Facing the journey of a thousand miles

Jonathan Faurie, FAnews Journalist

As South Africa enters into the festive season, it also braces itself for the period which results in the largest amount of road deaths. This is of significant concern to the public and the insurance industry as statistics show that only 35% of vehicles on the road are insured.

This is particularly concerning when one bears the most recent report by the South African Insurances Association (SAIA) in mind. The report shows that between 70% and 80% of the industry's claims are accident related which affects all road users, insured and uninsured alike, which is an issue that Santam Chief Executive Ian Kirk feels needs to change.

SAIA also feels that this may increase with the introduction of E Tolls. The controversial system was implemented at midnight on 2 December amidst a huge public outcry. SAIA feels that the public who either cannot afford the E Tolls or who are opposed to the system will increasingly use domestic roads. This will increase the traffic volume on roads where increased accidents will occur.

Kirk expressed these concerns while addressing the media at a SAIA press briefing at the end of November.

Is it a bridge too far?

While achieving this would significantly benefit the industry, one has to wonder if it is a bridge too far to cross when one considers all of the challenges which needs to be overcome in the market.

Inclusion is a huge challenge in the market, but the fact of the matter is that insurance is just too costly. When one is struggling to pay off a car, pay for its upkeep, and to pay for it to be on the road, insurance is a cost which is simply not thought of. And this is among the middle income earners who are bordering on the higher end of the scale. What about the middle income earners who are bordering the lower end of the scale?

"There is a need in the market for financial inclusion. Companies need to either introduce lower premiums or develop unique products which are aimed at the middle to lower income earners," says Kirk.

But herein lies another challenge. If the rumours of hard rates are to be believed, 2014 may be the year where insurers implement rates increases that will be above inflation. This means that product innovation will be the likely solution.

Because of the target market of these products, which is the lower to middle income earners, product providers are likely include a lot of exclusions. Traditionally, there is a low level of understanding among the South African public regarding products within the financial services industry. This is where the role of brokers will be key. Bearing in mind with the implementation of Treating Customers Fairly (TCF) on 1 January 2014, brokers and product providers need to share the responsibility of making sure that their target market is fully aware of every aspect of the product which they are purchasing.

Solving the rate fallacy

Here is a question which the majority of the market will not know how to answer correctly. How is your insurance rate calculated? Traditional thought would say that it is calculated based on the value of my car and when its value depreciates, so should my premium.

However, Kirk points out that this is a fallacy and that clients are quick to forget that the external factors, which influenced the original rate calculation, do not change.

This makes sense if one considers that you will live in the same house for a period of longer than 10 years. And if you keep the same job for that period of time, where you park your car during the day and the evening won't change. The vehicle is therefore the only depreciating variable in the equation.

"There are also other factors involved. Changes in weather patterns mean that we are likely to see more hail storms like the ones we saw last year, and more recently at the end of November this year, which brought a significant cost on the industry. And the cost of repairs is also an issue. While the cost of your vehicle depreciates, the cost of repairs goes up. This means that it costs the same to repair an R80 000 vehicle which has the same damage that a R120 000 vehicle has," says Kirk.

This is why insurance companies are under increased pressure by clients to write off vehicles. The problem with this is that once a vehicle has been written off, it is removed from the insurer's motor book. But there is still a good chance that the written off vehicle will be repaired illegally and returned on the roads with no road worthiness inspection and with no insurance.

Something needs to be done

Despite these challenges, something needs to be done. As Kirk points out, if the industry wants to move towards TCF, it needs to bear in mind that expecting 35% of road users to cover 100% of the market is in complete contravention of TCF principles.

Traditionally, the holiday seasons – Easter and Christmas – are troublesome times for road users with many deaths being reported. These contribute significantly to the over 20 000 deaths which occur on our roads each year. This comes at a significant cost to the industry. Statistics from the Department of Transport show that in 2010, fatal accidents cost the industry over R150 billion. This escalated to over R157 billion in 2011. The department has not released the 2012 figures yet.

Editor's Thoughts:
Although the challenges in solving the industry's problems are immense, there is a Chinese proverb which says: 'the journey of a thousand miles begins with one step'. But who is prepared to make that step? Is Kirk correct in saying that the industry's problems cannot all be sorted out from an insurance level? Government needs to play a role. But whether this will happen soon is another guessing game as SAIA points out that resolving these issues is not top of Governments to-do-list. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.