Stick with the strong ones

The key themes dominating the general insurance industry, as we near the end of 2013, are low economic growth, low interest rates and a weakening rand. Santam, the country’s leading short-term insurer, is also concerned with the impact of increased regulation and skills scarcity on the broader insurance market. To trade profitably, insurers will have to meet these challenges without losing sight of rising catastrophe risk, and risks related to environmental, social and governance concerns.

Against this backdrop, it is no surprise that 14 of the 32 typical insurers reported an underwriting loss in Q2 2013. The only way for insurers to survive in a climate where investment returns are not high enough to ease the underwriting situation, is for them to take difficult decisions on pricing. Unfortunately there are market forces at play that make it difficult for them to match insurance premiums with risk.

A number of new entrants to the market are dropping their premiums to unsustainable levels in an attempt to bolster their market shares. This raises additional questions: are there too many short-term insurers battling for market share given the size of South Africa’s short-term insurance market? And can the soft rate cycle be explained away by rising competition?

"While it is possible that today’s soft rates are the result of competition, it is equally likely that the situation has arisen due to the industry’s extreme focus on premium (price), as opposed to quality cover,” says Peter Atkinson, National Technical Manager at the Financial Intermediaries Association of Southern Africa (FIA).

 

He adds that insurers have been keeping premiums artificially low in response to aggressive marketing by the direct players, as well as the economic downturn. Whatever the cause, it seems logical that there will have to be an upward adjustment of rates at some stage going forward.

Could the industry consolidate through mergers and acquisitions as a result? "Although mergers and acquisitions are inevitable, we do not expect a major contraction in the number of market competitors,” says Atkinson. "Each merger or acquisition seems to be offset by new entrants to the market, thus maintaining good competition."

Barry Taylor, Chair of the Short-Term Insurance Executive Committee at the FIA, holds similar views. He says that the current soft market is a result of excess capacity and that the tough times will sort the men from the boys. "Existing players are looking to grow their books (market share) while the new entrants, with plenty of underwriting capacity, are looking for their slice of that pie,” he says.

Taylor expects consolidation will be an inevitable consequence of shareholder demands on insurers to trade more profitably.

What should short-term brokers make of recent developments? The insurance cycle applies to the greater insurance market, in particular classes that cover fire, storm and catastrophe losses. And although we are experiencing a soft insurance cycle, the situation in personal lines: motor is quite different. This category of short-term insurance seems to be in a long term downward trend rather than a cycle.

"Insurers should continue to support the broker channel by innovation and cost effective products and excellent service delivery, embracing the new age of communication,” concludes Taylor. "Brokers will naturally gravitate to insurers that provide good service to them and their clients.”