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07 Jul 2021




INSURERS ARE MAKING 'SUPER-PROFITS' WHILE 'OVERCHARGING' ON CAR INSURANCE
PREMIUMS

Londiwe Buthelezi
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New research by the economic advisor to the Optimum Investment Group found that
short-term insurers are sitting on record reserves, mainly made up of retained
profits in 2020.
iStock
 * Short-term insurers collected record premiums in 2020 and retained handsome
   profits as reserves.
 * This is cording to new research by the economic advisor to the Optimum
   Investment Group.
 * Meanwhile, many consumers are still paying the same car insurance premiums
   while they drive less.

--------------------------------------------------------------------------------

As more people continue to work home, alcohol consumption out of the picture
during sales bans and curfews reducing night-time driving, insurers have paid
less vehicle accident claims. They've also saved some money on property-related
claims, and their profits are reaching new records, shows new research.


Research conducted by Roelof Botha, economic advisor to the Optimum Investment
Group, showed that thanks to the swift recovery of economic activity in the
country in the third quarter of 2020, industries like banks and insurers had a
much better year than initially feared.



Short-term insurers, in particular, hit an all-time high on many fronts.

The industry's record reserves



Botha looked at the SA Reserve Bank's (SARB) quarterly bulletins. The latest was
published in June. He also did his own number-crunching by removing reinsurers
from the equation to conclude that short-term insurers were making
"super-profits".  

He found that total short-term insurance premiums in the country increased by
2.2% in 2020, reaching a new record of more than R130 billion. And because of
lower claims in certain product lines, these insurer's unappropriated profits
increased by more than 20% to a new record of R53.5 billion.  

This continued in the first quarter of 2021 as premium income climbed to R40.5
billion while the industry's claims ratio continued to decline. Botha said in
that quarter, the industry's total reserves - mainly retained profits - stood at
R76.7 billion, representing an increase of 13.8% year-on-year. He said his
calculations showed that the industry's total assets of R286.3 billion in Q1
2021 represented an increase of 43.5% year-on-year.

The SARB does not publish insurers' unappropriated profits. But it does publish
the industry's reserves. Botha said unappropriated profits make the largest
single component of these reserves.

"If you analyse the main sources of revenue for short-term insurers, you'll
notice that property insurance and vehicle insurance are the cash cows," said
Botha.

He said because of the rapid recovery in new vehicles sold after the initial
slump in the second quarter of 2020, insurers have been selling more new vehicle
insurance policies.

"Since the recovery in the middle of last year, there are approximately 800 new
vehicles on Gauteng roads, alone, every day of the calendar year. These are not
existing insurance policies for vehicles. This is new business," said Botha.

He said as the premiums received by short-term insurers increased, the gap
between that income and the claims paid keeps growing when one removes the
reinsurers from the equation.

Not passing the savings to consumers

Botha said he found it "mind-boggling" many of these insurance companies gave
their business interruption customers a runaround when they lodged lockdown
claims given the reserves they are sitting on.

The 2020 financial statements of big insurers like Santam and Old Mutual Insure
corroborate Botha's findings that it was not a bad year as everyone feared it
would be in terms of premium growth. For instance, Sanlam grew its conventional
insurance gross written premiums by 5% in 2020 to R31.1 billion, and Old Mutual
Insure grew by 1%. They also reported lower motor claims even though people
drove more every time the government eased lockdown restrictions.

However, their 2020 results show that Covid-19 provisions severely impacted
their underwriting profits and margins. These companies will update the market
when they report their results for the first half of 2021 on how much of those
provisions they've used.

While South Africa waits for these updates from insurers, Mike Gaines,
chairperson of Insurance Claims Africa (ICA) questioned why insurance premiums
have remained the same or increased on policy-renewal dates.

Many insurers have gone back to charging their customers the same car insurance
premiums as they used to before the pandemic.

"So, the number of accidents, relative to the premium that they charge, has
diminished so much. People are working from home; they're not travelling to
work. Those premiums have now almost become akin to overcharging," said Gaines.

The industry's representative body, the South African Insurance Association,
said it could not comment immediately on this. But it will address the matter on
Wednesday.


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