insurers taking a tougher stance at claims payout stage through 2010/11? Please add your comment below, or send it to

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