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Ready for a hard landing
(Business Day (South Africa) Via Thomson Dialog NewsEdge) Ready for a hard landing Good years are making way for tougher times Until recently, the underwriting and claims ratio environment for the short-term insurance industry has been extraordinary. Lars Forssman, director of Auto & General's broker division, says rising gross domestic product, stable and relatively low interest and inflation rates, as well as improved disposable income, resulted in an extraordinary boom in consumer spending.
Now the short-term insurance industry has to deal with the consequences of a pressured underwriting cycle and deteriorating profit margins due to harsh, unpredictable weather conditions and heightened competition.
These factors are hardening rates and putting increased pressures on the market. It is a classic example of the change in market cycle from soft to hard. He says profits are coming under pressure, but soft and hard market cycles are common in the short-term insurance industry.
Forssman predicts that industry underwriting margins will fall to 2% in the near future and then even out. However, the industry would be safer with an underwriting margin of between 4% and 4,5%.
When claims increase, loss ratios dictate premium rate hikes. This causes some volatility for the consumer and the short-term insurance broker.
We believe that to preserve market share in this unsteady environment, service excellence is paramount, and any insurer who hopes to retain business based exclusively on pricing will fall short. Forssman says the key is to deliver long-term quality rather than quantity.
Michael Blain, CEO of Centriq, says local insurers are facing an unprecedented image crisis, a volatile marketplace where traditional pricing and distribution channels are threatened, a dynamic and increasingly onerous regulatory and legislative environment, and a growing range of insurance options resulting from an enlarged international presence and the emergence of competition from broad-based financial services providers.
In this context, local suppliers are pressured to innovate to compete with offshore options by remaining abreast of best practice and delivering relevant, value-adding service to clients. Domestic risk managers are demanding security and service quality from preferred product providers, where trusted relationships matter more than lowest price. At the same time, increasingly onerous statutory requirements and regulations will inevitably mean increased reliance on the expertise afforded by leading solutions providers. As the insurance environment responds to global trends, so innovative insurance models are emerging.
The key to success is flexibility, lack of legacy constraints, a broad skills base, shareholder strength and credible empowerment credentials. Steffen Gilbert, CE of Santam, says the short-term industry had a series of good years from 2003 to last year. There were benign weather conditions, the JSE went with us and the economy did well. Everything that could have gone right for the industry did.
However, we had a reality check this year. There was an increase in industrial fire claims and a massive increase in the number of water-related claims in Gauteng, as well as southern and eastern Cape regions. Devastating floods sent the short-term motor book into reverse. But despite all the bad news this year the industry still made an underwriting profit for the six months to June.
Financial Services Board statistics show that, including some niche insurers, the industry made 7% in the first half this year. This tends to suggest that the industry is sticking to underwriting fundamentals. The only segment where there is a low premium rating is the corporate sector, and some real upward pressure on pricing is beginning to make itself felt in this area. Bruce Campbell, CEO of Mutual & Federal, says the industry recovered from 2001 following some consolidation.
Insurance prices went up in the wake of the 9/11 attacks, and this helped stabilise underwriting profits.
The industry hit a record high, in terms of underwriting results, in 2005, and at the peak there was an underwriting surplus of about 10%. However, the conditions were particularly benign during 2003-05. There were no catastrophes, large fires or explosions. We were very lucky over that period.
The position reversed in 2006. We are seeing a return to normal loss patterns and this has led to a sharp decline in the underwriting surplus this year. He says the motor account has led the loss charge, but there has also been a return to weather-related losses. There has also been downward pressure on commercial insurance terms. If this continues we could find ourselves in a similar state to the 1998-2000 period when trading conditions were particularly difficult.
However, with urgent action needed on motor premiums, most insurers are increasing these rates. Another alarming pattern is the increase in the incidence and rand value of violent burglaries. The environment is still attractive for short-term insurers, particularly in the light of increased spending power associated with black consumers.
Inflation is relatively low and the industry is likely to do well in the future, Campbell says.
Anton Ossip, CE of Alexander Forbes Risk and Insurance Services, says corporate insurance rates are still good and corporations are enjoying the fruits rate reductions over the past three years.
Small to medium companies dealing with the commercial property market, have had a higher incidence of fires and property damage, but rates are still contained.
We have been through a period during which loss experiences were low, but this is starting to swing the other way, Ossip says.
Copyright 2006 Times Media Ltd.. Source: Financial Times Information Limited - Europe Intelligence Wire.
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