Will soaring repossessions hurt short-term insurance?
Recent newspaper reports show that around 4 000 vehicles are repossessed in South Africa each month. This means that one vehicle is repossessed for every 10 vehicles sold. We suspect this trend will appreciate in coming months as many consumers are caught 'flatfooted' by the speed and severity of interest rate hikes.
Rising repossessions are a function of inflation and affordability. To find out more about affordability we took a look at WesBank's independently compiled Vehicle Sales Confidence Indicator. The quarterly report provides a useful assessment of confidence in vehicle sales along with an interesting assessment of South Africa's mobility costs.
Mobility costs
The latest report (published in April 2008) determined that the average total monthly mobility cost in Q1 2008 was R5, 374.52 – a whopping 43.64% higher than Q1 2004. It is clear that mobility costs are increasing far in excess of inflation. The statistic that should have short-term insurers hanging their heads in shame is that the insurance premium portion of monthly mobility costs has shot up almost 150% over the same period. Insurance premiums at an average of R1 143.00 per month account for 21% of today's total mobility spend. Even petrol costs couldn't match this increase, rising by 96% since 2004.
Impact on insurance
The sharp increase in repossessions and insolvencies has an immediate impact on motor dealerships and vehicle finance houses. But it's not as easy to work out how this trend will affect the short-term industry. As far as FAnews is concerned there are two obvious problems. The first is in policy lapses. Most insurers will agree that vehicle owners simply stop paying insurance once the vehicle has been removed from the client's premises. “Clients whose cars are repossessed no longer need insurance, therefore we lose a few clients,” says Lourens Joubert, Head of Corporate and Commercial Underwriting at Santam. In reality many of these consumers would have stopped making their monthly premiums payments long before the repossession 'D-Day'.
Increase in fraud
The second problem is “the obvious issue of fraudulent claims being submitted,” says Trevor Devitt of OUTsurance. He says insurers may notice an increase in cases where claims are submitted for 'stolen' cars which ultimately turn out to have been repossessed. A major problem facing the short-term insurers is how to relate trends in their industry to general economic trends. In most cases it's impossible to ascribe a policy lapse or fraudulent claim to an instance of economic hardship such as repossession.
Higher premiums
While the link between repossessions and short-term insurance is difficult to prove there's little doubt that insolvencies and repossessions are a direct function of increasing interest rates. Each successive hike in the prime lending rate means the consumer has to find more cash to service a larger monthly bond and hire purchase repayment. And with nine successive rate hikes in the last 22 months South African consumers are nearing the end of their tethers. Insurers agree that high interest rates impact their business. “Consumers' credit commitments may impact their premium payments and policy longevity – so the prospect of increased premium defaults and lapses exists,” says Devitt. A second-round effect is the increase in costs in the general economy which insurers must ultimately pass on to their clients through higher premiums.
It's difficult to draw a direct correlation between vehicle repossessions and the performance of the short-term insurance industry. What we can say is that policy lapses and fraud will increase as consumers come under more pressure.
