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Short term Insurance
Monday, March 1, 1999
Getting worse

Despite an increase of 14,8% in total gross premium income for the 1997 calendar year to R20 737m, short-term insurers faced lower profits. According to the latest figures from the Financial Services Board (FSB) net underwriting profit for the industry as a ‘‘hole plunged 26,7% from R678,9m in 1996 to just R497,5m in 1997.
The biggest culprit was commercial fire which faced a dramatic reduction in profits, falling 92,7% from R81,9m in 1996 tojustR6m in the year under review. The miscellaneous account profit also fell — down 67,7% to just R55,6m.
‘Miscellaneous’ is the last of six classes of short-term business in terms of which insurers report under the pre-1999 regulations, and includes commercial burglary, aviation hull, engineering & contractors’, and crop insurance. It is thought that crime losses are a significant contributor to the results in this account.
According to comments from the FSB and the SA Insurance Association (SAIA) the market worsened further during 1998. Unaudited figures of the 24 largest insurers suggest that last year might indeed end with a total underwriting loss. To 30th June 1998, the 24 insurers had already reported a total underwriting loss of R36m, corn- pared to a profit of R186m in 1997 for the same period.
“With a deteriorating economy the industry had to absorb new competitors,” comments chief executive of the SAIA, Barry Scott. “This and constantly increasing claims are contributing factors to the underwriting losses coming through.” More recently, he adds, “the newcomers are busy chopping rates left, right and centre.” And the fact the big insurers are cutting rates to maintain market share does not bode well for the outcome of this year either.
According to the FSB, during the 12 months to 30th June 1998, no less than ten new short-term insurance companies were registered, of which two were supported by foreign holding companies. There was also a dramatic increase in the numbers of captive insurers, which, says the FSB, is an indication of the market’s continued move toward “alternative risk solutions”.
Both factors are squeezing traditional providers of insurance cover. The FSB notes that the increase in GM the year before (1996) was 20%, with the slowdown in the growth to 14,8% in 1997 being ascribed to:
• World markets experiencing huge capacity, making it difficult for local insurers to increase the level of premium rates; and,
• Businesses worldwide opting to increase levels of self-insurance.
Meanwhile, SA insurers have to contend with the new Short-term Insurance Act 1998, which came into effect 1st January 1999. It introduces a new approach to legislation and supervision of the industry, with new statutory returns and a wider range of business classes on which to report.
In terms of the regulations to the Act, new wider disclosure provisions and other policyholder protection regulations will also be introduced over the ensuing months, and these could hamper insurers’ marketing efforts. The regulations should create more discerning buyers who will search, not only for lower rates, but better insurance covers.
Finally, there is the persistent disquiet on the part of reinsurers with regard to the losses they have faced on the commercial fire account. Although generous capacity and over- seas competition has made it difficult for them to react in the past, there is a hint that the tide may be turning, with some reinsurers evidently beginning to decline business where “the rates are too low.” By Nigel Benetton.

Copyright © Insurance Times and Investments® Vol:12.2 1st March, 1999
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