Short-term underwriting margins under fire

Gareth Stokes, FAnews Online Editor

There is no better way to get to grips with the performance of the short-term insurance sector than to consider the South African Insurance Association (SAIA) Special Report on Results in the Short-term Insurance Industry. The latest report – an update fo

Typical insurers shape up for a ‘flat’ year

The first – and clearly most influential insurer category – is defined as “typical insurers”. These are the companies you and I deal with on a daily basis – those that offer most types of insurance policies to the general public. This category, measured by net premiums, has grown every year going back to FY2007. And net premiums topped R35.579 billion in the first nine months of 2012, just exceeding the R34.915 billion in the comparative 2011 period. It seems, however, that rising compliance and administration costs are eroding profits. Underwriting profits for the nine months reduced from R3.219 billion to R3.195 billion.

Combined underwriting and investment income is marginally higher at R5.454 billion thanks to improved investment performances across the board. SAIA provides a useful graph of insurer operating and underwriting performances going back to 1996. While typical insurers enjoyed increases in both measures between 2008 and 2011 it now appears the cycle is turning once again. Operating margin as a percentage of net premiums – which touched 16% for 2011 – slipped to 15% for the period under review. And the underwriting performance expressed as a percentage of net premiums slipped from 10% to 9%. A look at South Africa’s largest short-term insurer, Santam, confirms this result. In its interim report for the six months ended 30 June 2012 the insurer announced its underwriting margin had slipped to 6.1% from 8.4% in the comparable period.

Eight of the 30 typical insurers posted underwriting losses for the nine months under review, with four in the red at 30 September. The good news for insurance consumers is that the percentage of claims on earned premiums has improved from 58% in 2011 to 60% today. Claims paid remain some way behind the average 66.5% achieved between 2007 and 2009.

Cell captive on track for record profits

The cell captives, defined by SAIA as “those insurers who offer insurance structures on a cell ownership basis for first party and third party cell owners”, have powered ahead in the first nine months of 2012. The nine companies in this sub-category reported net premiums of R5.912 billion to September 2012 (versus R5.534 billion in the comparable period, 2011). And with R702 million in underwriting profits so far they look on track to improve on their best profit year in recent times – the R962 million reported in 2010. After including investment income the segment has ‘banked’ R1.153 billion for the first three quarters of 2012.

In contrast to the traditional insurers the cell captives show a marked improvement in underwriting and operating margins expressed as a percentage of net premiums. The former improved from 2% in FY2011 to 12% while the latter surged from 11% to 20%. Cell captives only paid out 51% of net premium in claims for the period under review. Two of the cell captive insurers included in the survey reported underwriting losses – and one an operating loss – year-to-date.

Niche insurers still playing a vital role

SAIA reports on 32 specialist or niche insurance operators. These insurers offer specialised covers to niche markets such as aviation or marine insurance. This insurance sub-category also posted increases in net premiums for the nine month period, growing from R5.608 billion in 2011 to R6.257 billion to September 2012. And it seems that underwriting profits from this sector in the first three quarters have already exceeded those reported for FY2011. South Africa’s niche insurers are sitting on some R2.091 billion in underwriting profits, rising to R3.019 billion when investment income is included.

A closer look at operating and underwriting performances confirms a three-year upward trend in both categories. Operating profits as a percentage of net premiums rose from 35% in 2010 to 44% in 2011 and 48% to 30 September 2012. Underwriting margins, meanwhile, climbed from 16% to 29% to 33%. Seven of the 32 niche insurers reported underwriting losses for the period under review, with four reporting operational losses.

Many of the insurers featured in the SAIA short-term results summary make use of reinsurers to carry insurance risk. The report includes reinsurer results for the past four years. It was interesting to note how “flat” net premiums were over the period, perhaps indicating a preference by local insurers to underwrite larger portions of their risk themselves. The ‘flat’ trend looks certain to continue – with net premiums in the re-insurer category for the first nine months of 2012 reported at R1.797 billion versus R1.685 billion in 2011. Of greater concern is that five of six operational reinsurers reported underwriting losses, and one an operational loss.

Difficult times ahead

In their 2012 Interim Report – under the ‘prospects’ heading – Santam observes that “short-term insurance industry growth for the first half of the year was very subdued, mainly due to soft premium rates in the market”. They also said that claims frequency, average claims cost and reinsurance cost would lead to a hardened premium rate in the remainder of 2012 and through 2013… Unfortunately harder premiums do not immediately translate into improved profit margins and it seems short-term insurers will have to keep a close eye on costs and claims over the next few years.

Editor’s thoughts: Another major concern for insurers is that South Africa’s GDP growth rate is unlikely to achieve even the downward revised 2.7% for 2012. Add to this on-going economic stresses in the Euro-zone and ‘lower for longer’ interest rates and the industry bottom line will come under severe pressure. Do you think insurers will struggle to improve underwriting margins and profitability through 2013? Please add your comment below, or send it to gareth@fanews.co.za