Short-term insurance faces structural challenges

The South African Insurance Association (SAIA) ran a special feature in a number of national newspapers earlier this week.

The organisation is celebrating 100 years of involvement in the short-term insurance industry - albeit in slightly different guises over that period of time.

According to the report, SAIA can trace its roots to the Council of Fire Insurance Companies, formed way back in 1907. Various other associations followed, before SAIA was finally established as the controlling body for all organisations associated with the Council of Fire Insurance, in 1973.

Next two years will bring significant changes

While most of the articles in this special report focussed on the services provided by SAIA, we were drawn to a piece featuring Chairman of the SAIA Board, Adam Samie. In an article titled "Significant structural changes to come in the next few years," Samie shared some of his thoughts on the future for the short-term insurance industry.

Samie believes there will be numerous structural changes in the industry as it seeks to adapt to the tighter regulatory environment and an expected shift in consumer behaviour and expectation. In particular, the industry will have to pay close attention to financial disclosure around insurance products and the manner in which brokers are remunerated.

Knowledge will play a key role in the short-term insurance industry in coming years. Key individuals in the industry will have to be better educated and can expect to be selling insurance products to end users who will be more aware of their rights than ever before. "Four to five years ago it was much easier to sell short term insurance than it is today, said Samie.

To this end, SAIA is focussed on improving the knowledge of its members and end consumers. Samie noted that "SAIA has been very successful in its initiatives to improve the financial literacy of consumers."

A tough ask from vehicle insurers

Motor vehicle insurance remains one of the largest contributors to the total short-term insurance industry in that it accounts for approximately half of all short-term insurance premiums.

Samie believes that offering profitable motor vehicle insurance will become increasingly difficult in coming years. A number of factors contribute to dwindling profit margins in this category of short-term insurance. Top amongst these is that only 33% of South African motorists have some form of motor vehicle insurance cover.

The significant increase in driver numbers, coupled with deteriorating driver standards, problems at licensing departments and a severely neglected road infrastructure all contribute to increasing vehicle accidents and claims. There is no quick fix for any of these problems and it is likely the situation will worsen before it improves.

Despite this, the South African motor vehicle insurance sector remains hotly contested. Samie says that many insurers are forced to run this segment of their business as a 'loss leader' while attempting to bolster returns by re-investing the premium in other asset classes.

The age old direct versus broker sales channel

The South African short-term environment remains broker dominated. Despite the aggressive marketing efforts of direct insurers, they have only been able to secure between 25% and 30% of the industry. A survey of media advertising expenditure for 2006 reveals the extent to which direct insurers outspend the traditional brokers. Outsurance placed 40th with a total of R85.5 million, Dial Direct was in position 89 with R43.8 million and Santam a lowly 92nd, with R42.5 million. Outsurance even outspent the large life insurance players, Old Mutual, Liberty Life and Sanlam!

Statistics from the UK suggest that regardless of expenditure, direct insurers will struggle to grow their market share beyond the 35% to 40% level in the longer term. The broker selling channel should remain the dominant force in the short-term insurance industry for some time to come.

Editor's thoughts:
A number of industry challenges have been mentioned in this article. These include regulation, direct selling, difficult conditions in motor vehicle insurance and education.  What do you believe represents the greatest challenge to the short-term insurance industry in the coming two to five years? Send your comments to gareth@fanews.co.za.