Current economic influences on the motor book

Insurers must navigate and manage a myriad of unpredictable influencing factors which have a significant bearing on costing insurance appropriately. FAnews spoke to Hollard General Manager: Procurement, Facilities & Loss Ratio Projects, Anton Botha to find out more about how the depreciating Rand is affecting or not affecting motor books.

Policy rates have actually been gradually increasing in recent months. However, the depreciating Rand is not the only contributing factor to rates increases. Higher inflation, bad weather and the deterioration of infrastructure, also play a role in policy rates.

The effect of the weakening currency on the motor industry

The weakening of the Rand will have an effect on the local motor industry, particularly from an insurance perspective. One of the biggest effects is the increase in parts prices which increases vehicle repairs. Hollard has experienced a 5% increase in write-off frequency, but this is attributable to various factors and certainly not limited only to parts price increases.

Hollard’s historical data indicates that there is a significant correlation between the South African consumer price index and parts prices, more so than the correlation with other major currencies.

Further, the timing and total direct impact of weakening currency may depend on:

• The Rand depreciation against the countries where the parts/paint/vehicles are being manufactured for make and model of vehicle in question.
• The production capacity of the manufacturer and the size of the stockpiles of parts/paint/vehicles it holds. The general rule of thumb is that the larger the stockpile, the greater the delay in the effect of a change in exchange rates.
• Supply and demand of alternative/second hand parts through alternative part manufacturers and save a car campaigns.

Over the past 18 months or so, there has been a big drive towards sourcing alternative/used parts to repair vehicles that are no longer under the manufacturer’s warranty.
However, these are not the only contributing factors. It is also worth bearing in mind that in terms of cost of repairs, this pertains to severity of the damage to the car. Issues of consideration when scrapping cars.

There are a number of considerations that Hollard takes into account when deciding on writing off a vehicle. These include, but are not limited to:

• An insurer’s loss ratio is made up of 2 key elements namely frequency & severity.
• An increase in the one may be off-set by a reduction in the other and vice-versa.
• An increase in vehicle write-offs may be attributable to a number of factors unrelated to just prevailing parts prices. For example, changes in rules that dictate the threshold at which certain vehicles get written off.
• The enhanced features such as airbags, more electronic components which cannot be replaced across a very broad spectrum of vehicles have also contributed to the costs of repair and, as such, could impact on frequency of total loss.
• Exchange rate fluctuations also impact on new vehicle prices which curbs increased write-off’s due to more expensive parts. The increase in new vehicle prices, in turn, result in a slowdown of used vehicle depreciation with the same effect on the write-off experience
• Parts delays also sometimes result in vehicles been written off.

Fraud in the current economic climate

There are also concerns regarding fraud in the industry. Research shows a strong correlation between the incidence of fraudulent and inflated claims to tough economic times, and we can confirm that this still holds true in the current economic climate. That said, we are encouraged by the fact that vehicle thefts and car robberies have dropped to levels of almost 30% lower than five years ago.

This can be attributed, amongst others, to on-going efforts and initiatives by the South African Insurance Crime Bureau and South African Police Service.

The need for rate increases

As we have seen, there are a number of influencing factors which need to be taken into consideration when applying rates increases and motor vehicle write off’s. These need to be highlighted to policyholders so that they feel that these increases and write offs are in fact fair practice.