2014/07/28
SAIA Chairman Themba Gamedze Address at the Insurance Conference 2014
SHORT TERM INSURANCE MARKET ISSUES IN SOUTH AFRICA
Distinguished guests,
Ladies and Gentlemen
My name is Themba Gamedze, and I am the Chairman of the South African Insurance Association (SAIA).
The South African Insurance Association is the representative body for the short-term insurance industry. We have sixty members, which collectively account for 93% of South Africa’s gross written short-term insurance premium. The organisation’s longevity and credibility spans over 107 years.
Our vision is “To promote and represent the interests of the short-term insurance industry, while leading and enhancing the efforts of the industry to become recognised and trusted as an important contributor to the South African economy and society”.
When identifying the major current insurance issues, from a short-term insurer’s perspective, one does not need to look further than the activities currently on the SAIA agenda. Our Board is busy planning for a strategy session scheduled for September this year, so we have engaged our Board in order to rank the issues in terms of the importance through the eyes of the industry CEOs.
Our member feedback tells us, that the following issues are crucial, ranked in order of importance:
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SUSTAINABILITY OF MOTOR INSURANCE
During the mid-1990s vehicle crime was increasing at an alarming rate, to the extent that it was seen as potentially impacting the future sustainability of motor insurance. For most motor insurers, vehicle crime accounted for around 80% of the cost of motor claims. As motor insurance is the largest class of short-term insurance, this was clearly heading for crisis territory.
Major stakeholder groupings came together, under the leadership of the SAIA, in order to create strategies to deal with this major threat to our business. Out of this emerged Business Against Crime South Africa. The strategies included improved vehicle security, vehicle tracking, microdotting, improved border control, better policing, and a best practice model for vehicle licencing departments.
We now see the situation totally reversed, with the major threat to motor insurance business being crashes and the cost of vehicle repairs. For most insurers vehicle crime now accounts for less than 20% of the cost of motor claims.
As we did in the 1990s, we now need to bring our collective power to bear in matters of road safety. Through the suggestion of the SAIA, I am pleased to report that Business Against Crime is now developing a strategy to deal with road safety.
Furthermore we need to engage with government to ensure that we bring South African in line with most other countries by re-introducing a system of compulsory third party property insurance. It is clearly not equitable that only around one-third of motorists carry the major burden of the cost of crashes.
Dealing with these two factors alone would have a massive positive impact on the sustainability of motor insurance, and help us to increase the pool of insured vehicles on the road from the current paltry 35%.
Other important areas are issues around motor body repairers, and the need to put in place an enterprise development initiative in order to assist the growth of small black owned panel shops, alternative parts and issues around motor warranties.
2. STAKEHOLDER ENGAGEMENT, AND THE IMAGE AND REPUTATION OF THE INDUSTRY
When you speak to insurance professionals, they feel that they can justifiably be proud of the industry in which they work. They cannot understand or accept that the industry picks up so much negative publicity. While we acknowledge that there are issues around consumer credit insurance (CCI), the consumer credit insurance market represents a small part of the industry.
We have collectively embraced the principle enshrined in the Treating Customers Fairly initiative, and we were one of the first sectors to have an ombudsman scheme which has binding authority over its members.
At the SAIA we have a comprehensive Code of Conduct, which has been benchmarked internationally and has found not to be wanting.
Yet, as an industry, we do pick up negative press and the policymakers to feel the need to impose ever increasing regulation on our industry.
Rightly so, therefore, our CEOs have identified stakeholder engagement, and looking to the image and reputation of the industry, as an important area for continued attention. We need government and consumers to understand that we are a credible industry, and an industry that does have the interests of our consumers at heart.
3. INDUSTRY TRANSFORMATION
In discussions with government and other stakeholders it becomes clear that there is a sense of frustration due the slow progress of transformation in the sector. The much awaited Financial Sector Code (FSC) was finally gazetted in 2012, and is now in force, the standards have been finalised, and the training for the industry is complete. However, much needs to be done to achieve the objectives of the Code.
When one looks around the room at industry functions, even the audience here today, it is easy to see why we face these criticisms.
As an industry we need to embrace transformation, so that we can further enhance the positive impact that we can have on the lives of our people.
The areas of critical importance identified by industry CEOs include work place transformation and skills development, providing enhanced access to our products and services, and consumer education.
4. GOVERNANCE RISKS, LEGISLATION AND REGULATION
The question is often asked why it is that the South African financial services sector is going through such an all-encompassing programme of regulatory reform, and why it is that the SAIA is not doing more to challenge these reforms.
