Become Short-term Insurance Savvy

Results were weather-beaten; premium increases likely.

Short-term insurance companies paid significantly more in claims than they collected in premiums during 2013, suffering underwriting losses that were widely attributed to extreme weather events and rand weakness.

The most notable catastrophe events in 2013 were the January floods in Limpopo, followed by floods in the Western Cape and two significant hailstorms in Gauteng in November. The second hailstorm on November 27 is being described by the industry as “one of the most severe catastrophe events experienced in South Africa to date”, with total claims for the short-term insurance industry exceeding R1.6 billion.

According to Ian Kirk, CEO of Santam, five insurers suffered losses of more than R170 million as a result of that hailstorm.

Santam, South Africa’s largest short-term insurer, suffered a R225 million loss from the storm and reported an underwriting margin of just 2.8% for the 2013 year, or an underwriting profit of R477 million. This is 24% lower than the previous year.

The underwriting margin is an important measure of how well an insurance company is performing in its daily operations, as it excludes income earned from investments. Anything above 0% indicates a profit.

Santam holds roughly 23.1% of gross written premium (GWP) in the short-term insurance market.

Kirk said that the insurer was disappointed with its underwriting margin, which was well below its target range of 5% to 7%. He explained that its decision to increase its dividend no more than 5.6% to 433 cents per share, accounted for a more difficult underwriting year and the need to maintain capital reserves.

Specifically, hail and drought caused a net underwriting loss of R142 million on Santam’s crop book, compared with a R38 million profit achieved a year earlier.

That Santam reported an underwriting profit at all seems a considerable achievement, when examining the results of other intermediated short-term insurers.

Mutual & Federal (M&F), which was the next largest short-term insurer at the end of 2012 with 10.5% market share, reported an underwriting loss of R437 million, or an underwriting margin of -4.9%. This is despite growing its GWP by 16.6% to R11.3 billion for the year. M&F attributed this loss to severe weather, the impact of drought on its agriculture book and a continued soft market (low premiums, increased competition and reduced underwriting criteria), particularly in motor.

“The underwriting result was considerably worse than M&F expected and deteriorated in the space of a month, when we were unexpectedly hit by floods in the Western Cape and two massive hailstorms in Gauteng,” CEO of Mutual & Federal, Raimund Snyders, told Moneyweb at parent company Old Mutual’s recent results presentation.

Zurich Insurance, which in 2012 had a 5.3% share of the short-term insurance market, reported a R455 million underwriting loss for 2013, compared with a deficit of R258 million in the prior year.

Zurich attributed this to the 16% increase in claims expenses to R2.5 billion, as a result of more frequent and severe losses in both the property and motor portfolios. It said that rand weakness pushed up the cost of motor claims, while large property fires and three significant weather events in November 2013 knocked the commercial portfolio. The insurer made a R164 million after-tax loss for the year.

Kirk said that generally, the premium strength in the industry was not there. In other words, insurers were not pricing for the risks they were writing, but cutting rates to compete for new and existing business.

Low rates, extreme weather events and a slide in the rand, had led to losses in general insurance that “we’ve never seen before”, Kirk noted.

Although Outsurance (2012: 9.8% market share) continued to make an underwriting profit over the six-month period to December 31 2013, large natural catastrophe events in South Africa and Australia contributed to a net financial impact after reinsurance recoveries of R174 million for the period (2012: R59 million). Reinsurance is the means by which insurance companies pass a portion of their risk on to even bigger companies, known as reinsurers.

The direct insurer attributed its 20% increase in normalised earnings to R594 million to “satisfactory claims ratios that were below market averages”.

The way forward

Santam has implemented selective rate increases where risks are higher and is working to lower the average price of servicing claims and repairing motorcars, to contain costs.

“We are still in tough times but well positioned to deliver a reasonable underwriting margin in 2014,” said Kirk. “We understand the industry and its challenges and are going to stay the course, sticking to the strategy that we have.”

Similarly, Snyders confirmed that M&F was working to bring down the cost of claims, which would translate into lower price increases for customers. “I’m quite comfortable with how we have managed these catastrophes. We are not panicking and are increasing rates in line with our normal programme, not as a result of these specific catastrophic weather events,” Snyders said. “It is an episode, not a trend and our job is to ensure we have the reinsurance in place to weather these catastrophes.”

 

 

 

Author: MC World

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