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Short term Insurance
Monday, May 1, 1989
Softly, softly...

Short-term insurers are faced with at least another year of pressure on underwriting profits. This is the view of reinsurers who believe competition will remain fierce. The presence of overseas players and surplus capacity will continue to aggravate the situation.
Swiss-SA Reinsurance AGM. Gareth Bradburn, gives some background. “Underwriting results should he looked at in the context of business on which reinsurers have an effect and those lines where we have no effect.”
Mr Bradburn notes that insurers tend to keep personal lines and motor business for their net account. Much of the profits recently enjoyed by short-term insurers have come from these lines. But reinsurers do play a strong role in areas like industrial, commercial, fire and liability risks. On this side it is possible for reinsurers to influence the results of direct insurers through treaty terms and conditions. If harsher treaty terms are imposed by reinsurers when most are renegotiated at the end of the year this will affect insurance company results in 1990.
However, intense competition in both the insurance and reinsurance markets makes it more difficult for reinsurers to influence rates through harsher treaty terms.
Munich Reinsurance AGM, Barry Rowe, sums it up. “To ensure long-term continuity we would like to maintain reasonable treaty terms in a difficult market.”
The situation is aggravated by the fact that both local reinsurers and direct insurers are faced with financial restraints which require, amongst others, stricter solvency margins and contingency reserves. Overseas players are not subject to these rules. Natural catastrophes also play a role. Interestingly, however, the Sasol fire has had virtually no impact on local rating levels. Because of the nature of the risk, most cover on the plant had been placed overseas (see Insurance Times April 1989). Similarly, the Cedarberg fires and Free State floods have had no real effect. As Mr Rowe notes, “In monetary terms these events were not catastrophes.’
These factors may mean that reinsurers will enjoy profits for the 1988 year after sustaining heavy losses since about 1983. At the same time concern has been expressed for 1989. Reinsurers agree, however, that a run of large losses will have an impact on the market. This will place pressure on company results. Markets tend to harden once direct insurers start making underwriting losses on their net accounts.
Mr Rowe confirms that underwriting margins are under pressure and adds that the pinch is being felt in the corporate sector and on personal lines.
According to Mr Bradhurn things are made worse by a decline in economic conditions which brings an increase in crime related losses. “This comes through in classes like fidelity guarantee and fire in the form of arson. Indeed, there is a general rise in fraudulent claims.”
Economic factors also mean that the pool of insurable goods is not growing. As Mr Rowe puts it, “Everybody is chasing the same business.” Given this background most agree that management costs will have to be contained to ensure this does not cause additional strain on profits in our inflationary environment.
The bottom line is that short-term insurers are faced with continued pressure on their underwriting profits, although it may take a string of catastrophes to turn the current soft market around.
Industry sources note that it is impossible to put an exact date on a reversal in market trends but most predict that existing conditions will persist until the middle of next year. After that, the consumer can expect premiums to start climbing.

Copyright © Insurance Times and Investments® Vol:2.5 1st May, 1989
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