Consumers lose out as short-term insurance evolves
What happens when your short-term insurance client experiences a run of bad luck? A broker conducting business in the Eastern Cape learnt the hard way that insurers don’t tolerate repeat claims. The insurance company advised him to find alternative cover for his clients after a string of natural disasters. In other words, the insurer took a ‘one-sided’ decision to terminate insurance cover to clear unprofitable business from its books. We asked the country’s leading insurers how they applied such decisions in practice, and whether they followed any internal guidelines before terminating cover.
“We prefer to actively address reasons which cause an adverse loss history and unsatisfactory claims ratio,” says Steve Legge, General Manager: Business Development and Sales at Mutual & Federal. M&F would implement corrective measures to improve claims ratios performance rather than termination. “If there is no willingness to address the causes of a poor loss history, then termination is more likely,” he continues. “Santam has guidelines that are used internally for both personal and commercial clients where an investigation into each client’s history is done prior to giving notice of cancellation,” adds Shehnaz Somers, head of Personal Line Underwriting at Santam.
Ways to stay insured
Santam considers whether losses were as a result of a single large claim or a number of small claims (attrition). The group also considers corrective underwriting measures before cancelling a policy, such as increasing excesses, excluding certain covers, proposing additional risk management measures (extending alarms systems, installing tracking devices on vehicles) or having the client accept more of the risk. The industry refers to the latter step, a process whereby a certain amount of claim is first paid by the insured before the insurance policy responds, as ‘aggregate excess’.
Dennis Burton, Head of Distribution and Sales at Zurich Insurance Company South Africa says their “aim is to make it as easy as possible for customers to conduct business with them.” As such, all Zurich’s policies are a partnership between the customer and the insurer. “Obviously, insurers cannot control customers’ behaviour, so Zurich has developed a procedure where each case is treated on its merits,” says Burton. Before cancelling a policy Zurich will consider customer behaviour, period insured, type of losses and actions taken to minimise the losses. “Zurich is reluctant to terminate customers’ policies and the decision to cancel or not renew business is not taken lightly,” says Burton. “Zurich adopts a ‘fix’ rather than ‘cancel’ approach, but this requires a high level of co-operation from both the customer and broker,” he says.
On closer inspection the profit motive is a strong driver behind termination decisions.
Insurance companies are in business to make money. Operating expenses such as reinsurance costs, claims costs, operating costs, administration costs and the payment of commissions to intermediaries, must be recovered from insurance premiums. “The objective is to be left with a profit on underwriting the business,” comments Legge. If the claims ratio becomes excessive then the company fails its overarching profit objective. Zurich’s view is similar. Insurers are in business to deliver shareholder value and profit, which is done through risk selection and pricing. How does an insurer decide when to throw an insured (or book of insured) from its books?
The evolution of the ‘pooled risk’ concept
Legge observes that competitive forces in the industry mean insurers apply different criteria. “The range in the industry is typically around a few points of 65%, but there is no set figure,” says Legge. Acceptable claims ratios vary depending on the nature of an individual’s claims, or whether an insurer considers performance over one or three years, for example. “The mix of business in the client’s account or overall portfolio also affects what is an acceptable loss ratio,” he says.
Next we asked whether terminating policies with high claims ratios impacted on the sustainability of the short-term insurance pool? After all, the concept of insurance is to cover the unlucky (victims of theft / accident and acts of God) out of a large pool of paid premium. Somers explains: “The cross-subsidisation model is how insurance business was conducted traditionally. But the sustainability and competitiveness of this model is now threatened due to the fact that insurers who wish to target only profitable clients can attract them by charging a cheaper premium, since they are not subsidising the high claims of some clients with the low claims of other clients.”
“The experience of the insurance industry is that cancelling policies with high loss ratios is actually to the benefit of the insurance pool,” continues Somers. He says the remaining members of the pool end up contributing less provided those clients who claim frequently are removed. Frequent claimers erode the pool to the extent there may be too little money left to pay for catastrophic losses. Agreed – but what do the heavy claimers do? It seems the short-term industry is evolving to the detriment of its clients, creating an environment where certain undesirables (often through no fault of their own) are forced to self-insure! Clients shouldn’t lose hope. Santam’s risk management philosophy is a way of helping clients to avoid reaching the point of self-insurance. In partnership with brokers and clients the company tries to assist the market in taking preventative measures to manage risk, which will in turn assist with reducing the likelihood of claims. Reduced claims will lead to an improved risk profile for clients and lower insurance rates.
Short-term insurance is not a ‘right’
At the face of it a decision to terminate a short-term policy infringes an individual’s ‘right’ to insurance cover. Does the ‘right’ to insurance cover exist? M&F says there are various measures in place, such as the Policyholder Protection Rules, which regulate how thetermination of policies should take place, though these measures cannot be seen as a right or entitlement to insurance cover.According to Santam, rights are legal, social or moral entitlements, whereas insurance is based on the law of contract. Every party to this contract has the right to enter into a contract with partners of their choice. “Santam bases its decision to insure an individual’s assets on a multitude of factors which are particular to the nature of the short-term insurance business and which also take into account the individual’s risk profile,” says Somers.
The term ‘one-sided’ doesn’t apply
The responses we received from the short-term insurers indicate they’re not in favour of using the term ‘one-sided’ when discussing insurance policy terminations. According to Burton: “An insurance contract is not one-sided, as the insured party can give notice at any time. Insurance in South Africa is a choice, which includes an offer and acceptance, by both parties.”
What should you do if your policy is terminated? “If a client acts as if he is not insured, protects his risk appropriately and can show that there are good risk control and mitigation measures in place, there should not be a reason why insurance cannot be obtained,” says Legge.
Editor’s thoughts: The ability of insurers to cancel short-term insurance policies at the first sign of escalating claims is cause for concern in a country where house breakings and vehicle theft and hijacking are at unprecedented levels. Do you believe the short-term insurers are playing fair when it comes to policy terminations? We’d love you to share your experiences by commenting below, or contacting me at [email protected]
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