Chief Executive’s report and short-term market

We have chosen “Collaboration” as the theme for this year’s SAIA Annual Review. The Oxford English Dictionary defines “to collaborate” as “to work in conjunction with another or others, to co-operate”, or “to work jointly on an activity or project”. The words’ origins are from the Latin collaborare which means “to work together”.

This choice of theme was very deliberate and came about due to an understanding of how SAIA really manages to operate in these difficult times. We are a small organisation with a small staff complement, yet we seek to have a big footprint, touching many aspects of insurance, legislation and regulation, industry image, transformation and interacting with many stakeholders. We also represent the industry on many external Boards, Councils, and bodies.

How do we achieve this? Clearly this can only be through a collaborative approach. One of our core strengths is the ability to bring many people together, get them working in conjunction towards a common goal in a spirit of co-operation, in other words, collaborating.

During the year we developed a paper for internal use called our “Partnership Model”. This involves using opportunities to develop joint initiatives with stakeholders in order to leverage our efforts, thereby creating a greater outcome than we could achieve alone. Examples include our involvement with the Financial Services Board and the former Life Offices’ Association (LOA) on consumer education projects, creating jointly with the LOA, a panel to investigate alleged abuses into the conduct of the industry selling Consumer Credit Insurance products, and the joint working groups with the National Treasury and Financial Services Board drafting the regulations required for the Insurance Laws Amendment Act.

If we are to continue achieving our objectives, this approach will need to remain part of our core strategy.

Strategic focus areas

In our last Annual Review we talked about the new strategic focus areas set by the SAIA Board and our plans and organisational restructuring to deal with this. The strategic focus areas noted were:

• Legislation & Regulation
• Transformation
• Image & Reputation

Board Committees were formed to align with these strategic focus areas.

Late last year, given some of the concerns with the motor class of business, the SAIA Board agreed to add Motor as a fourth strategic focus area, and a new SAIA Board Committee – Motor – was added.

These Board Committees are in addition to the SAIA Executive Committee, which deals with SAIA operational issues, budgets and financial reporting, as well as staff matters.

In the last Annual Review, it was also reported that crime was not considered a strategic focus area for the SAIA, although it remains an important issue for the insurance industry. As a result, the South African Insurance Crime Bureau (SAICB) has been created as a separate company with its own premises in Midrand, and its own membership. I am happy to report that this new company is functioning well and is reporting its first operational successes. Despite this, SAIA still manages some crime-related projects under the banner of Image & Reputation. Included in this are the annual donation to Business Against Crime South Africa and the very successful Gauteng detective training programme, whereby 500 SAPS detectives received extensive training. SAIA co-hosted the graduation ceremony where the Gauteng Premier, Paul Mashatile, was the guest speaker.

State of the market

Volumes have been written about the worldwide financial sector crisis, which broke last year, the repercussions of which are still dominating the financial markets. There is not much point in dwelling too much on the current state of play, because the only certainty is that by the time this Annual Review gets distributed to members, the situation would have changed. So only a few observations are called for.

During October 2008, the International Association of Insurance Supervisors (IAIS) held its Annual Conference. This was coincidentally around the time that the crisis was breaking. It was fascinating to watch US regulators using the public platform of the conference to try to pass the buck for the responsibility for the crisis, even going as far as blaming their colleagues in other regulatory bodies for the mess. I think that, once the dust has settled, we can expect to see major changes to regulatory systems, especially in the US.

The South African financial sector has been relatively immune to the meltdown in foreign markets, and while the performance of equities has impacted on the bottom line of some of our members, we have not seen a headlong rush to government to seek bailout funding. The solvency of short-term insurers remains good, despite the loss of value of equities, with a marginal improvement in solvency of typical insurers for the year to December 2008, as per the latest report from the Financial Services Board.

This is not to say that the industry is complacent, far from it. There is no doubt that there is a worldwide recession on its way, which will have a dramatic impact on emerging market economies. Already we have seen a slowdown in South African exports, a large loss of value of the South African rand, and a sharp reduction in new car sales. Of course, all of this will affect South African insurers, so there will be tough times ahead for our members. On the positive side, our member companies are well capitalised with sound solvency margins, so there is no panic among insurers, just a firm belief that they will be able to ride out the storm.

