Short-term insurance industry facing numerous challenges in 2007

South Africa's short-term insurers must cope with numerous challenges in 2007 arising from such trends as global warming, rising crime and replacement costs and shifting demographics. All of these factors have negative consequences and are forcing insurance companies to become increasingly dynamic and cost-conscious in order to continue to grow their profits successfully, according to Santam CE, Steffen Gilbert.

Glibert says one of the foremost challenges facing the short-term insurance industry this year is education and affordability of insurance products for entry-level consumers. "This sector suffers some of the most severe losses due to basic housing structures and dense living arrangements, yet lower income earners lack knowledge about insurance. And even though products like Santam's low-cost home insurance have been structured to ensure affordability, minimum premiums of R15 per month remain unaffordable to some.

"We aim to provide products that fit the varied requirements of all South Africans; the challenge is their development and ongoing viability," Gilbert stresses. "Santam's low cost home and household insurance is being piloted in Soweto and we plan to extend it to other areas in the coming months."

Meanwhile, changing weather patterns is a growing threat faced by both insurers and South Africas agricultural producers, the CE says.

"When weather-related catastrophes occur it results in a rate hike for insurers by their reinsurers, which is generally passed on to the consumer through insurance premiums," explains Gilbert. "Insurers like Santam are often able to absorb these costs, and, as with policyholders, if claims are low, reinsurers wont increase rates. The recent floods in the Eastern Cape made no impact on premiums for this reason.

"I have no doubt that global warming is going to have more of an impact on insurers and policyholders as time goes by. Insurers will need to absorb a larger portion of reinsurance costs to keep premiums affordable in the future, which may result in significant cost-cutting in order to remain profitable."

He points to the unusual snowfall and flooding seen over the winter, the magnitude of which bore testament to a localised change in weather patterns. Climatologists predict that the Southern and Eastern Cape will experience more frequent flooding, while the Western Cape is set to become drier.

"These are factors against which farmers will need to insure themselves and possibly adapt by introducing hardier variations of crops, new production techniques or even entirely new crops," Gilbert notes. "Santam, through Agri Risk Services (ARS), is in the process of applying a sophisticated crop growth simulation model to evaluate all variables particular to a farming area. This will help us to better understand the impact of global warming in order to provide better cover for our clients."

Santam also has innovative new insurance products that can assist livestock farmers manage production risk and the effect of climate change. Rangeland production can now be insured against fire and drought, added Gilbert.

Other serious challenges being faced by local insurers this year are rising crime and replacement costs, Gilbert reveals. According to claims data, there has been a recent upsurge in the incidence of crimes like car-jacking, and combined with vehicle price hikes, this leads to premium increases for policyholders.

Local car manufacturers and importers are reporting price hikes of 2-3%, mainly as a result of the weakening rand. As vehicles become more expensive to replace, insurance premiums are hiked.

"Many car owners are taking advantage of new and affordable microdot identification technology and tracking to prevent car theft, and in so doing, keeping their premiums down," Gilbert points out. "Although not all preventative measures will reduce monthly premiums, in the long-run they will keep premiums down by reducing claims.

"Also, if a car is stolen and replaced by an insurer, premiums will go up, whether or not it was due to policyholder negligence. So it makes sense to prevent thieves from targeting cars in the first place.

"Carjacking also seem to be increasing, therefore car owners must be even more vigilant while driving," Gilbert concludes.