Short-term insurers must innovate to maintain underwriting margins

Gareth Stokes, FAnews Online Editor

Short-term insurance companies, like most businesses, trade through rising and falling cycles. In recent years local insurers have benefited from a “soft” rates cycle, as evidenced by their consistently improving underwriting margins. The bottom line is t

Among the stand out performances in recent years is the turnaround in the motor book. The strong rand played its part by reducing the cost of motor vehicle parts, while improvements in urban road infrastructure and a clampdown on drink driving, particularly around Johannesburg, reduced both the frequency and severity of motor vehicle accident claims. Thanks to these cost savings, Santam, which aims at a normalised underwriting margin of between 4% and 6%, was able to selectively reduce premiums to its clients last year. Will consumers benefit further in 2012? Kirk identified a range of cost pressures which could result in a tighter rates cycle and higher premiums for policyholders...

Catastrophe, climate change and reinsurance

A major hurdle for short-term insurers is a significant increase in 2012 reinsurance rates. Reinsurance is “insurance for insurers” and all of the major short-term players buy cover for risks that are too large for their balance sheets. Global catastrophe claims topped $400 billion through 2011 (though Swiss Re estimates insured catastrophe damage at $108 billion) with the result the so-called “sleep easy” protection policies purchased by local short-term players have become more expensive. Kirk said these increases would have to be carried over to individual policyholders. South Africa has suffered its fair share of  natural disasters in recent months too, with extensive flooding in the Limpopo and Mpumalanga provinces in January this year. Extreme weather is here to stay!

“Climate change is a reality in South Africa today,” observed Kirk. He said the group’s successful Eden study would be expanded to larger geographic areas in an attempt to learn more about the impact of severe weather and other systemic insurance risks going forward. The Eden study was conducted by the CSIR and focused on fire, flood and sea storm risk in the Eden community, Western Cape. Climate change has been singled out as a major concern for insurers and both Santam and the South African Insurance Association (SAIA) are hard at work to implement measures to address the consequences of this global phenomenon. As such the industry focus has shifted from addressing the causes of climate change to mitigating the risks associated with it.

Climate change is not the only systemic risk facing insurers. The poor state of infrastructure in many of South Africa’s municipalities is also cause for concern. Poorly maintained storm water systems and ill-equipped emergency response services are but two areas that can send claims through the roof in the event of fire or flood events. “We cannot keep pricing these inefficiencies into the system,” noted Kirk. “We have to take a proactive stance and deal with them.” Santam and other insurers are looking at areas where they can assist local municipalities and have invited other businesses to get involved too.

Technology assisted risk management

Risk management is important to all stakeholders in the short-term insurance space. The policyholder, insurance broker and insurer stand to benefit if risks are identified and addressed at the underwriting stage. Kirk observed that consumers in both the household and personal goods segments were already benefiting from technological advances. Insurance companies offer premium reduction for drivers willing to install telematics devices in their motor vehicles and for homes with state-of-the-art security systems. Although telematics-backed policies are seen as a niche area at present there is no doubt they will become the norm five to ten years from now.

A gradual migration to direct distribution

What will the short-term insurance landscape look like a decade from today? One of the trends is a gradual shift from the intermediated distribution model to the so-called direct insurers. Kirk said that around 50% of new personal lines business was written via the direct channel last year. In Santam’s experience much of this new business is due to existing direct insurance consumers changing providers. The group’s direct insurance offering – Miway – had 120,000 policies on its books at 31 December 2011. Despite this shift, Santam remains committed to its broker distribution model. “The intermediated model will remain because advice is an important part of the insurance offering,” he said.

No short-term insurance outlook is complete without comment on the regulatory environment. The South African financial services sector is among the most regulated in the world with consumers “protected” by dozens of laws and regulations. Insurers and their intermediaries have to comply with the provisions of the FAIS Act, FICA, SAM, TCF and New Binder Regulations to name a few. Kirk said that the regulation – although consumer friendly – would result in higher costs to policyholders. Regulation is the reason that Kirk shrugs off the threat of new entrants to the short-term insurance market. He says the increasing cost of compliance is a significant hurdle to new businesses. Large mainstream companies and smaller niche players will survive – the rest will be gobbled up through merger and acquisition.

“Insurance is a very important enabler of sustainable economic development,” concluded Kirk. It will be critical as government rolls out ten-year “trillion rand” infrastructure plan – because without insurance this development simply cannot take place. The local short-term industry is in good shape and ready to tackle the many challenges as they present. Santam, which recognises its leading position in the industry, is up to these challenges too – and ready to give back to society at all levels.

Editor’s thoughts: Santam conducts the bulk of its business through its broker distribution model. And there is no doubt the short-term insurance consumer gets a better deal going this route. Are you concerned with the growing popularity of direct distribution offerings, particularly among younger tech-savvy consumers? Add your comment below, or send it to gareth@fanews.co.za