Each year, with the permission of the Financial Service Board, we reproduce data from this body’s latest industry report, this year it is the “Special Report on the results of the short-term insurance industry for the period ended December 2008”.

An analysis of these results for typical insurers shows that while the cycle has turned down over the last few years and results are off the record peak of 2004, the industry’s performance is still some way ahead of the long-term cycle that has in many years past seen the industry struggle to make an underwriting profit.

FSB Report

Typical insurers (typical insurers, for the purpose of this report, are those insurers who offer most types of policies to, mostly, the general public).

The table below sets out combined statistics (net after reinsurance) for typical insurers for the calendar years 2003 to 2008. The figures are unaudited.

	2003	2004	2005	2006	2007	2008
Net premiums R’m	19774	24211	26828	31093	34351	37556
Underwriting profit/(loss) R’m	1381	2932	2542	2482	2169	2327
Underwriting and investment income R’m	2554	4303	4304	4588	4851	5064
Claims (as % of earned premiums)	67	59	63	65	66	66
As % of net written premiums:
Management expenses and commission	26	26	26	25	27	27
Underwriting profit/(loss)	7	12	9	8	6	6
Underwriting and investment income	13	18	16	15	14	13
Net premium increase (year to year)	17	22	11	16	10	9
Surplus asset ratio (median)	45	37	40	42	43	40

The following graph indicates how underwriting and operating (including investment income) results of the typical insurers have fluctuated over the past fifteen years.

Statutory surplus asset ratios

The following table indicates the spread of the statutory solvency percentages of typical insurance companies.

	Number of insurers
	Dec 2003	Dec 2004	Dec 2005	Dec 2006	Dec 2007	Dec 2008
Below 15%	1	1	0	0	0	1
Between 15% and 20%	0	0	1	0	1	1
Between 20% and 25%	2	0	1	3	0	1
Between 25% and 30%	3	3	3	3	6	2
Between 30% and 40%	4	8	5	4	2	8
Between 40% and 50%	2	1	2	4	5	4
Between 50% and 100%	7	5	6	4	5	4
Above 100%	3	1	1	3	3	3

Cell captive insurers (cell captive insurers, for the purpose of this report, are those insurers who offer insurance structures on a cell ownership basis for first party and third party cell owners).

The table below sets out combined statistics (net after reinsurance) for cell captive insurers for the calendar years 2003 to 2008. The figures are unaudited.

	2003	2004	2005	2006	2007	2008
Net premiums R'm	2 773	3 486	4 239	4 144	4 511	5 460
Underwriting profit/(loss) R'm	(65)	220	529	568	224	295
Underwriting and investment income R'm	240	506	857	980	810	1 079
Claims (as % of earned premiums)	57	56	52	52	62	67
As % of net written premiums:
Management expenses and commission	39	34	28	31	33	25
Underwriting profit/(loss)	(2)	6	12	14	5	5
Underwriting and investment income	9	15	20	24	18	20
Surplus asset ratio (median)	47	46	56	59	60	56

The following graph indicates how underwriting and operating (including investment income) results of the cell captive insurers have fluctuated over the past ten years.

Industry results - Niche insurers (niche insurers, for the purpose of this report, are those insurers who offer, mostly, specialised cover only, in certain niche markets).

The table below sets out combined statistics (net after reinsurance) for niche insurers for the calendar years 2003 to 2008. The figures are unaudited.

	2003	2004	2005	2006	2007	2008
Net premiums R'm	2 047	2 808	2 497	3 293	3 872	4 976
Underwriting profit/(loss) R'm	(48)	477	444	699	1 078	1 514
Underwriting and investment income R'm	652	1 067	1 081	1 308	1 779	2 839
Claims (as % of earned premiums)	70	55	51	48	43	40
As % of net written premiums:
Management expenses and commission	33	25	29	28	27	27
Underwriting profit/(loss)	(2)	17	18	21	28	30
Underwriting and investment income	32	38	43	40	46	57
Surplus asset ratio (median)	121	163	117	120	72	77

The following graph indicates how underwriting and operating (including investment income) results of the niche insurers have fluctuated over the past ten years.

SAIA Operational Review

The SAIA operations are covered in detail in the following sections of the Annual Review, therefore I will just touch on some of the highlights (and lowlights) for the purposes of this section.

