Delegating some tasks to specialist companies could save the insurance industry millions of rands and result in more moderate premium escalation for consumers, who are often forced to terminate their policies if they can no longer bear the yearly increases.
This is the view of Infiniti Insurance chief executive Sharon Paterson, one of the smaller insurers in the country, which, even without economies of scale, says it has managed to keep its cost escalation reasonable.
Infiniti, which generates an annualised income of around R700 million from its short-term insurance policies, delegates the bulk of its administration and daily management of portfolios to brokers and specialist underwriters by way of binder agreements.
Paterson said it had had a significantly lower management expense ratio than the market average, allowing it to pay binder fees without affecting the premium charged.
“It had always been a challenge whether to do this ourselves or with partners. But if you are going to be an insurance company, you can do it in one of three ways – full delegated authority; writing policies through brokers but underwriting yourself; or doing everything on your own. If you take the middle route, you are going to have duplication and that pushes up costs.”
Infiniti mostly offers short-term insurance for the horse racing, aviation and marine industries.
And in addition to broker books, it underwrites policies in niche areas such as hospitality, credit life, wildlife operations and motor warranties, among others.
The company has only two branches that do any direct underwriting, one for commercial legal insurance and the other for aviation. For everything else, companies that are specialists in underwriting for that particular sector are appointed as partners.
“If you are going to underwrite something as specialised as game, for example, you need an expert in that industry. Our aviation underwriters, for example, consider the competency of the service and maintenance crews of aircraft as well as the pilot, before agreeing to insure them. This is something that I, as a general underwriter, would not think of doing,” Paterson said.
Santam, the country’s biggest short-term insurer, underwrites itself but also makes use of specialised underwriting management agencies for some books. But its chief executive, Ian Kirk, is a critic of fully delegating underwriting to brokers.
“In certain situations, it makes sense to fully delegate. It can be the most cost efficient thing to do. But we (Santam) only do it where we control the underwriting agency, otherwise how do you ensure alignment…
“But to fully delegate to brokers, we wouldn’t do that.”
Kirk said this was because a broker would be in a conflicting situation if he had to work in the client’s interest and the insurer’s interest.
While delegating tasks within a clear mandate was one way of keeping the insurers’ costs down, both Infiniti and Santam were of the view that instead of merely increasing insurance premiums, short-term insurers should take a hard look at their underwriting practices. Underwriting is the assessment of insurance risk.
“With the squeeze on industry, insurers have to go back to good old-fashioned underwriting instead of merely putting through rate increases, which is not going to solve the problem. A client who consistently claims results in all clients having to pay more,” Paterson said.
Kirk said while costs were an important element to the rise in insurance premiums, they played a smaller role compared with the risk.