Short-term insurance under pressure
Johannesburg - Underwriters in the short-term insurance industry are emerging from what looks like the bottom of a down cycle and can expect better prospects over the next few years.
But there are issues – some new issues – that will have to be dealt with.
The industry is in good shape, says Santam [JSE:SNT] CE Ian Kirk, but faces a number of challenges, which would mainly be in the regulatory environment, from local government capability and from a significantly underinsured or non-insured population.
As the leading short-term insurer in South Africa with around a 22% market share, Santam is fairly representative of the industry and is the only significant insurer listed on the JSE.
Heavy flooding, claims for which will currently affect underwriters, are an example of underinsurance.
“Recent floods in the summer rainfall regions – and hail that impacted farmers in November and December last year – wrought huge damage and losses. However, only a small percentage of those losses were covered by insurance.”
Kirk says the implications of that were “severe and tragic” for those affected.
“The industry was working with local government, with communities and with national government to raise awareness of the risk of under- or non-insurance to pre-empt as much as possible future losses of that – or any – magnitude.”
The floods were more of an industry issue than an issue for Santam, Kirk says. “We have the diversification, with offices in towns throughout the country, to risk accordingly. And to an extent we’ve kept away from those known flood areas.”
Motor vehicle insurance is another telling example of under- and non-insurance.
Any reader who has been involved in an accident with a non-insured driver will know the problems that ensue in getting claims settled.
Kirk says it’s a huge issue, not only for the industry but also for the 30% of motor vehicle owners whose vehicles are insured. The rest are not.
“Motor vehicle insurance ought to be made compulsory in SA, as it is in many other countries. Santam is working with the industry association to promote national policy to ensure every vehicle on the road is covered, at least for third-party liability.”
The Road Accident Fund (RAF) isn’t an answer. With a deficit of around R45bn and only half of RAF money effectively making its way to beneficiaries, Kirk says it’s a system “riddled with inefficiency that just doesn’t work for SA currently”.
With clients financially burdened over the past two years, the detection of fraudulent claims had been on the increase but was now declining, Kirk says.
“When times are tough some clients treat their insurance policies like a savings account, which then can impose higher premiums on the honest clients. But the industry has become more sophisticated than it was before and we’re picking up more fraudulent claims, often through the questions answered by clients to call centres.”
He says the short-term industry needs to invest in broadening its market penetration. SA’s developed market segments are well served by insurers, but new market segments remain underserviced and present significant opportunities for the industry.
“It’s not about offering emerging market segments cheap products. Rather, we need to focus on distribution. So we’re looking at new channels of distribution – for example, banks, retailers and direct. We also explore and implement other solutions: for example, developing new products and training black intermediaries. That’s the new business imperative in short-term insurance.”
Proposed regulations could take a heavy toll on the industry. “A new regulatory environment would almost certainly see a diminishing in the number of insurance providers in SA, as the capital requirements and cost of compliance increased significantly.”
* This article was first published in Finweek
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