Editor's Notes:

9/28/2009 2:09:59 PM

We regularly get enquiries about the status of the Short Term Industry in South Africa and the impact the economic downturn (recession) may have on the insurers/underwriters and therefore impact it might have on the general public.  Leading to the question – “Am I at risk and what would happen if my insurance company disappears”?

Valid questions but fortunately for all of us all these companies plan for disasters and not really economic downturns so they are normally quite cash positive and having diversified their exposure globally not really affected by economic downturns.  The following article “A mid year look at the short-term insurance industry” reflects on the profitability of the industry and not on their ability to honour claims.  Yes, profits are less and many even made term losses but the industry is solid and liquid.

The biggest risk to the industry emanating from any economic downturn is fraudulent claims – that has increased by multiples but so has convictions as the industry is improving their “policing” of claims and non-disclosures.

Finally, the industry is as solid as ever.  Just ensure that you have disclosed all facts and figures correctly and revisit your insured assets valuations (and clauses/small print) at least twice per year.

A midyear look at the short-term insurance industry

In their August 2009 Bulletin the South African Insurance Association (SAIA) published the latest Financial Services Board (FSB) special report on results for the short-term insurance industry. The numbers are based on the “combined and un-audited statistics (net after insurance)” in the typical insurer, cell captive insurer, captive insurer and niche insurer space for the six months to 30 June 2009. It includes full year results for 2004 through 2008 and details of the corresponding 2008 half-year for comparison.

Net premiums track inflation higher

The FSB defines a typical insurer as one that “offers most types of policies to – mostly – the general public. There are 25 insurance companies in this category, with six reporting an underwriting loss for the six months ended June 2009. This is a slight improvement on the 10 that reported losses after the first quarter. Only three companies reported an operating loss for the period. Despite difficult economic conditions net premiums showed some improvement, topping R19.032bn for the period, a steady 6% better than the first half of 2008. There were also signs of improvement in the underwriting and investment income in this category, up from R892m to R924m for the comparable period.

The most interesting item included in the report is the Insurance Result as a Percentage of Net Premium graph. We can clearly see a declining trend in the underwriting margin, from 12% in 2004 to just 5% this year. Operating margins have declined somewhat too, from 18% in 2004 to 14% today. In the first half of 2008 there were 17 typical insurers that reported less than 50% for their statutory surplus asset ratios. The situation has improved somewhat, with only 13 languishing in this territory today. A further nine insurers report a surplus asset ratio of between 50% and 100% with three achieving 100% or more.

Cell captives meeting some resistance

The second insurer category documented in the FSB report is the cell captive insurer, defined as “insurers who offer insurance structures on a cell ownership basis for first party and third party cell owners.” This segment of the short-term insurance industry struggled in the latest six months. Net premiums written increased marginally from R3.077bn to R3.099bn while total underwriting profit fell from R297m in 2008 to just R198m. “Of the eleven operational cell captive insurers, two have reported an underwriting loss and none an operating loss for the six months ended June 2009,” said the FSB. This compares with four (of eleven) underwriting losses and two operating losses in the first quarter.

Underwriting results expressed as a percentage of net premiums have been consistent in this insurer class for the last three years. The underwriting performance improved from 5% to 6% in the latest quarter, while operating results, which include investment income, climbed to 21%. Two of the cell captive insurers reported statutory solvency percentages in excess of 100%, with four reporting 50% to 100%. The rest all reported less than 50%.

Captive insurers “are those insurers who offer cover of the risks of the owners’ company or companies only.” This is an extremely small segment of the domestic short-term universe. Net premiums in the first half of 2009 came to R377m. Although higher premiums were reported underwriting profit in this category amounted to a mere R9m. Claims as a percentage of earned premiums spiked to 88%, the highest ratio since 2004. There are only ten captive insurers covered in the FSB report. Four of these reported underwriting losses (and two operating losses) in the latest period. These poor results are reflected in the declining underwriting margin (now close to zero) and a massive decline in operating results as a percentage of net premiums, down from 82% to just 16%. Each of the insurers in this group reported statutory solvency percentages in excess of 100%.

The final category of insurer included in the FSB report is the so-called niche insurer. These are “insurers who offer, mostly, specialized cover only, in certain niche markets” Net written premiums in this category soared 26% in the first six months of the year, while underwriting profit was R200m stronger at R807m. The underwriting result as a percentage of net written premiums fell slightly, from 30% to 28%, but remains the best result across all the insurer categories.

The niche insurer category is clearly one where the insurer either performs very well or not at all. Of the 33 niche insurers, 18 reported underwriting losses, and 10 operational losses for the first half.

Editor’s thoughts:

The domestic business environment remains tough; but it’s clear the majority of short-term insurers are in a better position today than six months ago. Improving investment returns have somewhat compensated for disappointing underwriting results.

Article reference:  FAnews Online Editor, gareth@fanews.co.za