Short term insurers have had a tough time in the last couple of years thanks to poor motor portfolio results. While these losses are taking a while to affect vehicle insurance costs, Gari Dombo, Managing Director, Alexander Forbes Insurance, believes more rate hikes are inevitable.
Dombo is also of the opinion that, "Survivors in the motor insurance market will be those with the ability to price their cover accurately."
"Motor claims are driven by two factors; number of accidents (frequency), and cost of repairs (severity). Current premiums have failed to take increasing accident rates and repair costs into consideration. Hence, over the longer term, current premiums are unsustainable".
2006 saw over 700 000 more cars on South Africa's roads. With this figure looking to grow even further in 2008, added congestion combined with road deterioration and inadequate infrastructure expansion means less road available for more cars.
Furthermore, says Dombo, "Even relatively cheap vehicles are now equipped with expensive features, like airbags and sophisticated electronics, all of which cost plenty to repair. Since the average cost of repairing a vehicle has gone up substantially, even minor accidents involving cheap cars are expensive to repair."
Moreover, premiums are calculated on a percentage of the sum insured, with the overall sum insured decreasing over time. Hence, while the insured value might decrease rapidly over time, the cost of repairing vehicles does not.
Central to correct pricing is the acceptance that, from a risk perspective, treating everyone the same doesnt work. In short, cross-subsidisation is not the way to go.
This point has recently been highlighted by Hollard's decision not to insure Volkswagen Citi Golfs manufactured between 2004 and 2006 unless clients installed an approved anti-theft device. Clearly Hollard's own figures were showing that insuring high theft-risk models without an anti-theft device at current premiums simply did not make business sense - despite cross-subsidisation from other models.
For example, says Dombo, "If you need to apply a 2% margin for low risk and a 6% margin for high risk, you cannot hope to effectively cross-subsidise by charging all premiums at 4%. The same goes for different lines of business. One line, like motor insurance, should not be used to subsidise a non-motor class of insurance and vice-versa.
A lot of companies have incurred substantial losses on their shot term books by trying to do exactly this. As a business, this strategy will result in the good risks finding cheaper cover elsewhere. It, in fact, makes better business sense to identify and isolate high risk - and then charge higher premiums accordingly
As such Dombo believes that, "Winning in this business means having the right information to charge the right client the right premium."
The level of excess, or 1st amount payable by the client, also comes into play in assisting underwriters price risk accordingly. Without a system that allows you to generate the numbers, and then model them correctly, youre never going to be able to price right.
As such Dombo predicts that, "Statistical and actuarial skills will become even more sought after as these skills become central to the effective management of short term insurance books."
Dombo concludes that, "Accurate modeling aside, losses on most insurers motor books are driving home the fact that current premiums are unsustainably low. Going forward, the industry will need to consider increasing vehicle insurance premiums."
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