Spare parts rip the heart out of short-term margins
If you thought 2008 was tough, then you’d better brace for an extremely challenging 2009. It’s going to be more difficult to write new insurance business as the fingers of recession grip. And although the consumer will enter the New Year with high hopes of petrol price decreases, interest rate cuts and the possibility of real wage increases, we mustn’t lose sight of the looming job cuts in struggling sectors of the domestic economy. We’ve already seen retrenchment announcements from the mining and motor industries, with retailers and banks sure to follow. While the average consumer will benefit from slightly improved income to expense ratios the total income pool is going to shrink substantially.
But ‘difficult’ doesn’t have to mean ‘impossible’. There’s still business to be written and money to be made... Those who employ innovative techniques to improve administration and lower costs will emerge ahead of the game.
A tougher time for insurers
The same can be said for the large insurance companies. Short-term insurers face a number of challenges – particularly on their motor books. While FAnews Online has been debating fair valuations for motor vehicles in recent newsletters (Annual review of short-term policy essential & Will the insurers ever take responsibility?] the main difficulty is the rising costs of motor vehicle parts. Prices of spare parts continue on a unique inflation path all of their own. It’s not unusual for price hikes of 50% or more per annum! And we read today that a replacement headlight on a new Audi can cost as much as R70 000. The motor manufactures are absolutely crazy – with many claiming that they’re trying to squeeze every drop of profit from their parts division as car sales tank.
Soggy sales in the motor retail industry aren’t helping. The National Association of Automobile Manufactures of South Africa (NAAMSA) announced a 25% decline in sales (across all categories) for November 2008 – and it’s beginning to hurt. Because fair market values are falling while replacement part costs rise we’re going to see an increasing number of insurance write-offs, which inevitably cost the insurers more. Add to this the rising number of large fire claims and flood catastrophes and the short-term insurance margins are going to be under severe pressure.
Life companies like Sanlam, Old Mutual and Metropolitan will have to endure further periods of declining earnings due to shaky equity markets. Market commentators agree that it’s almost impossible to call the bottom of a bear market – so we’ll have to wait to see if the JSE All Share’s recent visit to 17 800 points is as bad as it gets. One this is certain – the markets won’t recover overnight – and that’s going to mean a slow recovery for the investment books of most life companies.
The regulators have plenty up their sleeve
The only constant in the insurance industry is change. As we enter 2009 financial service providers and intermediaries eagerly wait for the regulators to clarify a number of proposed regulatory interventions. Apart from the Insurance Laws Amendment Act, the ongoing debate over clashes between health and accident insurance products and a proposed micro-insurance act we also have to worry about government’s National Social Security System (NSSS) and proposed national health plan. With elections looming in April or June next year we expect government ministers and departments will focus attention elsewhere for the first six months. But after that it’s all systems go for new legislation.
We look forward to the next discussion documents on the issues that will affect the financial service environment, and will to bring them to your attention as soon as they’re published.
Editor’s thoughts:
Doing business in 2009 will be difficult; but not impossible. It’s times like these that reward innovative thinking – ideas that trim costs and administrative burden for example. What would you like to see addressed in the insurance industry 2009? Add your comments below, or send them to gareth@fanews.co.za
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