By Phakamisa Ndzamela
THE days of cutting premiums to attract customers could be coming to an end as South Africa’s short-term insurers, especially the motor insurers, face a tough business cycle.
However, with consumers under increasing financial pressure motor insurers will have to carefully considered measures to benefit their bottom lines, such as rises in premiums.
A clumsy increase in premiums could run the risk of reducing the number of clients that can afford adequate and comprehensive cover. An insurer could also lose its clients to other players.
With tough operating conditions prevailing in the market, the short-term insurers are likely to manage claims much more efficiently. Insurers may also be prompted to scrutinise claims more closely.
Short-term insurers Santam, Mutual & Federal and Lion of Africa have all reported weaker financial results in the first six months of this year.
Santam posted an underwriting margin of 1.3% in the period to end-June 2013 compared to 6.1% in the period to end-June 2012. The June 2013 result was far below Santam’s underwriting margin medium-term target of 5%-7%.
Underwriting margin is a key measure of financial performance in a short-term insurer.
Rival Mutual & Federal also posted a weak set of results in the six months to end-June. Mutual & Federal posted a negative underwriting margin of 2.7% and an underwriting loss of R118m.
Santam, however, posted underwriting income of R102m.
A company incurs an underwriting loss when it has huge claims and expenses compared to the premiums it collects. This can be caused by higher claims inflation and a weaker rand.
Absa Financial Services, which deals in insurance, posted an underwriting loss of R52m in the six months to end-June, due largely to weather-related claims.
Lion of Africa, which is 100% owned by Brimstone, had a weak underwriting result, posting a loss of R47.7m in the six months to end-June compared to a profit of R5.5m in the previous period.
The market is already anticipating that players such as Discovery Insure will likely report subdued numbers.
Some analysts believe the difficult conditions are likely to continue for the next 12 months.
Over the past six months South Africa’s short-term insurers have been hit by a weak rand and a higher frequency of claims, which are increasingly becoming more expensive.
Motor insurers have to import some car parts from overseas markets and the weaker the rand, the more expensive it becomes.
The rand has depreciated by close to 20% against the dollar this year, hurting motor insurers.
Santam indicated in its results last week that it was also affected by a rise in theft-related claims.
Short-term insurers have also had to pay out claims to agricultural clients who suffered damage from hailstorms and drought.
"I think we are going to have another year of weak margins in the short-term insurance industry," an analyst based in Johannesburg observes.
"The insurers can’t increase premiums fast enough. There is a lot of competition, you have a lot of direct insurers in the market. The consumers are also under pressure. They can’t afford expensive premiums."
South African consumers are battling higher levels of debt and rising electricity and energy prices. Lenders have also pulled back on the levels of credit that they are prepared to advance.
Byran Taljaard, an insurance analyst at Avior Research, says what has made it difficult is the fact that a weakening rand coupled with catastrophes and higher costs per claim have all hit at the same time. "The next 12 months will be tough. The risk is the rand because it has an impact on motor vehicle parts," Mr Taljaard says.
He points out that it is difficult for insurers to hedge the rand against a decline. It also poses a risk if one gets the hedge wrong.
He says the short-term insurers that are likely to suffer in this difficult underwriting cycle are those that are cutting premiums in order to get new business.
Bigger insurers are in a much better position in this market as they have bigger balance sheets.
Source: BusinessDay
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