A snapshot of the short-term insurance industry
In their February 2009 Bulletin the South African Insurance Association (SAIA) provides the latest results for the short-term insurance industry. The numbers are based on the “combined and un-audited statistics (net after insurance)” in the typical, cell captive and niche insurer categories. Using these statistics we can follow industry trends going back to 2003.
Net premiums still on the increase
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. Net premium for the 24 ‘typical’ insurers in this category reached R37.556bn in 2008 – 9.3% higher than the R34.351bn earned in 2007. Typical insurers have increased net premium every calendar year since 2003. Tough times or not, it seems there’s plenty of business out there. But increased premium doesn’t guarantee profitability. Insurers have to convert business into operating and underwriting results.
SAIA provides a graph going back 14-years to compare operating and underwriting results as a percentage of the net premium for typical insurers. Each of these measures has been on a slide since 2004. At the time, operating results as a percentage of premiums stood at 18% while the underwriting margin was a respectable 12%. Since then operating margins have declined to 13% and underwriting margins to just 6%. The latest results from listed short-term insurers Santam and Mutual & Federal confirm the trend. Santam’s 2008 underwriting margin came in at 6.4% while its main rival achieved 4%. The graph for underwriting results as a percentage of net premium seems to be bottoming out at around 6%. And that means insurers will hope for a slight improvement in 2009.
It’s certainly not the worst result the industry has ever reported. Between 1998 and 2000 the underwriting margin for typical insurers was negative while in 2001 and 2002 the underwriting margin was at 1% and 2% respectively. The best the industry could manage in the eight years starting 1994 was 3%!
Four of 24 typical insurers report an underwriting loss
Typical insurers have adapted to tougher market conditions through the year. Eight (out of 23) insurers posted an underwriting loss in the first quarter of 2008. This number dropped steadily – to seven by half-year – to six by the end of quarter three – to close the year at four. We conclude that while short-term insurers are feeling the pinch, they’ve cut costs to ensure profitability. Mutual & Federal, for example, achieved significant savings by cutting 600 jobs. The report also summarises how typical insurance companies are faring in the ‘statutory solvency’ department. Three insurers boast solvency ratios in excess of 100%, 20 companies are between 15% and 100%, and just one company is below 15%!
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 10 operational cell captive insurers have recovered slightly in the latest period. Net premiums surged 21% over 2007 to end at R5.460bn. The operating results as a percentage of net premiums improved slightly while the underwriting margin remained at 5%. Three of the cell captive insurers reported an underwriting loss for the full-year – with only one reporting an operating loss.
Another good year for niche insurers
Niche insurers enjoyed another good year. Premiums were up from R3.872bn in 2007 to R4.976bn in 2008. Even better – claims as a percentage of earned premiums have been on the decline in each of the last six years, from 75% in 2003 to a commendable 40% in the latest period. The operating result (including investment income) expressed as a percent of net premium climbed from 46% to 57% and is near ten-year highs. The underwriting profit as a percentage of net premium is at an all-time high of 30%.
Despite these achievements 12 of 33 niche insurers reported an underwriting loss for the year and three an operating loss.
Editor’s thoughts: Although a number of insurers reported operating losses in 2008, the outlook is markedly better than six months ago. It seems most short-term insurers have adapted their business strategies to survive the economic upheaval. Has the short-term industry seen the worst, or will 2009 be an even tougher year? Add your comment below, or send to gareth@fanews.co.za
