The state of the short-term insurance industry
There’s no better way to get to grips with the short-term insurance industry than to reflect on the South African Insurance Association (SAIA) Special Report on Results in the Short-term Insurance Industry 2010. The latest report was published in the SAIA Bulletin, February 2011. Although the report contains un-audited numbers it provides a broad overview of performances among South African insurance operators going back six years, to 2005! Insurance results are presented under a number of sub-categories including typical insurers, cell captive insurers, captive insurers, niche insurers and re-insurers.
Typical insurers enjoy a “field” day through 2010
The first – and clearly most influential insurer category – is defined as “typical insurers”. These are the companies you and I deal with on a daily basis – those who offer most types of insurance policies to the general public. And this category of insurance has grown significantly over the past six years… Net premiums in the typical insurer sub-category topped R42.337 billion last year, up from R39.512 billion in 2009. Underwriting profit improved generously from R1.722 billion (2009) to R3.696 billion, while the combined underwriting and investment income profit impressed too, up from R4.741 billion (2009) to R6.331 billion.
It appears the overall profitability of typical insurers is on the rise. The measure of operating profit as a percentage of net premiums and the underwriting margin turned around after six consecutive declines. Operating profit margins, which include investment income, rebounded from 12% to 15% and underwriting margins steadied from 4% to 9%. We can use South Africa’s largest short-term insurer, Santam, as a proxy for this result. The group announced full year results to 31 December 2010 recently, and improved its underwriting margin from 3.5% to 8.5%! These solid profit performances meant only six of 29 typical insurers posting underwriting losses last year – with four going on to post operating losses.
An improvement in profitability usually hits the consumer hard. This fact is confirmed by the steep decline in claims as a percentage of earned premiums. This ratio came in at a miserly 61% last year, having “stuck” above 65% since 2006.
Cell captive insurers power ahead too
The cell captives, defined by SAIA as “those insurers who offer insurance structures on a cell ownership basis for first party and third party cell owners”, enjoyed a solid 2010 too. The 10 companies in this sub-category reported net premiums of R6.318 billion last year. Underwriting profits (R962 million) more than doubled from the R410 million achieved in 2009, while underwriting and investment income was a more sedate R1.579 billion. A sign of concern could be the significant improvement in claims as a percentage of premium earned, down from 62% in 2009 to just 50% last year!
Cell captives remain extremely profitable with operating profits pegged at 20% and underwriting margins at 16%. Despite the apparent profitability of this sector, two of the cell captive insurers included in the survey reported operating and underwriting losses last year.
Specialised insurers are behind the curve
The situation is totally different among the country’s 30 niche insurance operators. A niche insurer offers specialised covers to niche markets – think aviation or marine insurance as examples… This insurance sub-category also posted annual increases in net premiums, growing from R2.497 billion in 2005 to R6.465 billion last year.
Underwriting profits hit the proverbial brick wall in 2010, slumping from R1.723 billion to just R1.006 billion. Companies made up some of this shortfall through better than expected investment performances. A closer look at operating and underwriting performances shows an industry in decline going back three years. Operating profits as a percentage of net premiums slipped from 57% in 2008 to 46% in 2009 and just 35% last year. Underwriting margins almost halved from 30% to 16% over the same period. It came as no surprise that nine of the 30 niche insurers reported underwriting losses in 2010, though only four recorded operational losses.
Many of the insurers featured in the SAIA short-term results summary make use of re-insurers to carry insurance risk. The report includes re-insurer results for the past four years. It was interesting to note how “flat” net premiums were over the period – perhaps indicating a preference by local insurers to underwrite larger portions of their risk themselves. Net premiums in the re-insurer category slipped slightly from R2.314 billion in 2009 to R2.170 billion last year. Two of the six operational re-insurers reported underwriting losses in 2010, though none reported operational losses.
Editor’s thoughts: The “typical insurer” covered in the Special Report on Results in the Short-term Insurance Industry 2010 makes up the bulk of the domestic insurance market. We can therefore assume the industry enters 2011 in rude health… But insurers could run into trouble this year after the massive countrywide flooding witnessed early in the New Year. Do you think local insurers have become “brave” when it comes to purchasing re-insurance? Add your comment below, or send it to [email protected]
