Concern over sustainability of short-term insurance industry misguided

The sustainability of the short term insurance industry in South Africa has received much attention in recent months, as stakeholders debate exactly how long companies operating in the industry can continue with falling profits and rising costs. However, while current market conditions are tough, this is actually part of an existing insurance cycle, not just a downward trend.

 

This is according to Lance Moroney, Business Unit Head of Non-Life at Aon Hewitt South Africa, who says the insurance cycle is a pattern that has existed for many years and will continue to do so in the future. “The insurance industry has always been cyclical in nature and we see periods in which profits are squeezed and new players offer low premiums to attract customers, thereby exacerbating the impact on margins.”

 

He says a recent survey conducted by tax advisory firm KPMG, which revealed that traditional short-term insurers struggling to achieve growth in recent years may face a watershed over the next six months, indicates that although insurers might be feeling the strain now, the insurance cycle will balance out in time. “It is obvious that if we face another economic downturn, the insurance industry will suffer as a result. There is little room for manoeuvre in a recession to put premiums up in order to get more profitable.”

 

Moroney says one of the reasons that the short term insurance industry is currently experiencing such pressure is due to the increasingly competitive environment, which has witnessed a significant increase in new players over the past five to 10 years. “As the insurance cycle evolves, competition develops between the established firms and the newer insurance companies, who offer lower rates and premiums to capture market share.”

 

“However, absorbing lower margins over a continued period of time is not a sustainable business model and eventually premiums do have to correct. When this happens, the smaller, or unprofitable, competitors are often bought out by larger industry players, resulting in less competition in the short term insurance space and a return to a more profitable business model.”

 

“This is a pattern that has been witnessed in the industry for some time and we are currently in the middle of a competitive cycle that is seeing new entrants competing for business. However, despite the recent strain on growth, the industry is showing signs of returning to more profitable levels from a low point in 2009. This indicates a focus of the industry on improving and addressing profitability issues, and a focus on improving their existing books of business. The recent economic downturn and strain on profitability levels led to a focus on expenses across all areas of the business with efficiency improvements achieved in management and business restructure. Improvements in claims processing and handling such as a reduction in fraudulent claims have led to significant underwriting profit gains in some cases.”

 

Moroney says that for any company to decide to merge with another or be taken over is a significant business decision that has more to it than just economic hardship.

 

“Profitability is a challenge and the margins are often not that fantastic for a generalist insurer; but while there may be some casualties going forward, many of South Africa’s short-term insurers are specialists in a particular sector, so we may see more companies returning to their core business model before gradually growing their product offering over time.

 

Moroney says that increased compliance and capital requirements may lead to some consolidation in the short term insurance industry. “Imminent risk-based regulation could lead to merger and acquisition activity as regulations are implemented, but the effects of this have not yet impacted the market.”