The fight for control is becoming a key battle in the insurance industry

The short-term insurance industry has been under pressure for the past two years, and the main pressure seems to be coming from the motor insurance sector. Weather claims, bad driving and yes, believe it or not, you, as a broker, unknowingly, have just become a suspect.

“The industry has two distribution models, direct and intermediated. The intermediated model is the model which is feeling the majority of this pressure. The industry needs to take a step back and ask who it is to blame for this,” says Gari Dombo, Managing Director of Alexander Forbes Insurance.

The key to the Big Data debate

Dombo believes that the industry has only itself to blame for the position that it finds itself in as he believes that within the data brokers hold, by virtue of having a mandate, lies the power to unlock the Big Data debate, which is key to risk management.

According to Dombo, the industry now realises the need to get this power back. There is a concerted effort on the part of insurers where they are asking how they can use data to their advantage and how they can get information back from brokers.

“The power that has been given to brokers has not been in check for a long time. The key issue for insurers going forward is to ask what new agreements they need to enter into with brokers. Insurers need to ask what it is that brokers can and cannot do, and insurers need to ask themselves what they need to do as the risk carriers,” continued Dombo.

The key factor that we are not putting into this equation is the client. Insurance primarily exists to serve the needs of the customer in the best possible manner. This has unfortunately not been the case over the last few years, which is one of the reasons why the Financial Services Board (FSB) has been implementing legislation to protect the public.

This has been a sore point for insurers. However, when pressed on the issue, Dombo admitted that the industry has created the legislative beast which is giving it so many sleepless nights.

Holding the industry at ransom

Dombo points out that the industry is also being held at ransom by a number of other issues.

The first issue is that of rising costs. South Africa is in a precarious position whereby there are more uninsured vehicles on the road than insured vehicles. When a person is involved in an accident and the insurer has to claim back from the other party, there is no guarantee of a successful recovery. The insurer has to bear the cost of this, which is passed onto the client.

The industry has been working towards compulsory third party insurance, but this needs to be done in such a way that is fair for everyone. It also needs to be done in such a way that the client cannot simply cancel the insurance. Dombo believes that the most logical way to do this is through the Road Accident Fund (RAF) where there will be an additional cost added to the fuel levy. Hopefully this will be finalised in the near future.

“To a large extent, the industry has been held at ransom by parts suppliers. However, there now are quality alternative parts available. There are also a number of underwriters who are asking motor industry bodies how the process around quality alternative parts can be handled to ensure that these parts carry the relevant guarantees. This was a major bugbear in the past with the automotive glass sector where insurers struggled with suppliers who held the industry at ransom. Now there are alternatives, and as long as these alternatives adhere to industry safety standards, they can be an option in the industry where a reduced cost can be passed down to the policyholder,” said Dombo.

More control lost?

Dombo added that the motor industry is the major contributor of claims in the short-term sector. This is a major contributing factor to high costs in the industry.

A major indicator of this is the average cost per claim. Insurers look at this and calculate premiums based on this indicator. If it increases, premiums increase. If it decreases, premiums decrease. Dombo pointed out that currently, the average cost of repair is between R15 000 and R20 000 per claim, but this does not necessarily mean that the severity of collisions are getting worse.

The South African motor industry has largely moved from a repair based industry to a replacement based industry. If a part or panel is damaged on the car, it will most probably be replaced before it is repaired. And as pointed out above, the industry has been held at ransom with regards to the price of parts. There may be some relief in sight as the Competition Commission is launching an investigation into possible price collusion in the motor spares industry. There has also been some movement in the industry to go back to basics to get the skills of repairing back into the industry, and with that, bringing down costs. One company, Repair Solutions, is embracing this and will hopefully help curb unnecessary costs with constantly replacing instead of repairing autobody parts.

However, there is another factor which may or may not be a contributor to insurers pricing factors. “Insurers do not have as much control over the value chain as they should have. We, as insurers need to see where we can assert our control on the value chain to decrease the average cost per claim. To a large extent, we have left this unchecked. Insurers are now increasingly pushing to make sure that they are in control of as much of the value chain as possible. This does not mean that you have to own a panel beater, you just have to know what is happening so that you can reduce your average cost per claim,” concluded Dombo.

Editor’s Thoughts:
If Dombo’s assessment of the industry is accurate, there is a lot more to the price war in the insurance industry than meets the eye. A lot of it has to do with insurers gaining more control in the industry. Do you feel that costs within the industry will stabilise once this is achieved? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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