Insurance Laws Amendment Act

Probably the issue that caused most upheaval in our offices was the Insurance Laws Amendment Act. This was tabled in Parliament during May 2008, with institutions being given only three weeks in which to respond and comment. The Bill, when tabled, had far-reaching consequences for the insurance industry, in that it had implications for:

• Health insurance and the demarcation between health insurance and medical schemes
• The way the industry deals with its intermediaries and administrations with comprehensive changes proposed to Section 48 of the Short-term Insurance Act
• The proposed implementation of Financial Condition Reporting.

SAIA, along with other financial associations, objected strongly to the limited time made available. Although additional time was allowed, the process was still extremely unsatisfactory.

In order to meet deadlines, effectively all other issues were put aside during this process, which placed extreme pressure on SAIA’s ability to cope and on member companies’ resources. Nevertheless, our members came to the party, and together with our SAIA team, we managed to put together well-considered responses.

The Act, having been passed, requires much work to be done in formulating regulations, and our work will be cut-out for us for the remainder of 2009.

Road accidents and motor issues

Ten years ago motor vehicle crime was increasing at a relentless rate year-on-year. Motor crime accounted for more than 50% of insurers’ motor claims. Quite rightly, our primary motor insurance focus at this time and for many years thereafter, was to reduce vehicle crime. SAIA was instrumental in the creation of Business Against Crime South Africa (BACSA) and has contributed to the funding of the institution since its inception. To this day we continue to contributed to the funding of their work. However, we participate with them in a wider area of crime-combating initiatives, namely violent and organised crime.

Since our involvement with BACSA begun, motor theft has reduced by around 50% (measured per thousand vehicles) and is no longer the primary cause of concern for motor insurers. Instead, motor vehicle crashes have replaced theft as the primary point of concern for insurers. The reasons for this are many: depreciation of the rand, state of our roads, age of our car park, lack of compulsory roadworthiness testing, alcohol abuse, and a general poor attitude towards road safety of our drivers.

This has placed the motor account under pressure and is starting to drive insurance rates towards unaffordable levels.

In the United Nations General Assembly report titled 2003 Road Traffic Injuries and their Impact on Societies, it is stated that “Road traffic injuries are a global problem affecting all sectors of society. To date, road safety has received insufficient attention at the international and national levels. This has resulted in part from a lack of political responsibility and multidisciplinary collaboration needed to tackle it effectively.”

In the Report of the Road Accident Fund Commission (2002) it is stated that “South Africa has one of the highest road traffic death tolls in the world. The reasons are manifold – ranging from arrogance behind the wheel to ignorance about the rules of the road; from fraudulent issuing of drivers’ licences to the absence of infrastructure to patrol and police the roads; from drunk driving to speeding. A number of initiatives from both civil society and from the authorities have failed to stem the rising tide of casualties.”

Furthermore, the World Health Organisation in its review of “The Global Burden of Disease” projects changes in the ranking of the 15 leading causes of death and disease worldwide, from 1990 to 2020. In this review, the rating of road accidents as a cause of death is projected to move from the ranking of 9 in 1990 to 3 in 2020.

Furthermore, Arrive Alive reports that:

• The number of unlicensed vehicles on the roads is 481,000
• The number of unroadworthy vehicles on the roads is 377,000
• There is a total of 970,000 expired licences
• There is a total of 233,000 expired Professional Driving Permits
• 90% of road accidents are preceded by a road traffic offence
• It is estimated that the cost of road accidents to individuals, commerce, communities and the country tops R38 billion per annum
• Every day 36 lives are lost on average. Of these 15 are pedestrians and 3 are killed in taxi-related incidents
• Around 20 people are permanently disabled on our roads every day
• More than 7000 people are left maimed each year by poor attitude and behaviour on our roads

Despite these horrific statistics, road safety is not a national priority, and no government / business partnership exists to combat this scourge to society.

Our Board has recognised the need for SAIA to play a role in road safety and has instructed us to talk to role players to create a partnership along the lines of Business Against Crime South Africa, involving government and the private sector.

The steady increase in vehicle accidents has certainly placed pressure on insurers’ motor accounts. This, coupled with an effective reduction of 50% in new vehicle sales over the last two years, will mean that motor insurers will face tough times over the next few years.

