Press Office Feature : What’s pressing South Africa’s short-term insurance industry?
|Author:||Retha van Reenen|
|Posted:||30 Apr 2015|
We are in the midst of rapidly changing times and consolidation in order to leverage scale benefits within the industry are upon us.
We are seeing this at every level and cannot shy away from the consequences and effects thereof - it needs to be faced head-on.
Consumers and Brokers
Those brokers who have over the years added on all sorts of fees without too much questioning from their clients are starting to feel the pressure.
Cash-strapped consumers are continuing to compare their bottom-line spend using DIY insurance platforms like online insurance quote comparison sites etc.
This behaviour, which is particularly popular amongst Generation Y (those born in the 1980’s), are forcing brokers to re-evaluate the sustainability of their business models and in-house administration, which in turn impacts the ultimate cost to the consumer.
Underwriting Management Agencies (UMAs)
Currently, pressure felt by the frontline (i.e. consumers and brokers) is channelled right back to insurers, and where applicable, the UMAs who represent insurers.
We are also seeing what many have been predicting for the last 24 months - consolidation and the resultant exiting of many UMAs whose business models have proven to be unsustainable.
Eventually, even capitalists go on strike
Another factor contributing to current market conditions is the fact that too many UMAs have not delivered the required returns for their carriers and reinsurance partners for several years in succession.
What has surprised me, however, is the amount of time taken for the providers of capital to object.
A big part of the problem has been the lack of growth in the developed markets, and so international reinsurers have been loose with their capital in developing economies.
But the South African short-term insurance market is not “developing.”
As such, we are not capable of generating the returns (as currently experienced in many other African countries where their insurance markets are truly developing and therefore offer much more attractive returns on capital).
Our market has also seen the proliferation of too many UMAs who cannot add value in their selected market segments.
True specialist UMAs who retain and apply subject matter expertise (i.e. marine, aviation, specialist liability, engineering, complex property risks, etc.) do add value.
Therefore, their product pricing is typically not influenced much by system and procurement efficiency advantages - simply because their insurance products are not high volume-based transactional insurance deals.
Motor books causing the pressure
The majority of UMAs who have been swallowed up by their carrier, or who have been given notice and battling to find a new carrier, or reluctantly merging with another UMA, are typically heavily weighted to motor and personal lines business (which in turn mainly consists of motor in any case.)
This class of business requires better risk selection capability; use of technology to integrate many of the processes and client engagement situations, and of course, mass scale procurement advantage in respect of managing claims costs.
Most, if not all UMAs, do not possess the advanced risk selection capability due to a lack of investment capacity.
These UMAs are all intermediated, and therefore unable to manage their claims costs efficiently. Other smaller factors like more expensive reinsurance costs are also playing a role.
Insurers and reinsurers
Ultimately, for a viable insurance industry to be maintained, the ultimate risk takers (meaning the insurers and reinsurers in the context of this article) need to service the capital which investors have allocated to underwriting insurance risks.
When analysing the bulk of SA insurers’ return on capital, there is one distinguishing highlight - the leading direct insurers consistently outperform return on capital expectations (although one may argue that this outperformance comes at the cost of the consumer).
On the other hand, most (not all) general “intermediated” insurers are underperforming when it comes to the return on capital expectations.
This distinguishing factor begs the question: Why does the intermediated channel not produce the required return on capital?
In a nutshell, my guess at the answer is as follow:
Overall, the acquisition costs for intermediated insurers are higher, and the difference effectively represents certain duplicative administration functions that exist between intermediated insurers and their intermediaries.
As such, inefficiency is at the heart of it all.
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