This article from RiskSA
With increases looming, will insurers’ ability to absorb costs pay off in the long run?
“Your clients may be found wanting as the replacement costs on imported cars and parts are ready to skyrocket due to the weakened rand. The cracks are already showing. Massive increases have surfaced, and some believe it is only a matter of time before the depreciation severely impacts on the vehicle insurance and repair sector. But those insurers with deeper pockets who manage to absorb the increases could significantly boost the number of policyholder on their books. So, is it a case of which insurer blinks first?”
ANDY MARK & ANTON PRETORIUS
The South African insurance industry is currently poised on a knife’s edge. Our volatile economic situation is a direct result of an overnight devaluation in the exchange rate due in part to international pressure, but mostly to our own internal political shenanigans. In December 2015, the South African economy took its worst hit in years when President Jacob Zuma announced the removal of Finance Minister Nhlanhla Nene.
That led to the news that Fitch downgraded South Africa’s credit rating to one level above junk. Experts warn that the depreciation of the rand will severely impact the vehicle insurance and repair sector. The rising cost of motor vehicle spare parts, coupled with the weak rand, means the cost to repair damage to a car has skyrocketed compared to a year ago.
RISKAFRICA is in possession of the official motor vehicle parts price index that compares parts price increases over the last year for two common Hyundai vehicles. The increase in the weighted-average part price for the Hyundai iX35 amounted to 17.5 per cent between January 2015 and January 2016 (with a 4.5 per cent increase noted over the last month).
Logically, vehicle premiums should rise similarly in order to maintain loss ratios. This hasn’t happened as yet, and the odour you’re smelling is that of motor books burning at insurers around the country.
How do we sleep while our (motor) books are burning?
According to Philippa Wild, head of technical marketing for Discovery Insure, the company has seen an increase in average cost per claim, but that the full impact will only be felt in the next three to four months. Neill Andrews, head of pricing at Hollard Broker Markets, reiterates this. “When the rand depreciates, some repairers might immediately increase prices while some might first clear stock before they import more expensive parts.” Andrews says some motor books are feeling the heat. “There are still a number of portfolios performing well in spite of the currency depreciation while others are struggling. Currency depreciation is not the only reason for some of the underperforming portfolios. Some are struggling because of low premiums, poor underwriting and ineffective claims management. We did, however, notice some portfolios worsening since the depreciation, resulting in lower profits and higher losses.” Andrews has extensive knowledge on the vehicle insurance pricing sector, but has asked that we do not quote figures verbatim. He roughly broke it down as follow: About 25 – 30 per cent of claims are as a result of theft and total loss accidents. The remaining 70 – 75 per cent comes from repairs relating to accidents, hail, third-party costs and windscreens. “Very roughly, 25 – 30 per cent of vehicle claims are
total losses and not subject to currency fluctuations”.
He adds that of the remaining 70 – 75 per cent for repairs, labour makes up roughly 35 per cent (subject to salary inflation and not currency) and that the remaining percentage is for parts and paint, which is subject to currency fluctuations. “If the rand depreciates by 10 per cent for example, one should not expect a 10 per cent increase in claims. For every 10 per cent depreciation in the rand, claims costs will increase by up to 4 to 4.5 per cent.”
He continues, “The increase in claims cost is dependent on how much of (and when) the costs will be transferred from the repairers to the insurers. Depreciation against the US dollar is also not the only driver as a significant proportion of parts are imported from the Euro Zone, Japan and South Korea.” Andrews says it’s definitely a case of who blinks first. “Some insurers, especially those with reasonable underwriting margins would be able to absorb some of these increases and not necessarily transfer it to the customer immediately, but will be required to do so over time.”
It is all about timing
The challenge lies in the timing of premium increases. A premature escalation could be disastrous as this would result in clients fleeing to cheaper premiums from a competitor. This, of course, also heralds a period of opportunity to those insurers with deeper pockets because if they blink last, they could significantly boost the number of policyholders on their books.
However, we are wary of the wisdom of this strategy as insurers whose clients have left because of rate increases are also more likely to be those more vulnerable in a hardening economy, and this brings with it a host of other problems like insurance fraud.
Another insurer (who preferred to remain anonymous) was of the opinion that a premium increase totalling 40 per cent might well be possible before we see any relief. Others were more bullish and felt that an increase of 25 per cent would be adequate to bolster up worsening loss ratios.
“With the costs of imported parts increasing at an unprecedented rate,” says Wild, “it is inevitable that rates will need to increase,” but adds that vehicle with locally manufactured parts may avoid a rate hike. “Discovery Insure will increase rates if need be and at the appropriate time. This depends on the extent and timing of part increases, including a mix of local versus imported parts,” she explains. Wild continues, “In the current scenario, the actual replacement value of parts and the repairs on your vehicle could very easily surpass the values that you are insured for, leaving you seriously out of pocket in the event of a loss or claim.” Wild explains that if your insurance policy stipulates that your items are covered for ‘retail value’ as opposed to a fixed amount (sum insured), then fluctuations in the exchange rate will not have an impact on your payouts. Where sums are fixed, however, consumers should check that the amount stipulated is adequate to replace the item in question in today’s rand terms. We’ve looked into the crystal ball, and we’re afraid that the immediate future is not looking pretty for the industry. Consumers faced with rampant increases are much more likely to choose food on the table over a vehicle insurance policy. Astute brokers would do well to start calling clients and seeing where they can assist in reducing premium costs by insuring that only vital items remain covered.