SA’s largest short-term insurer Santam says claims arising from natural disasters and climate change have become hard to predict, making its profits more volatile.
Santam said weather-related claims had pushed its payouts up 8%, squeezing its underwriting margin just as it had started to recover from large payouts related to the 2017 Knysna fires and other natural disasters.
"The first half is never a prediction of what’s going to happen during the rest of the year because it’s volatile. We often have big storms in the fourth quarter," said Santam CEO Lizé Lambrechts.
The persistent effect of natural disasters on Santam’s profits, as the company also recorded a spike in flood and hail claims in 2012, 2013, 2015 and 2016, shows that the effects of climate change are starting to show on companies’ bottom lines.
Reinsurer Munich Re, which recently published natural disaster figures, said that in the first half of 2019 losses related to these events totalled $42bn, of which $15bn was paid out by insurers as people in many of the affected countries did not have insurance. In the first half of 2018, natural-disaster losses were $33bn, while in 2017 it was $135bn, according to Munich Re.
Santam, which is owned by SA’s largest insurance group, Sanlam, said catastrophic events raised its gross claims paid 8% to R9.7bn. This dragged its headline earnings down 3% to 990c per share. It had to pay out claims related to Betty’s Bay fires,
a hailstorm in Newcastle and flooding in KwaZulu-Natal. It also recorded an increase in agriculture hail claims.
‘Difficult to predict’
"It is a volatile environment, and I would say that this year we got all the catastrophes that we dodged in 2018 in the first six months. It may be occurring more frequently, but it’s difficult to predict," Lambrechts said.
The rise in claims saw the insurer’s conventional insurance net underwriting margin shrink to 5.3% compared with 8.4% in 2018. Underwriting margin shows the percentage of collected premiums the insurer kept after paying claims and other expenses.
After the catastrophic events of 2017, which included Knysna fires and floods in Durban and Gauteng, Santam paid in excess of R2bn in claims related to these. A year earlier, when it and other short-term insurers were affected by flash floods that hit Johannesburg in November 2016, it also paid about R700m in floods and hail claims.
The insurer has tightened its underwriting practices and established partnerships with 53 municipalities to reduce these risks by donating firefighting equipment among other things, but this hasn’t stopped catastrophe-related claims flooding in.
"We use reinsurers extensively to manage our risk, but we can’t reinsure everything because then we reinsure away our profits as well. Our business model is to take on risk. That’s why people take on insurance," Lambrechts said.
Reinsurers such as Munich Re and Swiss Re, which are much bigger, insure companies such as Santam. But Santam pays the first R150m of catastrophe claims out of its pocket in the same way that consumers pay excesses when they claim.
Even though the insurer’s headline earnings were affected by catastrophes, it had a strong first half in terms of premiums collected as it managed to grow conventional gross written premium 8% to R14.2bn in an ailing economy in which consumers are cutting their spending.
"Definitely, consumers and small business are under pressure, and our personal and commercial business has grown below inflation. But that growth was supplemented by MiWay and specialist and reinsurance businesses outside of SA."
Lambrechts said that MiWay, which recorded 9% premium growth, has been attracting customers who never had insurance before. Even though Santam vehicle insurance grew premiums 3%, motor would remain a big focus for the insurer even in the face of rising price competition from fintech start-ups. Fintech start-ups such as Naked insurance and okgo.live are disrupting the market with on-demand car insurance.
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