Short-term insurers maintain momentum through third quarter
As the year draws to a close it seems as good a time as ever to take a quick look at the short-term insurance industry. When we last commented on the sector we observed that insurers were on the front foot thanks to an 8.4% underwriting margin through the first half of 2011. Have they kept the momentum through the third quarter? There’s no better way to answer this question than to study the Financial Services Board (FSB) Report on results of the short-term industry to 30 September 2011, as distributed with the South African Insurance Association (SAIA) November 2011 newsletter. As always the report is dividend into categories including typical insurers, cell captive insurers, captive insurers, niche insurers and re-insurers. We will focus on the main categories in this list.
A 12.9% increase in typical insurer net premium
Typical insurers are the dominant category in the local insurance market. As at 30 September 2011 there are 30 insurers that fit the “typical” description: “Those insurers who offer most types of policies to, mostly, the general public”. Net premiums in this category surged from R30.914 billion in the first three quarters of 2010 to R34.915 billion this year – a 12.9% increase. Typical insurers benefited from a 20% surge in underwriting profit, from R2.690 billion to R3.219 billion for the three quarters under review. The impressive profit performance can be ascribed to aggressive claims management with the result claims as a percentage of net premiums earned has reduced to just 58%. This number has been pegged above 60% in each of the past five years!
A graph of insurers’ results as a percentage of net premiums, going back as far as 1996, confirms the profitable outlook for the sector. For typical insurers the underwriting profit has improved from just 4% in the 2009 calendar year to 9% for the first three quarters of 2011. Operating margins climbed from 12% to 15% over the same period. Despite these solid performances eight of the 30 typical insurers reported an underwriting loss for the first nine months of 2011 and six an operating loss.
Statutory surplus asset ratios are an indication of the financial strength of the 30 typical insurers. According to the FSB the bulk of typical insurers (23) boast statutory solvency ratios in excess of 30%. There are two insurers in the 15% to 25% bracket and five in the 25% to 30% range. Overall the typical insurers remain in good financial health.
So-called cell captives come unglued
Cell captive insurers are described as “those insurers who offer insurance structures on a cell ownership basis for first and third party cell owners…” Net premiums written in this sector of the market have increased every full-year going back to 2006. But this segment of the market suffered a setback in the Q3 2011. Although net premiums to 30 September 2011 beat the comparable 2010 period by 11.68% (from R4.955 billion to R5.534 billion), the section’s underwriting profit slumped from R567 million to an R11 million loss. There is not enough detail in the report to draw any conclusions and we will have to wait for the impact to reflect on the full year results before commenting further.
The underwriting and operating results show a sector in steep decline. Operating results as a percentage of net written premiums slumped to just 8% for the nine months (versus 26% at the end of quarter two) and the underwriting result dipped below zero (-0.2%) for the first time since 2003! Two of the 10 cell captives reported an underwriting loss and one an operational loss for the period under review. All of the cell captive insurers reported statutory solvency ratios of 25% or better, with four in the 100%-plus bracket.
Niche insurers buck the trend
A quick look at the top line result for niche insurers – those insurers who offer specialised cover to certain niche markets – suggests this sub-sector will struggle to match its 2010 full year. Net premiums received for the first nine months of 2011 came in at R5.608 billion versus R5.610 billion in 2010. But the “flat” new business had little effect on the bottom line. A massive improvement in claims as a percentage of earned premiums, from 45% to 37%, resulted in underwriting profit nearly doubling from R850 million to R1.667 billion!
The niche insurers are the only category where both underwriting and operating results as a percentage of net premiums exhibit an upward trend. These numbers came in at 30% and 41% respectively compared to the 16% and 35% achieved for full-year 2010. Seven of the 29 niche insurers reported underwriting losses to Q3 2011 and five operational losses. Solvency ratios, meanwhile, are the most scattered of all the categories. Even so, an impressive 14 insurers boast solvency ratios of 100% or better!
Solid industry performance
Overall the short-term insurers are on track for a solid full year 2011. The ongoing concerns over underwriting margins among typical insurers seem to have been addressed for now. And aside from the hiccup in the cell-captive space it seems most insurer categories will match or better their 2010 performances.
Editor’s thoughts: There are many ways to get a feel for a particular industry. One way is to consider the numbers, as we’ve done today. Another is to solicit feedback from the proverbial trenches… Based on your business experiences would you say the short-term insurance industry is on solid footing year to date 2011? Please add your comment below, or send it to [email protected]
