Unravelling short-term insurance industry results
In their May 2008 Newsletter the South African Insurance Association (SAIA) treats readers to a summary of the latest results from the short-term insurance industry. Readers should note that the findings are based on the “combined and un-audited statistics (net after insurance) for typical, [cell captive and niche] insurers for the calendar years 2003 to 2007.” FAnews Online took a look at the numbers to see what they reveal about some of the developing trends and patterns in the industry.
Net premiums on the rise; but…
We’ll begin with the typical insurer, defined as an insurer that offers most types of policies to (for the most part) the general public. Our first observation is that net premiums continue to increase. They’ve been on the rise each year since 2003. The latest calendar year (2007) showed an improvement of around 10% on the previous year. The trend appears intact through the first quarter of 2008 with net premiums of approximately 9.033bn for the three months to March 2008 against 8.440bn in Q1 2007. Of course increased premiums mean nothing if the underwriting margin is under pressure.
It doesn’t matter how much business you write if the new business cannot be concluded profitably. In this regard a graph which maps the operating and underwriting results as a percentage of net premiums proves very useful. Profitability in the short-term insurance industry has been on the decline since 2004. In that year operating results as a percentage of premiums stood at 18% with the underwriting margin at a health 12%... These margins have fallen slightly in each of the following calendar years. By 2007 operating margins had declined to 14% and underwriting margins to 5%.
Although margins aren’t at record levels the industry is still streets ahead of the last crunch period. Between 1998 and 2000 the underwriting margin for typical insurers was negative… And things weren’t much better in 2001 or 2002 either, with the underwriting margin at 1% and 2% respectively. The best the industry could manage in the eight years starting 1994 was 3%!
Underwriting losses on the rise...
One of the alarming statistics quoted in the report was that the number of typical insurance companies reporting underwriting losses had increased from six (out of 23) for the full year 2007 to eight (out of 22) in the first quarter of 2008. Could this be the first warning sign that short-term insurers are feeling the pinch? The report also summarises how typical insurance companies are fairing where it comes to statutory solvency requirements. In December 2007 only four companies achieved more than 100%. The balance of companies hovered between 25% and 100% with only one company stuck in the 15% to 20% bracket.
A similar survey of results is compiled for cell captives and niche insurers. Cell captives are defined as “insurers who offer insurance structures on a cell ownership basis for first party and third party cell owners.” Niche insurers are defined as “those insurers who offer mostly specialised cover in certain niche markets.”
The statistics confirm that the cell captive section of the short-term insurance industry is under pressure. Although premiums are on the rise an underwriting loss was achieved in the latest calendar year. And first quarter results for 2008 show this trend is likely to continue in the coming period. A quick look at the results as a percentage of net premiums confirm that the underwriting margin in this sector has fallen from 5% in 2006 to negative 2% in 2007. Five of 10 cell captive insurers have already reported an underwriting loss in the first quarter of 2008!
Cell captives and niche insurers tell two different stories
Niche insurers have performed better than both typical and cell captive insurers. Net premiums in 2007 stood at R3.872bn, a 17% improvement on 2006. And Q1 2008 net premium of R1.087bn showed 9% growth over the first three months of 2007. Underwriting profit improved significantly to R1.078bn from R699m – showing that the niche insurance remains a lucrative area for short-term insurance operations. But this massive profit could come to an end as the abnormally high underwriting margins come down from 28% in 2006 to around 9% in 2007. With 15 of 33 operational niche insurers reporting underwriting losses in Q1 2008 we could see a significant correction in this sector.
What is clear from this report is that while net premiums are on the rise – the cost of underwriting the risks contained in these premiums is on the rise. And the cost of doing business in South Africa is on the rise too. We can expect profit margins in the short-term insurance industry (both operating and underwriting) to come under pressure in 2008.
Editor’s thoughts:
This un-audited survey, which covers three segments of the short-term insurance industry, confirms that the short-term underwriting margin is in a downward trend. Do you think the short-term insurance industry is in danger of experiencing a period of negative underwriting margins last seen over the three years beginning 1998? Add your comment below, or send to [email protected]
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