Financial Sector Charter

Last year, under the section titled Transformation, I wrote: “The period under review was a difficult one for the Financial Sector Charter. At the time of writing, the Charter has still not been gazetted and it remains uncertain when this will happen. There was a deadline imposed of 9 February 2008 for gazetting the Charter, failing which the Department of Trade and Industry (DTI) Codes of Good Practice would hold sway. Well the deadline has come and gone, and the situation for the Charter was rescued by an extension granted by the Minister of Trade and Industry, effectively adding six months.”

Twelve months later, little has changed, except that the six months’ extension came and went without any progress, and countless meetings and discussions were held, some at Ministerial level, also with no positive outcome.

Therefore, the industry is today faced with an impossible situation. We have a transformation charter that took years and countless effort to develop and which, if implemented fully, would deliver significant transformation to the sector. This Financial Sector Charter (Charter) received political support and was embraced by the financial sector. Failure to gazette means that the Charter now has no legal status, only the DTI Codes do. Yet, at some time in the future, government may decide that the Charter does indeed have value and decide to gazette it, which would give it the force of law, and industry would be compelled to comply for scorecard purposes. In order to secure business, our members are currently being compelled to comply with the Codes reporting, but in case the Charter does get gazetted, we are recommending that companies also report against the Charter. This is duplication of work, and cost, but seems the prudent thing to do!

For SAIA and its member representatives who devoted countless hours to developing and implementing the Charter, its potential demise is a telling blow. We had become attached to the Charter, it was created out of many hours of hard toil over several years. Yet, due to the cloud of uncertainty that has enveloped the process over the last two years, its potential demise would not be mourned by many.

The current sense is that the Codes have prevalence, it’s time to get on and embrace them, because if the Charter does not get gazetted soon, I fear it will be lost forever.

Nevertheless, my comments do come with a caveat, by the time this Annual Review gets distributed, the 2009 elections will have happened, a new government will be in place and the political will may have been found to gazette the charter.

SAIA Chairman

During the course of last year SAIA Chairman, Mr Adam Samie, announced that due to pressure of work he was not able to continue as SAIA Chairman after the Annual General Meeting. Mr Samie was Chairman for two years.

Following the Annual General Meeting of 2008 and the appointment of the new Board, it became clear that no Board member could find the time to offer to assume the Chairmanship of SAIA. The Board agreed to propose to members that a change to the SAIA Articles of Association be made to allow the appointment of a Chairman who is currently not the Chief Executive of a member company.

A Special General Meeting was held, at which the necessary changes to the Articles of Association were made and shortly thereafter Mr Ronnie Napier was appointed Chairman.

Ronnie Napier has served the short-term insurance industry for many years in a number of different industry bodies and other relevant organisations and initiatives, including being the inaugural Chairman of the Financial Sector Charter Council. He was previously the representative of Lloyd’s in South Africa and senior partner of law firm Webber Wentzel Bowens. He was Deputy Chairman of the SAIA Board in 1999 and Chairman from 2000 – 2007.

Appreciation

At the Annual General Meeting held in September 2008, Mr Adam Samie resigned as Chairman of the SAIA Board. He remains a member of the Board. During his tenure of two years, he played a significant role in SAIA’s affairs overseeing the process of developing a new strategic focus. He was also a leading player in the development of the Financial Sector Charter. SAIA remains hugely in Adam’s debt for the service he rendered during his time as Chairman.

Since his appointment as Chairman, Ronnie Napier has slipped into the role as easily as if he had never vacated the position. I have appreciated the support Ronnie has given, both to the association and me personally.

As noted earlier, the financial services industry is experiencing a challenging period. The job of an insurance company CEO is not an easy one. Despite this, our member companies’ Chief Executives have found the time to serve on our Board and its Board Committees. For this, we are extremely grateful, for without their guidance we would have no sounding board against which to verify our efforts.

SAIA is a small organisation that endeavours to achieve a large footprint. For most part it’s successful, and this success is in no small part due to the efforts of the many employees of our member companies who give willingly of their time. For this we are also truly grateful.

During 2008 we implemented a new strategic focus for SAIA. This involved setting up new Board Committees and creating new strategies for the different strategic areas. During the year we suffered from staff shortages, which placed immense pressure to perform on the members of the SAIA team. I am happy to report that the team was not found wanting and that the vast majority of the objectives were met. To each and every member of SAIA, I express my sincere appreciation.

Barry Scott
Chief Executive

>> Click here to read the latest Financial Services Board (FSB) Quarterly Report on the results of the short-term insurance industry