There are signs...

Registrar of Short-Term insurance releases his annual report for 2002. Tomorrow we release the long-term annual report highlights.

For the first time since 1997 the short-term insurance industry has reflected a positive underwriting result.

According to the 2002 annual report from the registrar of short-term insurance, underwriting results for the primary short-term insurance industry during 2002 showed a further improvement, as was the case with gross premiums, from 0% (where underwriting profit is expressed as a percentage of net premiums) in 2001 to 1% in 2002.

The major contribution to underwriting profit generated in the Property and Accident & Health classes of business.

Gross premiums of the primary insurers grew by 18.5% during 2002, compared to a 7.6% increase in 2001 and an adjusted figure of 8.6% in 2000. The adjustments in 2000 were made due to numerous financial year-end changes by insurance companies.

The relatively high increase in gross premiums experienced in 2002 was partly due to the experience in the reinsurance market, which resulted in a severe reduction in capital following the events of 11 September 2001.

This resulted in an increase in reinsurance tariffs worldwide, forcing primary insurers to increase their rates.

Another contributing factor to the substantial increase in gross premiums was the high inflation rate in 2002.

Investment income contributed to a 20% operating profit expressed as a percentage of net premiums for 2002. Insurers noticeably shifted the composition of their assets from investments in shares to investments in cash and deposits during 2002.

Surplus assets as a percentage of net premiums of primary insurers have declined from 94% in 2001 to 78% in 2002. The effective management of capital has become increasingly important to all insurers with many adopting new and innovative ways of improving the management of their capital.

Internationally many firms' balance sheets are under pressure, with falling solvency levels focusing attention on optimising the allocation of capital across business activities.

Various issues are still occupying the programmes of international bodies, especially those of the Financial Stability Forum. The insurance related issues, some of which are already pertinent to South Africa, are:

*Monitoring the movements in asset prices and their effects on balance sheets. Specific mention is made of increasing "back-up in bond yields".

*The greater transparency in the reinsurance sector is to be welcomed.

*Information gaps still exist with regard to credit risk transfers. Stock must be taken of i nstitutional participation and supervisory information needs.

*International coherence in the critical corporate governance areas is supported.

Auditor oversight, audit and accounting practice standards and conflicts of interest related to rating agencies and financial analysts are mentioned.

*Exposure to health related risks, e.g. asbestos and officers and directors’ liability insurance is a cause for concern.

*Capacity to deal with large-scale disasters.

*The lower interest rate environment and interest related guarantees.

*Different types of off-balance sheet financing and Special Purpose Vehicles.

*Newly licensed insurers are in a position to adjust their products to the new environment but existing insurers find it more difficult having existing policies on their books.

*Effects of proposed international accounting standards on the fair value calculation of specific assets and liabilities and other related issues.

The short-term insurance industry will be facing many challenges in future such as possible legislative changes focusing on a risk-based capital approach, changes in international accounting standards, risk management and reinsurance capacity.

Corporate governance is receiving the necessary attention by boards of directors and the challenge is the implementation thereof in a sustainable and effective way.