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Short term Industry
Sunday, January 1, 1989
Consumers losing

While the short term insurance industry may well congratulate itself for the healthy cash position it achieved in 1988, it should also look closely at how that position was achieved.
Healthy underwriting was one contributing factor, and claims incidence also decreased somewhat in the personal lines. But premium increases earlier in the year, largely effected at the expense of the consumer, must not be ignored. Some companies can be commended for assisting personal lines policyholders by reducing premiums or introducing premium discounts. This generally occurred in the second half of the year, once they saw how they were placed financially for 1988. Commercial Union introduced an across-the-board 10% “thank you” discount, while Guardian National also cut premiums. Several other insurers felt it more important to reward only the better risks, so offered various discounts.
One industry spokesman said that his company was cutting premiums to bring it into line with other members of the industry. This leads one to wonder how many consumers were taken for a ride before the discount was offered, and how many were conned into thinking they had a good deal after it was brought into effect.
In spite of the premium cuts some major companies came out of the 1988 financial year with huge increases in underwriting profits. Mutual & Federal, for instance, announced a 234% increase, from R13,6m in 1987 to R45,4m in 1988. IGI also increased its underwriting profits from 1,05m in 1987 to R8,5m in 1988.
Even these figures are understated because most companies put away additional reserves following the Melamet Commission’s recommendations in June that solvency margins be raised from 10% to 15% and that a catastrophe reserve be established over the next five years.
Foreign competition
Foreign competition was a key element in the year. The lack of flexibility and innovation on the part of local insurers opened the door for Lloyd’s, especially, and other smaller firms from the “fringe market”. Many said this was the start of a rate war - a highly hazardous situation for any underwriter.
Brokers actively promoted the export of business (for example liability insurance) because of the opportunities offered by the foreign markets. They insisted that there was enough business for everyone, and pointed out that only 7% of total premium income was actually leaving the shores of South Africa.
Lloyd’s South African representative, Ronald Napier, was quoted as saying, “Lloyd’s will not rock the boat, but will compete as it is recognised as a legitimate South African insurer.”
Ken Saggers, MD of Mutual & Federal, said that all he asked for was a “level playing field”, which could be obtained if there were more stringent rules governing Lloyd’s operations in South Africa.
He felt that at least half of the premium leaving the country could, in fact, be placed locally. “I believe the brokers have a leading role to play by making a concerted effort to retain the business here.”
On the commercial side, insurers said they would stand fast and ignore the pressures placed on them by overseas competition. As a result they lost business and skills. Many local underwriters were demotivated and left for greener pastures. This was particularly the case in specialised fields of underwriting.
Registrar of Financial Institutions, Theo van Wyk, urged insurers to underwrite scientifically and not to succumb to pressure that could lead to instability in the industry. He cautioned against a repeat of events which led to the AA Mutual Insurance crash in 1986.
He stamped his strong character on the industry. Mindful of the need to protect the consumer, he made it known he was completely in favour of free markets. He was also the first in the Financial Institutions Office in years to acknowledge the grave shortcomings of over-regulation.
Self-insurance
During the year there was a large shift towards self-insurance. While this was not particularly new among large commercial and industrial enterprises, 1988 saw personal lines clients moving in that direction too.
Many were no longer prepared to fork out for the massive premium increases that had been imposed. Instead they increasingly assumed certain insurance risks for their own account.
The crime rate decreased somewhat and members of the public became more aware of the need to protect their possessions. This facilitated the slight shift away from traditional insurance.
Political riot
Political riot cover was expanded in 1988. For the first time Namibia had its own cover under the newly established National Special Risks Insurance Association (NASRIA). South Africa was already covered under SASRIA (South African Special Risks Insurance Association), and the TBVC states were included in April.
SASRIA’s fund stood at a whopping R1,2m in 1988, just nine years since it was established. This was largely because premium income increased dramatically after declaration of the second State of Emergency in 1986, while the incidence of claims was not unduly high. Brokers continued to complain about the low commissions (5%) received for handling SASRIA policies separately from other short term business.
Melamet report
The Melamet Report was one of the most awaited and talked-about issues of 1988. Reporting largely on the AA Mutual Insurance (AAMI) collapse in 1986. It did, however, include numerous recommendations aimed at strengthening the local short term industry and protecting the public.
Justice Melamet and his commission found quite a number of causes for the AAMI crash. Many centred on the financial state of the company, such as a lack of correct technical reserving, bad management and lack of control, inadequate accounting and a shortage of capital.
In the wake of the report the Financial Institutions Office (FIO) announced that short term insurers would be required to raise their solvency margins from 10% to 15%. Many companies were way above this level, but started to establish additional funds. This was to fulfill another recommendation that a catastrophe reserve be built up by each insurer over the next five years to equal 10% of annual net written premium.
The various recommendations were studied closely by the industry and the FlO. Amendments to the Insurance Act of 1943 were discussed. The implementation of those accepted will take place in due course, although the solvency margin requirements were to be phased in immediately.
Import surcharge
In August the government introduced an import surcharge ranging from 20% to 60% on various luxury goods. An example of goods affected were televisions, videos and hi-fis. The effect of this from the insurers’ point of view is yet to be seen. But policyholders were advised, and even urged, to make sure they were not underinsured.
Most insurers promised to hold their rates steady for several months, in spite of the increased sums insured of their clients. They tended to feel that the effects of the surcharge would not be as great as those of inflation and the weakening exchange rate.
Lastly, on the question of sanctions, insurers and brokers alike stressed they had contingency plans should their links to the Western World be cut off. It seems they have the situation well under control.

Copyright © Insurance Times and Investments® Vol:2.1 1st January, 1989
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