A snapshot of the short-term insurance industry
In their August 2008 Bulletin the South African Insurance Association (SAIA) provides the latest results from the short-term insurance industry. These figures are based on the “combined and un-audited statistics (net after insurance) for typical, cell captive and niche insurers for the calendar years 2003 to 2007” and include the first six months of 2008. FAnews Online took a quick look at the results to see how well the industry has weathered the economic storm thus far.
Net premiums 8.7% higher for the comparable period
We’ll begin with the typical insurer, defined as an insurer that offers most types of policies to (for the most part) the general public. Despite difficult conditions insurers in this category managed a moderate increase in net premiums for the first half of 2008. Net premiums reached 17.953bn compared to R16.513bn to June 2007. Insurers have now managed to increase net premium in every calendar year since 2003. But increased premium doesn’t guarantee profitability. To assess performance we need to consider the operating and underwriting results.
SAIA provides a 14-year graph comparing operating and underwriting results as a percentage of the net premium. Each of these measures has been on a slide since the beginning of 2004. In that year operating results as a percentage of premiums stood at 18% with the underwriting margin at a respectable 12%... As things stand today (at the end of June 2008) operating margins have declined to 13% and underwriting margins to just 5%.
Things have been worse though. Between 1998 and 2000 the underwriting margin for typical insurers was negative while in 2001 and 2002 the underwriting margin was at 1% and 2% respectively. The best the industry could manage in the eight years starting 1994 was 3%!
Seven of 23 typical insurers report an underwriting loss
One of the alarming statistics quoted in the report was the number of typical insurance companies reporting underwriting losses. For the first quarter of 2008 eight (out of 23) weighted in with an underwriting loss. Although only seven of the 23 insurers report the same condition for the half-year there’s still cause for concern. The trend confirms that short-term insurers are feeling the pinch. The report also summarises how typical insurance companies are fairing where it comes to statutory solvency requirements. The latest table shows that only three insurers boast solvency ratios in excess of 100% with one company slipping below 15%!
A similar survey of results is compiled for cell captives and niche insurers. Cell captives are defined as “insurers who offer insurance structures on a cell ownership basis for first party and third party cell owners.” Niche insurers are defined as “those insurers who offer mostly specialised cover in certain niche markets.”
The 10 operational cell captive insurers have recovered slightly in the latest period. Premiums are on the rise and both the underwriting and operating results as a percentage of net premiums have improved. The underwriting margin in this sector has risen from 5% in 2007 to 10% in the first half of 2008. And only one of the cell captive insurers has reported an underwriting loss in the period. When investment income is thrown into the mix the picture is less impressive. Because of the dismal stock market returns over the last 12 months the operating result has fallen from 62% to 43% while the underwriting result has fallen from 13% to 5%. And on this measure half of captive insurers report an underwriting loss.
Can niche insurers convert higher margins?
In the niche insurer category, net premiums in 2007 stood at R3.872bn, a 17% improvement on 2006. In the first half of 2008 net premium of R2.263bn showed 16.9% growth over the first six months of 2007. The underwriting margin across this category has subsided slightly from 28% in the first half of 2007 to 27% in 2008. But despite this 10 of 33 operational niche insurers reported underwriting losses.
What is clear from this report is that while net premiums are on the rise – the cost of underwriting the risks covered is on the rise too. We can expect profit margins in the short-term insurance industry (both operating and underwriting) to remain under pressure for the remainder of this year.
Editor’s thoughts:
This un-audited survey, which covers three segments of the short-term insurance industry, confirms that the short-term underwriting margin is in a downward trend. Do you think the short-term insurance industry is in danger of experiencing a period of negative underwriting margins last seen over the three years beginning 1998? Add your comment below, or send to [email protected]
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