Motor books under pressure

A clear understanding of the numerous factors that have contributed to the increase in motor insurance premiums over the past few years will help brokers manage client expectations when the inevitable premium increases are implemented.

Given that the general motor book ran badly again during 2008, the increase in motor premiums will continue to accelerate. "The losses reflected by most motor underwriters will necessitate a large general increase in premiums, perhaps as high as 25%," comments Mark Stone, client manager at Centriq Insurance.

"Although it is apparent that there needs to be some upward adjustment in motor rates in general, increased competition has kept motor premiums at levels that are not always risk-related," says Andrew Lilley, Chief Operating Officer of CIB. "This ultimately has a negative impact on the profitability of a motor book, especially in light of the increasing costs within the motor repair industry."

Claim causes

Between 85-90% of motor claims are accident related. "Although there is a perception that vehicle thefts are high or on the increase, we have not seen a significant change in these numbers over the last few years," says CIB. "What we have noticed is that the type of theft has changed. For example in the past more vehicles were stolen whilst unattended, however, we have seen a shift towards vehicles being hi-jacked or stolen whilst in operation. An explanation for this could be that advancements in standard motor security have made it more difficult for vehicles to be stolen when unattended."

Repair costs

Another factor contributing to the increase in motor insurance premiums is the fact that parts on newer vehicles are vastly more expensive than older vehicles. Stone says the majority of these increases came through in the last quarter, with the trend still continuing as new technology on new cars continues to be more expensive to repair. "Far more lower-level vehicles are imported and the parts are therefore more expensive," says Stone. He also notes that some of the newer manufacturers may not have the repair infrastructure which will result in increased repair costs.

"Not only has the cost of the parts themselves contributed to the pressure, but due to the increase, dealers as well as repairers are holding less stock which means that they now need to be ordered in," explains CIB. "This means an increase in the average repair time, resulting in an increase in the average number of days that clients require a car hire, which ultimately translates to an increase in the average cost per claim."

Increase in crime

The global recession will furthermore continue to result in an increased demand for second hand parts and therefore an increase in thefts. "We also expect fraud by repairers to keep margins up, while the decrease in new car sales will result in an increase in the cost of parts to keep the manufactures margins up," comments Stone.

Escalating accident rate

Stone points out that the increase in the number of inexperienced drivers has resulted in increasing incidents of collisions. The number of unlicensed drivers remains high, while the number of vehicles on South African roads continues to rise. "The state of the roads continues to deteriorate with higher traffic volumes and construction, not to mention out-of-order traffic lights and a lack of policing," he says. "Furthermore, work pressures are increasing and people are working longer hours, are more stressed and in a greater hurry. All this contributes to fatigue, reckless driving and road rage."

Uninsured drivers

CIB notes that the number of uninsured vehicles on the road is constantly increasing. "This is largely due to the cost of insurance as well as the increasing number of 'uninsurable' individuals, who often do not have the means to pay for the damages to their vehicle, let alone those they caused to a third party.

Insurers for the "innocent" party have to institute a recovery process in an attempt to recover the costs from the uninsured driver - requiring time, money, and increased numbers of staff to deal with a more lengthy process. Despite these efforts, the uninsured drivers are not always able to pay, leaving insurers with those losses.

Industry developments

Non niche underwriters continue to decline unsupported motor business, and an increased return on equity expectations from re-insurers means increased cost of capacity which also results in increased premiums."Then there is the increased regulation of insurers resulting in increased internal costs, along with the fact that investment markets are very volatile and risky," notes Stone. "Due to current market conditions, insurers are investing more in cash instruments and therefore realise lower returns than previously. This means they require increased underwriting returns."

Trends

CIB says that the trend is definitely moving towards a more risk or cost related method of rating as opposed to the standard rates that of the past few years. "Insurers are taking a more proactive approach in the management of their motor books by rating more scientifically as well as closer management of the salvage of the written off vehicles and the recovery process."