In his Day of Affirmation speech, given to the National Union of SA Students at the University of Cape Town in June 1966, senator Robert F Kennedy made the point that "like it or not, we live in interesting times". You can bet that right now most executives in the short-term insurance industry are wishing for more mundane times.
The industry has not escaped the wrath of the global meltdown and is experiencing a drastic shift in market dynamics and client behaviour. Over and above the recessionary pressures, it is being challenged by the demands of compliance as well as the emergence of direct insurers. And with the credit crunch biting down stronger than ever, businesses are reassessing their insurance expenditure.
Though the industry managed to grow capital through 2008, it was by a modest amount. According to research by KPMG, premium income increased 9% from R47bn to R51bn - down from a high of 22% in 2004.
"When premium growth is compared with consumer price inflation of 11,5% and gross domestic product of 3,1% during the same period, it is clear that the short-term insurance market has shrunk in real terms during 2008," says KPMG national insurance industry leader, Gerdus Dixon. "This is a worrisome statistic."
More concerning, the industry's underwriting profits have halved since 2004, which was a year of record profit. Participants in the survey reported aggregated profits of R1,1bn for 2008, down by 35% on the R1,7bn reported in 2007.
Half year results to June from the industry's biggest players, Santam and Mutual & Federal, reflect the challenges the broader industry is facing and sound a warning that recovery is not around the corner.
Mutual & Federal reported underwriting losses - a 7% decline in premium income and declines in investment income. Santam's underwriting result declined to R88m during the period, compared to R326m earned during the first six months of 2008. Premium income grew 7% and investment income was also up - a credible achievement.
Though economic growth is expected to remain slow, negatively affecting industry growth, Santam CEO Ian Kirk reminded delegates at SA's annual conference of the Insurance Institute that SA's difficulties are nothing in comparison to the situation in the US.
"US firms took a massive capital blow," he said. Insurers in that market suffered a 28% decline in capital, with the likes of AIG taking a 40% knock. "The financial services industry will have to adapt to an environment where 45% of the world's wealth has been wiped out, unemployment is on the rise, and the regulators are certain to get more involved. The risks faced by insurers are very significant," he said.
The consumer is under pressure in both the personal lines and corporate space. There is a big downward pressure on price and upward pressure on re-insurance price.
Exacerbating the difficulties, local companies such as a Paarl printing company were hit this year by fires and floods in the East Rand. Profitability was also constrained because people are not buying houses or cars, making it difficult for insurance companies to get growth out of existing policies.
And declining household disposable income coupled with job losses is reducing the consumers' ability and appetite to fund their insurance spend. Mutual & Federal is also concerned about the pressure on SMEs, which are folding at a rapid rate.
Andrew Chislett, CEO of short-term insurance brokers Glenrand MIB, chooses to see the glass as half full, rather than half empty. "The interesting thing about insurance, though it isn't recession proof, is that the requirement to take out insurance is often contractually stipulated when people borrow to buy a car or a house. This helps maintain some resilience." The difference now, he says, is that people will shop around for the best deal.
Of course with the current economic crisis, wild cat calls for "cut the middleman and save" are gaining traction with consumers and businesses alike. The debate, which is long running, sees independent brokers and advisers promoting their impartiality and the benefits of professional advice. The direct channels punt their option as bringing lower costs and more efficiency to the market.
In practice, says Powerhouse Financial Solutions insurance director Sandra Grobbelaar, assessing certain risks, such as business risk, can be quite complex. "Obtaining the right cover requires independent, expert advice which brokers are qualified to provide." Besides, she says, "the cost of advertising and commission negates the myth that consumers save by going direct".
However, Telesure MD Tom Creamer says that a degree of commercialisation is creeping into the short-term insurance market. "Short-term insurance has low barriers to exit and consumers will jump for a 5% to 10% saving," he says. The problem is that customers are ascribing a relatively low value to professional advice. "For as long as that happens a new approach to broking is necessary."
He cites the UK, where traditional broking has lost market share to direct marketing and affinity marketing. Affinity marketing is where a company, such as the AA or Woolworths, will take advantage of its strong brand to market other products, in this case insurance.
Some traditional insurers, he says, are starting to come to terms with the need for a multibrand, multichannel strategy. "Santam and Sanlam have shares in MiWay, which is a direct play." But there is room in the brokers. "Provided they become more specialised, manage their costs and use technology more effectively," says Creamer.
Shifting distribution methodologies are one of the changing dynamics of the industry. But there are other pressing concerns.
WHAT IT MEANS
 Premium income of 9% in 2008 is down from the high of 22% in 2004
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One is the difficulty companies face in securing inflation based increases from customers. "The problem is that the insurance industry is too reactive," says Chislett. "Their underwriting margins are less than half of what they want; their investment portfolios have not performed, and there is pressure on profits." Other concerns include the inability to price correctly for risk and the increase in claims frequency and value.
Many insurers are making losses on their motor books. The parlous state of SA's roads, the high number of unlicensed and ill-disciplined drivers and the growing costs of repairing cars in SA are contributing to the losses in this sector.
What it all means is that risk management must become more of a priority. "Insurers, intermediaries and policyholders need to collaborate to mitigate their risks," says Kirk. "Unless this happens, the inefficiencies in the system will flow to the consumer."
