Short term Insurance claim trends and unforeseen risks

By nature, the short term insurance industry is a volatile one. To highlight the changes in the industry, would be to highlight the overall challenges that have affected the financial services industry as a whole.

2016 was a low risk year for the short term industry, in terms of catastrophic weather to date; namely earthquakes, tornados or other extreme weather conditions that South Africa has been fortunate enough not to experience on a regular basis. Whether it be unforeseen risks to your business such as heavy rainfall in KZN or erratic thunder/ lightning storms in Gauteng, weather conditions do in fact affect the short term industry directly. This, it is key to plan finances accordingly if you run a business or brokerage. The stop-gap here is to make sure that all eventualities are factored into insurance coverage.

For the industry, the implementation of Twin Peaks and the (Retail Distribution Review) RDR brought great waves. Twin peaks has allowed industry regulatory bodies to further focus on increased transparency and investigation into regulations. Although RDR’s details have been unclear, causing some uncertainty in the industry around South Africa’s short term distribution networks, its role out will be sooner than later. Insurers and financial institutions await the role out of RDR with baited breath.

Another trend in the industry this year was the increase in macro-economic uncertainties.

The rising ambiguity of the state of the economy – due to economic and political shifts in the country – has inevitably put pressure on households’ disposable income and the decline of the consumers’ purchasing power, which has led to the low sales of short term insurance policies.

Related to a decrease in consumer purchasing power, we have seen an increase in policy lapses in the short term industry, which could flow into 2017. Consumers focus on cutting back on costs, and grudge-purchases such as short term policies are the first to go from people’s budgets. Another contributing factor to this decline, would be the drop in new vehicle sales, which has a ripple effect with consumers, who can’t afford to purchase vehicles. According to the Momentum Unisa Household Wealth Index for Q2, the gap between what households are required to repay (debt instalments) and what they actually repay has been on an increasing trend since 2012 - and has increased even more in Q1 2016.

Due to the low confidence levels in our economy currently, South Africans have become more cautious with their spending patterns. This will directly affect the productivity of the short term industry, who rely on customer interaction to sell policies and grow their businesses.

It is estimated that 30% of insurance claims are fraudulent –this is according to the South African Insurance Crime Bureau. Further findings reveal that South Africa has recently been seeing a huge increase in fraudulent insurance claims. In 2014, over 7 000 fraudulent insurance claims were detected as fraudulent, altogether reaching an estimate of over R400 million. A 30% increase from 2013; forcing insurance companies to enforce stricter payout measures.

2017 looks to be an interesting year for the short term insurance industry. With a possible credit downgrade looming, advancements in RDR and Twin Peaks, an increase in severe weather patterns, and an increase in fraudulent claims, South Africa’s financial services industry is set to see incredible opportunities and challenges.