News Article : Back to normal
|Category:|| Short-Term Insurance : Personal Lines|
|Posted:||08 Nov 2005|
In good shape with rates on an even keel
The short term insurance market looks to be returning to 'normal underwriting cycles' for 2006. This follows an unprecedented string of profitable years.
Globally things have taken a distinct turn for the worse, and losses will definitely filter through the reinsurance chain to the South African market. Catastrophe losses are at record highs with Hurricane Katrina standing at US$40 billion, where it devastated parts of Louisiana in the USA, the second biggest loss of all time.
Two weeks later Hurricane Rita was making landfall a little south of Katrina, threatening Houston and surrounds, which could become the third most devastating of all time. New Orleans has been clouted by both.
In contrast, South Africa has remained calm and collected for several years, with some underwriters reporting record profits. What few large losses they have suffered have largely been passed on to the reinsurers.
A good example of this was the Stilfontein earthquake that caused about R500m in insured damage. Reinsurance support was such that the claim cost Mutual & Federal just R10m. To some extent the local market, like any other, must rely on the global reinsurance market to provide important risk capacity for possible catastrophe losses, large fires and heavy storm damage.
The level of reliance on reinsurance is determined by insurers' risk appetite, available capital allocation and business portfolio composition.
However, as Caroline da Silva, head of commercial at Santam suggests, "The impact on the South African Consumer will be determined by how South African insurers have structured their reinsurance programme and also, of course, on what happens in the global market between now and January 2006 when the major reinsurance renewals take place. Currently the impact of Katrina, without Rita and any other catastrophe, may be more a case of "smoothing out" of the premium cycle."
But reinsurance is more 'behind the scenes', so to speak. A more direct influence on premium rates, of course, is the claims experience on the various books of short-tem insurance business. The larger companies, such as M&F and Santam, which incidentally account for 55% of the market, have been working hard and successfully toward achieving a 'balanced mix' of business.
For example, it makes sense for personal lines insurance business to account for about 50% of your book. The individual risks are small, loss-making blocks can be quickly identified, and premium rates can be adjusted, often at a month's notice. On the other hand, commercial risks (say, for clients with an asset base up to R250m), while the business can be very profitable, can also generate very high claims losses.
Competition remains fierce, and the more astute underwriters will rather "let the business go than take on risks at uneconomic premiums" just for the sake of growing the book.
Da Silva, for instance, says her company has "no intention of being a victim of the soft cycle," referring to the fact the commercial market is getting more competitive with new players fighting for insurance risks by undercutting premiums.
"We had a large number of fires this year, having had none at all in 2004," she notes. Even though Santam has paid out R68m for 10 major fires so far, the business is "still very profitable and the increase in claims is really only an indication of how they are normalising in 2005 - 2004 had been a very unique year."
Corporate business is the big stuff, with assets exceeding R250m per client. Many of the risks are huge, often running into the billions where a carefully structured reinsurance programme needs to be in place. This, of course, is the area of the insurance book that will see the first affects of the catastrophe losses overseas come the 1st January renewals.
Keith Kennedy, Executive general manager: claims at Mutual & Federal, says this sector of the business was certainly under-rated the 10 years up to 9/11. However, this major disaster started a correction in rating." Perhaps this year's catastrophe losses will also help push the correction further through tougher reinsurance treaty terms.
Personal lines insurance is also experiencing a 'normalising year' for 2005, following the exceptional 2004 when underwriting profits had been stratospheric. Even so, for this year at least insurers are "still doing very well."
Crime and theft rates are under control, according to most companies. However, there is some concern regarding the motor insurance sector because, while the number of claims has remained fairly level, the cost per claim has been escalating quite dramatically.
One reason is the huge increase in new car sales, which involve expensive high tech components such as air bags, and even windscreens with built-in chips to detect water. Even the smaller cars these days enjoy a 'full house' of accessories, and are becoming very expensive to repair. It all leads to higher values on our roads.
Mr Kennedy notes that motor theft is "down a bit, largely through implementation of tougher security measures and better police work." But although personal lines is "going well, burglary and general theft is still too high," he adds, "while the frequency of road accidents continues to rise."
Interestingly, the buoyant economy is affecting the houseowners' and householders' sector too. Consumer confidence has been boosted by higher equity values of homes. People are renovating and building additions to their properties, all giving rise to higher insured values. So too are they buying high value items for the home, upgrading of systems, and getting in the latest technology. It means higher risk values, higher premiums, but also increased interest from the criminal fraternity.
Commentators were hard pressed to say what 2006 has in store for clients. It will probably be a case of 'more of the same'. Barry Scott chief executive of the SA Insurance Association says there is no indication one way or the other, although the current claims experience is not as good as last year.
Says Keith Kennedy, "We are starting to see a lot of competition. Companies will remain under pressure to grow and this should keep rates down." But he thinks we'll see some selective premium increases in the motor book to cover the higher costs of repairing modern tech vehicles.
Says another underwriter, "The industry remains competitive and will continue to provide the client with insurance cover at a good price. This means premiums will probably soften a bit, but only to the extent it does not compromise profitability."
Meanwhile, the insured market should start expanding as the industry's Mzansi product gets under way. This initiative, spearheaded by the SAIA will initially provide householders' insurance, contents and cellphone cover to the low income level market. Mr Scott says proposals are with the Banking Council to provide a payments mechanism. Motor insurance could be added to the package at a later stage. Either way it promises to expand the risk pool for the industry enormously and that can only be good for the underwriters' book.