Direct model trumps traditional insurer profits
The South African short-term insurance industry is continually evolving. Although claims management remains a critical part of the overall insurer business model the recent trend is to allocate more resource to the risk management process. This is one of
It seems local insurers enjoyed a profitable 2011 despite ongoing global economic woes. With the threats posed by slow GDP growth and financial system liquidity having largely worked through the system, the obstacle to ongoing performance excellence is from an unexpected source. PwC Financial Services Leader, Tom Winterboer, observes: “The greatest challenge currently facing the industry is a raft of proposed new legislation governing solvency and business practices, including Solvency Assessment and Management (SAM), binder agreements and micro-insurance legislation.” He said the expanding regulatory universe would have both financial and administrative implications for the sector. How did the country’s “big four” short-term insurers perform last year? A sensible starting point is to determine how much business they have on their books.
Premiums track inflation higher
At 31 December 2011 the four short-term insurers boasted R36.6 billion in gross written premiums (GWP), a 5% improvement over the previous year. Ilse French, Short-term Insurance and Investment Management Leader at PwC singled out Santam as the star performer in this regard. The group, with 22% of the short-term market at present, reported a solid 12% increase in GWP for the year. Operating profits improved across the board thanks to a strong combined underwriting margin across the four insurers of 9.1% (versus 6.4% in 2010). But things get interesting when you split out the numbers to exclude the country’s best-recognised direct insurance brand.
We will begin with the claims ratio – the percentage of premium paid out by an insurer to settle claims. Over the past three years the percentage paid out to the insured (by the four insurers surveyed) has decreased significantly, from 72.8% in 2009 to just 61.9% today. If we exclude Outsurance from this calculation the remaining three insurers report a claims ratio of 64.6%! It seems the direct insurer pays out considerably less than its traditional broker-based peers. The experts say this is due to improved risk management (underwriting), but it could just as easily be due to tougher claims settlement policies or higher excesses charged. Another benefit of the direct distribution model is that acquisition costs are kept in check. The acquisition cost for the big four came in at 11.3% in the latest year, versus 13.6% if Outsurance’s numbers are excluded.
This trend persists when putting the underwriting margin under the microscope. All insurers in the survey achieved 9.1% (already mentioned) versus just 6.3% without Outsurance, suggesting that the direct insurer boasts an underwriting margin somewhere in the region of 20%! The bottom line is that Outsurance pays out less of its collected premium (claims ratio) – spends less on acquisition – and generates more than three times the industry underwriting margin. This revelation explains why it is the darling in the RMB Holdings stable – and why the traditional broker-based insurers have so keenly entered the direct space.
Prospects for 2012
PwC reports invested assets for the short-term insurers of R28.6 billion, on which R1.6 billion in income was generated through 2011. The return on average invested assets was 6.2%, slightly better than inflation, and slightly better than the 5.1% achieved by long-term insurers. It seems many of the country’s insurers (both long and short) have de-risked their balance sheets by moving out of equities and into cash and bond investments. This trend will accelerate as the January 2014 SAM implementation date looms, because the new regulation introduces stricter capital requirements for equity investments.
Aside from regulation the biggest challenge to short-term insurers will be the struggling consumer. We have often mentioned the impact of administered price hikes (typically above inflation) on household budgets – and by this Wednesday (4 April 2012) each and every potential short-term insurance client will be paying up to 71c per litre more for fuel! The average household will have little in the kitty for grudge insurance purchases once this increase passes through the economy.
“Premium growth will be under pressure this year due to inflationary pressures in the economy, the regulatory examinations affecting intermediaries, the current soft short-term insurance cycle as well as continued economic uncertainty,” concludes Winterboer. These pressures will force insures to cut costs by further limiting their claims payouts (by more aggressive risk management and claims settlement practices) as well as seeking out alternative distribution channels in the hunt for new business. Aside from the continued foray into the direct space PwC expects an increase in the number of insurers pursuing affinity partners and expanding their businesses into Africa, India and China.
Editor’s thoughts: The country’s major broker-based insurers entered the direct insurance market some time ago. Santam’s MiWay and Mutual & Federal’s iWYZE already boast large numbers of policyholders. Has your brokerage suffered as clients migrate to the direct short-term model – and do you think the introduction of affinity business partners will impact your business further? Add your comment below, or send it to [email protected]
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