South African motorists might wonder how the terrorist attacks of 9/11 could have anything to do with the 20%-plus increase in their motor insurance premiums last year, but the events are connected.
This is because local short-term insurers offload much of their risks to international reinsurers, which increased premiums after that date.
Reinsurers increased certain types of catastrophe cover by 200%-300% and many stopped writing riskier lines of business. Many reinsurers exited the market, removing surplus capacity to permit what many consider was a long-overdue hardening in premium rates. For the previous 15 years, the international insurance market was overtraded, which was good news for insurance customers as it kept premiums low. Insurers were prepared to absorb underwriting losses as long as the financial markets were booming. That changed after 2000, when investment returns imploded, forcing insurers to be more picky about the risks they underwrote, and the terror attacks merely aggravated a trend already in play.
SA insurers purchase most of their reinsurance abroad from companies such as Swiss Re and Munich Re. The post-9/11 increase in global reinsurance rates inevitably reached SA. This, together with the sharp drop in the rand in 2001, resulted in most local motor insurance premiums rising more than 25% for each of the past two years.
This is good for underwriting performance, but increases of this magnitude create problems of a different kind as motorists are more prone to opt out of the insurance market in a country where more than two-thirds of cars are already uninsured.
Still, these are happier times for SA insurers. Underwriting profits are at their highest levels in more than a decade, according to the March 2003 Financial Services Board (FSB) Report on the short-term industry.
Underwriting profits, or what's left after insurance claims and administration costs have been deducted, touched 4% of net premium income in March 2003, up from 2% the previous year and a negative 1% in 2000. For most of the 1990s, insurers reported underwriting losses, relying on investment income from booming bond and stock markets to make up the shortfall.
This also prompted a spate of acquisitions. Industry consolidation started in the mid-1990s when Mutual & Federal (M&F) bought Protea Assurance; Commercial Union merged with General Accident to become CGU; Constantia merged with Global Insurance; and Guardian National took over Aegis and Standard General.
In the past two years: Santam moved to the top of the league with its purchase of Guardian National; M&F purchased CGU and FGI Namibia (and is in the process of acquiring control of Credit Guarantee Insurance Corporation); and Hollard acquired FedGen. M&F retained 72% of the CGU client base and Santam about 95% of Guardian clients.
Market leaders Santam and M&F both reported strong improvements in underwriting performance over the past year. SA Eagle, the country's third-largest insurer, reported an underwriting loss last year, mainly due to the restructuring costs and heavy investments it made in automating its systems, the benefits of which should begin to show in the current financial year.
Whatever improvements have been tallied on the underwriting side have been obliterated by weak investment returns over the past two years. There are concerns that the recent rally in world financial markets will not last and may drift sideways for several years. Some insurers, such as Santam, have taken out capital protection cover, using derivatives to provide some protection against further decline. All are paying close attention to their mix of asset classes, particularly equities.
Insurers are having to maintain their underwriting discipline and the results are starting to show. According to the FSB, management expenses and commissions as a percentage of net premium income have dropped to 24% from 30% over 10 years among the country's 23 "typical" insurers, defined as those offering policies typically to the public.
"The underwriting environment has improved, but let's keep this in perspective," says Santam acting CEO Hannes Wilken. "An improvement from 1,5% to 2,5% in underwriting profits is significant, but is still marginal when compared with the risks we cover. "We've also seen a rise in weather-related claims, with four big catastrophes recorded in the third quarter of last year and another four this year, to which Santam is exposed," he says.
"This year we've seen yet another firming in the reinsurance renewals that insurers had to pass on to clients," says M&F CEO Bruce Campbell. "I think we're going to see premiums continue to harden in 2004 and beyond."
Growth in short-term premium income tends to track GDP growth. The SA economy should grow by about 2,8% this year, rising to about 3,5% next year. This makes it a relatively attractive market for insurers over the next few years.
