Until recently, the underwriting and claims ratio environment for the short-term insurance industry was extraordinary and the short-term insurance industry reported excellent results. FAnews asked a couple of industry experts what 2007 will hold.
After an extraordinary rosy period, came market volatility in the form of currency fluctuations, increases in the oil price, as well as a number of local natural disasters.
Pressure on insurers
"The number of motor vehicle accidents also amplified due to the increased number of cars on our roads, the deteriorating infrastructure and the large number of new and inexperienced drivers," says Lars Forssman, director of Auto & General's Broker Division. "These factors increased consolidation, put pressure on short-term insurers claims costs, deteriorated profit margins and are bringing about rate increases which exceed consumer price inflation. Ultimately, the hard market cycle has reared its ugly head."
Santam CE, Steffen Gilbert, agrees, "South Africa's short-term insurers must cope with numerous challenges in 2007 arising from such trends as global warming, rising crime and replacement costs and shifting demographics. All of these factors have negative consequences and are forcing insurance companies to become increasingly dynamic and cost-conscious in order to continue to grow their profits successfully."
'The emergenceof trends experienced in the insurance industry in 2006 will continue to have an impact on the fourthcoming year," says Micheal Blain, CEO of Centriq Insurance.
"The underwriting segment of the market continues to grow with several specialist facalities having entered the market during 2006. We expect this trend to continue during 2007 but anticipate some saturation risk in certain specialist lines. This will put pressure on industry profitability and some consolidation is inevitable. Futhermore, regularory pressure on renumeration models is likely to change the business models of some adminstrators, with cell captives affording the only approved solutions in many cases." explains Blain.
Challenges
Glibert says one of the foremost challenges facing the short-term insurance industry this year is education and the affordability of insurance products for entry-level consumers. "This sector suffers some of the most severe losses due to basic housing structures and dense living arrangements, yet lower income earners lack knowledge about insurance. And even though products like Santam's low-cost home insurance have been structured to ensure affordability, minimum premiums of R15 per month remain unaffordable to some."
Meanwhile, changing weather patterns is a growing threat faced by both insurers and South Africa's agricultural producers, says Gilbert. "I have no doubt that global warming is going to have more of an impact on insurers and policyholders as time goes by. Insurers will need to absorb a larger portion of reinsurance costs to keep premiums affordable in the future, which may result in significant cost-cutting in order to remain profitable."
Other serious challenges being faced by local insurers this year are rising crime and replacement costs, Gilbert reveals. According to claims data, there has been a recent upsurge in the incidence of crimes like car-jacking, and combined with vehicle price hikes, this leads to premium increases for policyholders.
Challenges for brokers
"With regards to the regulatory environment - besides the recruitment of qualified and accredited staff and the actual cost of compliance, all brokerages are now focusing on the second stage of accreditation of financial advisers. In 2007, the accreditation programme moves on to the required 60 credits and this skills programme is much more time-consuming and intensive than last year's 30 credit programmes," says Forssman.
Financial Sector Charter requirements will also present significant challenges in 2007. "According to the Price Waterhouse Coopers' 2006 Emerging Trends and Strategic Issues in South African Insurance survey, 'the industry has been slow to react to the demands of the Charter', particularly with suppliers such as BEE accredited panelbeaters, and with developing products for the emerging market, however, the 2008 deadline looms and much activity is required in this area," explains Forssman.
New distribution channels
"More retailers are entering the financial services arena offering everything from credit cards to household and motor insurance. This follows an overseas trend and should not be perceived as a severe threat," says Forssman.
Blain holds another view, "Retailers, service providers, banks, motor dealerships and others offering credit to consumers are seeking to extend their product offerings by including insurance products at point-of-sale. This development will give rise to range of challenges including commision regulation. FAIS complaince, and adherence to the National Credit Act and pending privacy legislation related to consumers. The role of traditional brokers will continue to be impacted by direct distribution models and costs of complaince."
Not all doom and gloom
"Long-term prospects are positive and the industry will benefit from general economic growth and fixed investment which will accelerate towards 2010. We believe that to preserve market share in this unsteady and rather tough environment, service excellence is paramount.
"The key is to deliver long-term quality rather than quantity"concludes Forssman.
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