A triple boost for motor insurance profits

Gareth Stokes, FAnews Online Editor

Approximately 40% of South Africa’s short-term insurance business is conducted in the motor vehicle space. In recent years insurers have struggled to turn a profit on their motor books, raising questions over the sustainability of this segment of the mark

“Affordable motor vehicle insurance is important, not only for individuals, but for the entire insurance sector, the vehicle finance industry, the motor industry and various organisations in the supply chain,” said Pearson. It will take continued pro-active collaboration between SAIA, its member companies, and the likes of National Treasury, the Department of Transport (DoT), motor vehicle manufacturers, enforcement agencies, Business Against Crime South Africa (BACSA) and other interested parties to achieve this goal.

The root cause of escalating short-term motor claims

Prior to 2002 motor vehicle crime such as hi-jacking, vehicle theft and theft from vehicle accounted for the bulk (up to 70%) of motor vehicle claims payouts. The industry responded to these alarming statistics by joining forces in an attempt to reduce the burden of such claims on local insurers. Thanks to consistent efforts by BACSA, supported by South African enforcement agencies and motor industry stakeholders, motor crime has reduced by around 50% since.

Nowadays accident repair accounts for the largest slice of short-term motor payouts. There are many factors impacting the cost of these repairs, most notably part prices, the prevalence of imported vehicle on our roads and the impact of technology. And last year local insurers paid out in the region of R16 billion on parts alone! And that’s not counting the R43 billion cost borne by the country due to 10, 000 fatal crashes and 13, 000 road accident deaths each year. It is estimated the cost of motor vehicle accidents to the South African economy exceeds R100 billion.

Although the industry could reduce costs by taking greater control over the management (from towing to repair) of each claim event it is hoped that by working together the industry can reduce both the frequency and cost associated with accidents. And that is why the SAIA is supporting (in some cases) and driving (in others) a number of interlinked projects in the vehicle insurance space.

Three projects to tackle spiralling short-term claims

1. Automatic Number Plate Recognition (ANPR) project

The ANPR project is a BACSA and SAP collaboration aimed at preventing stolen vehicles from exiting South Africa via road. Why? Because approximately 88, 000 vehicles are stolen in South Africa each year. The statistics suggest 45% of these vehicles are recovered. The remaining 48, 000 stolen vehicles are either re-registered locally (50%), smuggled to neighbouring African countries (30%) or chopped for parts (20%). In each case the impact on the insurance sector extends beyond the initial insured loss. Re-registered vehicles are often cloned (resulting in multiple insurance covers on a single vehicle) while “chopped” parts are often substituted for OE spares during accident repairs.

SAIA is playing its part by “sponsoring” five border-post cameras over the next three years. Three of the five cameras are already in position and delivering results. Over a six month period images from these cameras led to 38 vehicle impounds valued at R4 million. “This is a really good initiative,” said Pearson. “Because if we take our foot off the accelerator on the vehicle crime front then we’ll undo all the good work we’ve done so far!”

2. Compulsory 3^rd Party Motor Property Insurance

Only 35% of the vehicles on our roads are insured. “The under insurance issue is not an easy matter to address,” said Pearson. She reminded conference attendees that the concept had been discussed many times before. One of the fears raised by SAIA members is that compulsory insurance would erode the number of comprehensive policies on their books. But there are other challenges...

If we consider there are upward of 6.5 million vehicles that need insurance we are immediately faced with resource constraints. Stakeholders would also have to agree on distribution models, mechanisms to collect premiums, administration of the system, levels of cover, price – the list is endless. How much would it cost? SAIA reckons an affordable solution would be in the region of R50 per month, though the SA Actuarial Society has indicated the cost could be considerably dearer. One of the possibilities is for government to administer the scheme and collect premium by way of an additional fuel levy or add-on to the annual vehicle license fee. But this isn’t a foregone conclusion given the hard lessons learnt at the Road Accident Fund.

A compulsory 3^rd Party Insurance solution won’t be introduced overnight. But SAIA is hard at work to make sure all the industry stakeholders put the concept on their respective agendas. “We have been working with Road Traffic Management Corporation, have had talks with National Treasury, participated in meetings with DoT and the Financial Services Board,” said Pearson. “Thus far the feedback has been positive.”

3. Cost of Parts project

A simple model suggest 70% of motor claims stem from accidents – with 70% of that figure linked to repairs – and 70% of the repair figure due to the cost of replacement parts. That means around R34 in every R100 paid out by motor vehicle insurers for motor claims goes to parts. Pearson said the Cost of Parts Project would address cost and quality issues in the parts space: “We don’t control this space… And insurers who pay for parts have no knowledge of what is eventually fitted.”

A cohesive approach

“There are a number of synergies and linkages across these SAIA projects,” said Pearson. “It is good for the industry to stand together and do things together – because by working together on motor issues we have, and will continue to, make a huge difference.”

Editor’s thoughts: South Africa’s financial services regulators love “copying” their UK and Australian counterparts. Perhaps the DoT will follow the UK example and force motorists to produce proof of insurance at vehicle licensing stage… My only wish – if this route is preferred – would be that the systems and resources are in place before implementation. We already lose enough work hours trying to renew our driver’s license every five years. Do we need compulsory 3^rd Party Insurance – and how would you go about introducing it? Please add your comment below, or send it to gareth@fanews.co.za