STEPHEN CRANSTON: Short-term insurance still good business model despite disasters

November was the cruellest month for insurers — but also the month in which people most needed cover. One of the worst days of the past decade was November 9 2016, on which flash flooding hit Joburg’s eastern suburbs. About 90mm rain fell in three hours.

Mutual & Federal (now called Old Mutual Insure) alone booked a loss of R150m. For Santam, June 2017 was the traumatic event as floods hit its home town, Cape Town, and it had a high market share of the assets in Knysna affected by the fires.

With R64bn premium income in the first half, short-term insurance is a sizeable, and mostly well-funded, industry.

In the first six months of 2017, Santam’s underwriting margin of 4.2% was less than half the 9.6% of 2015. Yet Old Mutual Insure CEO Raimund Snyders sees 4%-6% as a good margin given that 80% of its insurance is in the high-claiming motor and property books.

Old Mutual Insure has lost market share. It was the top insurer 20 years ago.

In any other industry, Santam CEO Lize Lambrechts, who took over at the peak of the cycle, would not look so impressive, but against the peer group, a 4.2% margin in 2017 conditions was strong. But the recent hail in Gauteng and floods in Durban will keep the industry busy.

Well ahead of its sleepier competitors, Santam has expanded from basic motor insurance into niches such as liability insurance and has acquired entrepreneurial underwriting management agencies such as Emerald in property and Mirabilis in engineering. Santam also built one of the first credible direct short-term insurers, MiWay, instantly recognisable by its cerise colouring, like cans of Tab.

Short-term insurance is still a good business model in a high-claims year. It still makes money on the client funds it runs: Santam earned the equivalent of 2.9% of its net premiums from the free float, which was 40% of its insurance profit. And insurers also built up an investment account on their balance sheets, though this is more liquid than in the past. Santam nonetheless added a useful R250m in earnings from its investments at a lacklustre time for the JSE.

Hollard, now the second-largest insurer after buying Regent Insurance from Imperial, undoubtedly has a more capable management team and dynamic culture than the traditional number two and three, Old Mutual Insure and Bryte.

Hollard has restructured into four units, and all its disparate short-term insurers are now grouped under Hollard Insure. It is headed by Willie Lategan, who is also the chief financial officer.

Lategan says Hollard isn’t often visible to the public as it has been successful at its partnerships; it is the insurance back engine to the likes of Edcon, WesBank and now Imperial.

Hollard Car Lite is the group’s attempt to bring more uninsured cars into the net. It competes with Meridian, headed by the celebrated Brian Benfield, selling third-party, fire, theft and total-loss policies rather than pricey comprehensive offerings.

Unsurprisingly, direct insurers are much bigger spenders on technology than their intermediated counterparts

The industry has adopted a business-to-consumer model faster than other financial service businesses. Direct sales were initially through call centres but increasingly they now take place online.

Personally, while I would never think of buying a life policy or unit trust through a broker, I value my short-term broker. There are many more moving parts in motor and household insurance than there are in life cover, which could hardly be more binary.

Outsurance, which is the leading direct player, will disagree. But the group has diversified, cautiously moving into life, and most recently investments, without changing its direct sales model. Says incoming CEO Marthinus Visser: "We consider various options to diversify our business to lower the risk of self-driving cars shrinking the current insurance markets." It has also replicated its model in Australia and New Zealand, even though self-driving cars might get there first.

Visser says premium growth has been fairly slow due to slow economic growth. But Outsurance’s underwriting ratio remains high: it is widely believed that direct insurers turn down more claims than their traditional rivals. How else can they consider an underwriting ratio of 10% to be quite manageable when this is well below its historic level of about 25%?

Unsurprisingly, direct insurers are much bigger spenders on technology than their intermediated counterparts.

Tom Creamer, who runs Douw Steyn’s predominantly direct Telesure group, says data science, telematics, robotics, artificial intelligence as well as insuretech are already deployed across the group, over brands such as DialDirect, Budget and First for Women.

But Discovery Insure still owns the technology high ground. It entered an industry with far better management than, say, the medical aid industry in the 1990s.

And it was a sector that was already "disrupted" by the direct players with their "cut out the middle man" proposition and Outsurance’s popular "Outbonus" for non-claimers.

But Discovery Insure head Anton Ossip says Discovery Insure’s value proposition is engagement — 90% of clients opt for a telematic device that monitors their driving, measuring speed and braking, for example. And unlike as is the case with Outbonus, there is no need to wait five years to be rewarded — there is instant gratification through free petrol and cheap tyres.

Discovery Insure is growing in a stagnant industry, with 31% premium growth in the financial year, but it took more than six years to become profitable.

It is a hybrid insurer, getting 60% of its sales from brokers and 40% direct.

KPMG points out that one of the largest insurers in SA is Escap, a captive insurer (if that phrase isn’t too close to the bone), which insures the business risk of Eskom, a company the accounting firm apparently knows well.

The premium of Escap is not usually calculated as part of SA’s gross written premium income, but at R1.6bn it is now in the top 10 insurers in SA, knocking out Standard Insurance.