Building a profitable business during uncertain times
The 2013/2014 financial year has not been an easy year for the short-term insurance Industry. The hail catastrophes in the Gauteng area during November 2013, followed by severe storms in the Western Cape, Kwazulu Natal and Mpumalanga have meant that loss ratios across all insurers are under severe pressure.
The advent of the Binder Regulations, which became effective in January 2013, and the release of Directive 159 on outsourcing activities, has forced insurers to re-examine and re-design their business models. Rate increases, cancellation of schemes and consolidation have all been used by insurers to deal with the challenges of the increased level of claims that is being experienced across the industry.
Effects on the industry value chain
Many observers are asking how this would affect the various links in the value chain of the industry. In particular, a question has arisen as to whether or not independent underwriting managers will be able to maintain their independence and relevance given all the chaos that is going on around them.
There is no doubt that underwriting managers have been affected by the changes in regulation and that various financial and other benefits that they used to enjoy prior to January 2013 have been reduced. They can no longer charge intermediary fees, or add onto the gross premium in any way and the opportunity to interact directly with policyholders is extremely limited.
However, many underwriting managers concentrate only on one kind of insurance business. These managers would not necessarily be exposed to the general insurance market or to the specific categories of business in which claims experience is poor. Of course, this is not true of generalist underwriting managers or those which deal specifically with motor insurance, which are likely to have been affected as badly as insurers.
Growing profit during times of pain
It is not necessarily the case that these generalists would experience the same trauma as insurers. Both specialist and generalist underwriting managers operate as independent businesses and fulfil the important binder functions of determining premiums and entering into, varying and renewing policies.
Underwriting managers are also allowed to continue earning a share of profits in terms of the new Binder Regulations. This means that underwriting managers who maintained sound underwriting and claims settlement practices, and which had portfolios that were unaffected by the weather catastrophes, were able to grow profits at a time when internal divisions of insurers were generally experiencing pain.
That is no to say that the absorption of underwriting managers into insurers’ internal divisions does not also bring benefits. There are sound strategic reasons for this absorption and the skills of underwriting managers can often be deployed more efficiently in such a model. Access to actuarial, marketing, legal and reinsurance services is also often enhanced in this model
One size does not fit all
There is clearly no longer a one-size-fits-all solution to the question of how insurers should deal with underwriting managers. It is important for insurers to be flexible and to be able to accommodate a number of business models to ensure that they are able to spread their risks adequately, over different portfolios and classes of business. Such flexibility will allow underwriting managers to operate independently where it makes sense, such as in cases where niche expertise and the ability to operate unaffected by what might be happening in the rest of the principal insurer’s business is important.
Underwriting managers most certainly have a bright future in today’s short-term insurance market. However, there is a responsibility on these managers and on insurers to ensure that all options in respect of operating models are explored so that the best possible model can be chosen. This requires flexibility on the part of underwriting managers and insurers and a clear focus on what is best for the policyholder and for the business.
