GWP up, but underwriting margin under flood
The insurer kicked off its 10-month update by trumpeting an 8% improvement in gross written premium over the period compared to the prior year; but also observed that its year-to-date net underwriting margin was hovering below the bottom end of its 5-10% target range. This disappointing outcome seems certain to carry into the full year despite a reduction in the insurer’s COVID-19 related contingent business interruption (CBI) claims provision. All that an insurer can do in such conditions is to tighten up the areas that it can control, most notably by introducing tighter underwriting conditions.
“Good progress has been made in implementing underwriting actions to address the high claims ratios, resulting in improved underwriting results since midyear,” wrote Santam, adding that a three-pronged focus on procurement; segmented premium increases; and higher claim excesses would continue into 2023. The message to South Africa’s non-life insurance brokers is quite clear, and you should probably prepare your personal lines clients for the double whammy of higher premiums and reduced cover in 2023, or at the very least higher premiums accompanied by larger excesses. Operational responses to an unfriendly claims environment are especially evident where cover for electrical appliances damaged by power surges is concerned, with many insurers having increased excesses or simply removing cover for this risk last year.
Are brokers still a better ‘bet’ than direct?
According to Santam, its commercial and personal business “achieved acceptable growth in gross written premiums, whilst the underwriting actions to address the increase in claims frequency and claims inflation [has] started to gain traction”. Direct insurer MiWay was less successful, achieving subdued gross written premium growth. The good news for the direct business is that its claims ratio has shown steady improvement since the half-year result. “An improvement in the claims ratio [has been] achieved since June 2022, following the positive impact of underwriting actions,” writes Santam. Who knowns, perhaps this underwriting action will convince more policyholders to approach brokers to negotiate better premiums when placing their business and personal assets on cover in the New Year.
It seems that traditional insurers are increasingly turning to alternative risk transfer (ART), reinsurance and specialist lines businesses to underpin premium growth and underwriting margins. The Santam Specialist business was singled out for excellent growth in gross written premiums in the four months since June 2022, with significantly improved underwriting results in the liability, engineering, crop and travel classes. The ART business segment reported strong operating results with very good growth in fee income while Santam Re also reported steady gross written premium growth following a general increase in reinsurance rates globally. The reinsurance business was, however, negatively impacted by increased claims activity and large losses during the reporting period.
All evidence points to 2022 being another record year for catastrophe losses, with Impact Forecasting, Aon’s catastrophe model development team, reporting total economic losses due to global natural disaster events at USD227 billion in the first three quarters of 2022. The cost to private and public insurers stood at around USD99 billion, or 46% of the total. In fact, in its first-half 2022 assessment, the global professional services firm estimated the total economic loss due to the April 2022 KZN floods at USD3 billion, calling it an “exceptional April flood event”. And that, dear reader, is somewhere north of ZAR54 billion.
What does the future hold for non-life insurers?
Santam’s 10-month operational update offered some insights into prospects for the remainder of 2022 and the coming year. “We have concluded a strategy refresh process to ensure our Future Fit strategy remains optimal in the current and medium-term environment,” they write, adding that insurers’ operating models must respond to evolving consumer needs. This means continually tweaking process and product to accommodate client behaviours, needs and technologies. “We will aim to acquire and understand our customers through the enhanced use of data and connect with them through a shift to a focused multi-channel approach complemented with ecosystem adjacencies and partnerships at scale”. PS, multi-channel we’ve heard before; but this writer loved ‘ecosystem adjacencies’.
Brokers should note that Santam, still the country’s largest non-life insurer by some way, is restructuring its commercial and personal business multi-channel business into three business units “to focus on the distribution channels where it interacts directly with clients through brokers and partnerships”. These operating model changes take effect from 1 January 2023. Santam also noted that its customer-facing businesses MiWay, Santam Specialist and Santam Re would continue to provide growth and diversification benefits. As for profits: “the net underwriting margin target of 5% to 10% and our return on capital target of 24% remain valid; the pivot in our strategy aims to ensure delivery against these targets in a changing environment”.
Although the 10-month result offer a reasonable picture of what the market can expect from Santam for 2022, the group warned that its final results, due on or about 2 March 2023, could be impacted by the inherent volatility of non-life underwriting and investment activities. We conclude today’s newsletter with some reflections on the insurer’s capital management and investment performance. Per the operating update, “Santam Group’s economic and regulatory capital position remained strong following the interim dividend payment in September 2022 … the economic capital coverage ratio on 31 October 2022 exceeded the mid-point of the 145% to 165% capital target band”. But the investment performance update was dominated by rand weakness.
Complex financial instruments for capital protection
The weakening of the rand against the US Dollar since 30 June 2022 resulted in significant foreign currency gains on shareholder investments, whilst the bond market remained volatile… The group also reported that it had entered into a zero-cost collar over listed equities to the value of ZAR1.4 billion, based on the SWIX 40, to provide capital protection under the continued volatile market conditions… The performance of this financial instrument, dear reader, is out of scope for this newsletter.
* This article was written by Gareth Stokes and first appeared on the fanews.co.za platform.
