The state of the South African insurance industry
“We are significantly influenced by what happens in the United States,” said Santam chief executive, Ian Kirk, presenting at this year’s Insurance Institute of South Africa (IISA) Annual Conference 2009. He took to the stage immediately after Peter Miller, president and chief executive officer of the American Institute for CPCU and Insurance Institute of America (IIA), who had painted a rather grim picture of the international insurance environment.
Although at pains not to dwell on matters international, Kirk had to set the scene. He noted that the main crises in the international space included excesses in developed world housing markets and ridiculous gearing in the banking environment. As the dust settles on the crisis economists put the total cost of international government bailouts at more than $4.1trn. The financial services industry will have to adapt to an environment where 45% of the world’s wealth has been wiped out, unemployment is on the rise, and regulators are certain to get more involved.
What is the impact on South Africa?
South Africa has weathered the storm better than most, but even so we’re facing the first recession in 17-years. Although the banking system emerged from the financial crisis largely unscathed, corporate South Africa is going to have to adjust to slowing business conditions. The immediate impact of the consumer-led recession is evident in the latest Statistics SA labour force survey – jobs are being cut! And this rising unemployment comes at a time when consumers are already under severe pressure. “Individuals are really bombed out – there’s no doubt about that – and that’s causing trouble,” said Kirk. The general economic slowdown is exacerbated by bank lending activity. “The banks are not lending aggressively in South Africa at the moment,” said Kirk. He said banks were concerned with consumers’ abilities to repay their loans and with pinpointing the bottom in the housing market.
Despite the difficult market conditions, domestic insurers actually grew capital through 2008. This accomplishment should be viewed alongside the capital blow suffered by US firms. Insurers in that market suffered a 28% decline in capital, with the likes of AIG taking a 40% hit. And up to 60% of capital was destroyed across the life sector. Even so, “the risks faced as insurers are very significant,” said Kirk. The consumer is under pressure in both the personal lines and corporate space, and there are problems on the asset side too. “There’s big downward pressure on price and upward pressure on re-insurance price plus severe pressure form catastrophe losses,” said Kirk.
According to Kirk the industry would have to rebuild capital and get back to the basics of insurance business in the coming years. He reminded the audience that insurers were selling intangibles – promises rather than physical goods.
A return to short-term insurance growth
Santam uses a simple model to estimate growth in the short-term insurance space. They sum inflation (CPI), growth (the country’s GDP) and an additional 2% to compensate for emerging market risk. Unfortunately the short-term industry only grew at 5% in 2008 and with Q1 2009 GDP growth at minus 6% 2009 is going to be slow too. If we feed analyst expectations of minus 2% for South Africa’s 2009 GDP and 6% for inflation, then the model predicts 6% growth for the industry in the current year. Kirk says it will take two years for industry growth and underwriting margins to show substantial improvement.
He points to three major problems in the short-term industry. The difficulty in securing inflation based increases from customers, an inability to price correctly for risk and the increase in claims frequency and value. Kirk is particularly worried about the large increases in average repair costs for motor vehicle accidents. These costs increased by 6% in 2005 and 6.7% in 2006, but surged to 13% in 2007 and 13.5% in 2008. Early indications are that inflation in the accident repair space will spike further through 2009. Technological advances, with expensive parts incorporated in entry level markets, mean that short-term insurances simply cannot risk rate on vehicle value. Kirk says he is extremely worried about “the sustainability of the motor sector!”
The South African short-term insurance space has to build in high risk ratings for crime and safety factors too. Other trends establishing in the industry include increased collaboration between consumers, concerns over levels of crime and safety, a renewed focus on capital preservation, shifts in weather patterns, the importance of skills and education, and increasing governance and regulation. “I think the regulator here has adopted a very considered approach through the crisis,” said Kirk.
Effective risk management is essential
How should the short-term insurance industry meet the current environmental challenges? Kirk believes “it’s all about risk management. Insurers, intermediaries and policy holders need to handle this aspect better.” He said the need for risk management is higher than ever before and that if insurers fail to manage risk down, the inefficiencies in the system would flow to the consumer. He warned that returning to the consumer to fund these risks would lead to further reductions in levels of insurance penetration, already low by international standards.
Kirk was particularly concerned with the level of fire and motor risk in the domestic insurance market. And he lamented the level of motor vehicle insurance, the numbers of unlicensed vehicles and drivers, poor driver behaviour and shocking road infrastructure and stressed the need for compliance with and monitoring of road traffic laws. “The most important issue is around risk management. We have to get better at it. And the other message is we have to collaborate to address risks: motor, fire, safety and security and the environment!” said Kirk.
Editor’s thoughts:
Ian Kirk wasn’t the only presenter at this year’s IISA conference to raise concerns about aspects of the short-term insurance space. How would you go about remedying poor levels of penetration in the short-term motor vehicle insurance space? Add your comments below, or send them to [email protected]
