Nowhere to hide from a hard market cycle
01 August 2013 | Magazine Archives FAnews & FAnuus | Short Term | Drew Schnehage, Aquarius Underwriting Managers, Lourens Joubert, Santam
The glory days of soft rates in the local insurance market are coming to an end as the South African economy comes under pressure from high global oil prices and a slow down in global economic growth.
Speaking to the FAnews, Aquarius Underwriting Managers CEO Drew Schnehage says that global economic outlook as well as other influencing factors is driving this.
The biggest factor is the fact that the world is in the process of rebuilding economies which were significantly affected by the 2009 global financial crisis, countries such as the US and China are experiencing slower growth which in essence affects the rest of the world.
"Other factors such as climate change and political instability also have a role to play. But one thing is for sure, a hard rates cycle is coming so a certain amount of adaptation needs to take place,” says Schnehage.
Nowhere to hide
The effects of a hard cycle will have a particular impact on companies in the industry which often means that there will be nowhere to hide.
Schnehage points out that companies within the industry will have to go back to basics and implement the rate increases in all aspects of their business. "If you are not all in with the rates increases then you must be all out. There is nowhere to hide from this. Companies will need to implement the rate increases in their rates, extent of cover, excess and underwriting procedures,” says Schnehage.
She adds that the effects on the industry will be compounded if the whole market doesn’t form a united front in the way that they deal with this.
The fact that the market will be going into a hard rate cycle for the first time in eight years will mean that a number of companies will be experiencing it for the first time. "Over the past eight years there have been ten new entrants into the liability market and three new entrants into the direct, personal lines, market. And these companies don’t know how to deal with different trading conditions. So while the experienced players in the market implement necessary changes, some players stick to soft rates. This means that consumers who are under financial pressure will shop around for the best deal.”
However, this provides a false sense of security. While certain companies are sticking to their soft rates, the market is changing and they have to make significant changes in other areas to make up for the fact that their rates are still dangerously low. "The effects of this are that clients won’t get paid out for certain claims or will only get basic cover without the knowledge that they will have to pay extra for certain cover such as hail and fire to thatch roofs.”
Shared outlook
One of South Africa’s oldest insurers, Santam shares this outlook. "The reality is that short-term insurance premiums have over the past few years, in many cases, remained flat or largely lagged inflation despite the cost pressures and risks insurers face. Even with high claims volumes, Santam remains focused on being there when clients need them most,” says Lourens Joubert, Head of Commercial Lines at Santam.
He adds that last year, Santam paid out 99% (more than 600 000 claims valued at over R11 billion) of claims submitted in 2012. With Rand devaluation peaking at over 20% and with two thirds of motor losses collision-related, the impact on replacement value for imported parts, electronics and machinery and equipment exposes clients to underinsurance and insurers to significant increased risk.
In addition, the number of large fire claims experienced during 2012 was significantly higher than annual averages.
"We have to factor in that risks on the ground remain high and these factors must reflect in pricing if insurers are to be able meet their obligations to clients,” says Lourens.
