South Africa needs a robust short-term insurance sector to serve and protect consumers against harm. File Image: IOL

This article was first published in the 3rd quarter 2018 edition of Personal Finance magazine.

Millions of South Africans go about their daily lives secure in the knowledge that their car, home and personal goods are protected by short-term insurance policies.

They enjoy peace of mind that their short-term insurer will step in to cover their loss following a car accident, burglary, weather catastrophe or other loss event. Such losses occur more frequently than we realise, with more than 3.2 million claims made by consumers against their short-term insurers in 2017 alone.

One of the best illustration of the value of short-term insurance is to consider the industry’s response to natural catastrophes. There were three significant loss events in South Africa in 2017, including wildfires in the Eastern and Western Cape (in June), hailstorms in Gauteng and severe rainfall in the Gauteng and KwaZulu-Natal.

South Africa’s largest short-term insurer, Santam, said 2017 was the costliest 12 months for natural catastrophe losses in its 100-year history. Their policyholders submitted gross claims totalling R823 million following the Knysna fires and more than R1 billion following the October storms, mostly for flood damage.

“Catastrophes have increased in both frequency and severity,” says Christelle Coleman, executive for high-net-worth solutions at Old Mutual Insure. “This has meant a huge leap in our thinking around catastrophe preparedness, especially when it comes to expediting the deluge of claims that come in”.

Old Mutual Insure was one of many local insurers who contributed to the more than R3.3 billion in claims payouts in the aftermath of the Knysna wildfires. The fires destroyed thousands of hectares of vegetation and hundreds of houses, making it the largest insured catastrophe loss event ever recorded in South Africa.

How do insurers pay-out such massive amounts in claims without going bust? Can the sector survive the ongoing natural catastrophe onslaught and still cover local consumers against ‘run of the mill’ losses? And – perhaps more importantly – will last year’s record catastrophe claims result in increases to your short-term insurance premiums?

South Africa is fortunate to have a well-developed short-term insurance industry with dozens of insurers selling policies to both consumers and businesses.

The financial services regulatory framework under which our insurers operate is acknowledged as one of the most progressive in the world, with stringent capital requirements for insurers and comprehensive protection for consumers built in.

The industry has taken the occasional collapse in its stride, remained solvent through the 2008 global financial crisis and subsequent market downturn, and continues to pay out billions of rand in claims each year.

According to the regulator, our short-term insurers collected R116 billion in premiums and paid out R72 billion in claims in 2016 alone. Approximately half of this business is categorised as personal lines insurance (insurance for individual consumers) with the remainder being for commercial and corporate policies.

Risk sharing

The sharing of risk is central construct of short-term insurance. Your insurer “saves” your premium alongside the premium it collects from each of its policyholders in a risk pool. The accumulated capital in this pool needs to be sufficient to pay out all predicted claims for all policyholders in a given year.

However, it is virtually impossible for an insurer to pay out a Knysna-size claim from its own capital, so it supplements this by entering a reinsurance agreement – basically an insurance policy for the insurer.

One of the unavoidable consequences of a record catastrophe loss year is that your insurer will have to pay more for this reinsurance. “Both insurers and reinsurers are under pressure following a record natural catastrophe loss year,” says Peter Olyott, chief executive of Indwe Broker Holdings.

But Old Mutual Insure does not believe that these cost pressures will impact personal lines clients to the same extent as commercial clients. “The challenges experienced with regards to the shortage of capacity in the commercial and corporate reinsurance space is not predominant in personal lines,” says Coleman.

Furthermore, short-term insurers must honour the social compact they have with individual policyholders.

“We cannot continually increase premiums, because at some point cover will become unaffordable to consumers,” says Edward Gibbens, executive head: commercial and personal at Santam.

Commentators at insurers and insurance brokers agree that the domestic insurance sector can meet its commitments to policyholders regardless of the recent surge in weather-related catastrophe events. The sector is well-managed and well-regulated and, for the most part, strikes a balance between consumers’ premiums and claims payouts to prevent insurers from making excessive profits.

But the country’s traditional insurers also face challenges from start-ups that are redefining the concept of insurance on the back of new technology. “Insurers that operate in the personal lines arena will be hard pressed to deliver against the backdrop of technological innovation, increasing customer and broker expectations, and the impact of disruptive insurtech newcomers that are reshaping the marketplace,” says Coleman.   

Peer-to-peer model

One example of this disruption presents as Pineapple, a peer-to-peer insurance platform that sets out to disrupt the insurance world by creating a mechanism to address the mistrust between insurers and policyholders.

It aims to tackle the perceived conflict between a traditional insurers’ profit motive and its ability to pay or refuse claims. Its journey looks remarkably like a return to the true social roots of insurance wherein communities pool money to help individual members of that community during times of need.

“Insurance is a beautiful construct where everyone comes together to help everyone else, but its [current] incorrect structuring is leading to frustration and people feeling begrudged by their purchase,” said Marnus van Heerden, co-founder of Pineapple during a presentation to the Cover Insurtech Conference, held in Johannesburg recently.

The start-up plans to completely redefine the concept of insurance by delivering a new business model that will achieve affinity, fairness and simplicity while creating more value from an insurance policy than the traditional model.

And there are dozens of insurtech businesses being developed along similar lines.

Traditional insurers are more aware of their social contract than ever before. “There is an increased need for businesses to act more responsibly, ethically and transparently, and to be more stakeholder oriented,” says Gibbens.

“Santam has come to realise the enormous role we play in the broader society as a respected brand and as a corporate citizen, something that continues to motivate us as we help to educate more South Africans about the importance of having insurance and being financially literate.”

He says insurers will prosper if they acknowledge their roles in in the lives of South African families and businesses in offering them security from financial shocks.

PERSONAL FINANCE