The answer is really quite simple! South Africa is a member of the G20 group of nations, despite not being amongst the largest twenty economies. Similarly, we are members of the BRICS grouping, again despite not being one of the largest five emerging markets. We have been granted membership of these “clubs” because we are the most influential economy in Africa. On 16 July 2014, the National Treasury confirmed that the wording proposed on the BRICS insurance/reinsurance project had been accepted by BRICS Heads of State and successfully incorporated into the Sixth BRICS Summit Leaders' Declaration or the so-called Fortaleza Declaration on 15 July 2014. The Fortaleza Declaration in paragraph 16 confirms the following statement on cooperation in insurance and reinsurance markets:
“We recognize that there is potential for BRICS insurance and reinsurance markets to pool capacities. We direct our relevant authorities to explore avenues of cooperation in this regard.”
The inclusion of the wording in this Declaration represents a significant milestone, as it signals to the rest of the world the BRICS commitment to take forward work on the insurance front and an instruction to BRICS leaders to take it forward.
While we may enjoy the benefits that membership of these grouping brings us, the flip side of this coin is that lawmakers need to bring the level of our financial regulation up to the standard of the largest economies in the world.
For example, we regularly undergo Financial Sector Assessment Programme reviews, performed by the World Bank/IMF, which produces scorecards indicating where policymakers need to improve. Similarly, our Financial Services Board is on the executive of the International Association of Insurance Supervisors, which has twenty-six Insurance Core Principles for regulators, which need to be complied with.
So, in order to achieve this, South Africa has embarked upon a rapid modernisation of our regulatory regime. So far, so good! However, this is being done at a pace far faster than the larger economies implemented this change. Whereas Solvency II will have taken fourteen years in Europe, we have caught up in six, and will now launch simultaneously with Europe.
So, for a relatively small association like the SAIA, this pace of legislative change represents a tsunami of legislation, far beyond which we can comfortably address. We are well aware that the use of “tsunami” does not sit comfortably with all, but the term has now become part of the local vocabulary, so we use it without apology.
Similarly, for our members, the compliance challenge has become a massive burden. In my member visits to CEOs, the lament most often heard is that CEOs, especially of small to medium sized companies, now spend in excess of 50% of their time dealing with compliance. This detracts from their ability to deal with underwriting challenges, marketing their products, and growing their businesses.
Of course, this also comes at a cost. While not solely due to compliance, if one analyses the costs of doing insurance business over the last six years, costs plus commissions have increased from 25% of premium to 32% of premium for typical insurance. This 28% increase has certainly placed underwriting margins under pressure, with this increase of course coming straight out of the underwriting margin, and ultimately being passed on to consumers.
So for 2014 most of the existing initiatives will continue, with final implementation being in the not too distant future. However 2014 is the crucial year for us to get it right!
Some of the more important issues that will focus our attention during the year are:
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Solvency Assessment and Management (SAM)
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Treating Customers Fairly
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Twin Peaks, with the concomitant challenges to “Who regulates what?”
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Retail Distribution Review
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Consumer Credit Insurance proposals
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BRICS Reinsurance Project
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Policyholder Protection Scheme, which will see a fund being developed in order to protect consumers in the event of the failure of an insurer
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Third party Cell Captive Review
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Ongoing binder regulation issues
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A review of the ombudsman landscape
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Financial inclusion and the development of a microinsurance framework
5. NATIONAL DEVELOPMENT PLAN
Government places great significance on the National Development Plan. Yet it has not often been talked about in the corridors of the short-term insurance industry.
In our recent engagements with government, the SAIA has acknowledged the importance of this matter, and our Board has agreed that we should place this matter high on the SAIA agenda. In order to give wings to this, a grouping of CEOs has been delegated with the responsibility of developing a strategy for the SAIA.
6. SUSTAINABILITY OF THE INTERMEDIATED MODEL
While clearly not an issue for our entire membership base, for those CEOs with large books of broker business this is a significant issue.
The growth of the direct market has changed the face of the personal lines market substantially over the last fifteen years, with direct players now accounting for in excess of 40% of premiums. Some of the traditionally broker aligned insurers have interests in direct companies.
There are many issues challenging the sustainability of the intermediated model, not least being:
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Profitability of broker business when measured against profitability of direct business
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Quality and completeness of data derived from intermediaries books
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Fees paid to binder holders
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The slow uptake of the industry data switch STRIDE
No doubt many of these issues will be raised in the upcoming Retail Distribution Review paper which is overdue from the Financial Services Board.
This issue has also been identified by the Financial Intermediaries Association (FIA). We have met with the FIA, and agreed that they should lead the discussions on the issue, given that we represent a grouping which includes the direct players.
7. CLIMATE CHANGE
There is a general sense that weather patterns of late have not been “normal”. In 2012 we had a hail storm on the East Rand which cost insurers R1bn. This was considered by many as the one-in-one-hundred-years storm. Yet in 2013 we had another storm which cost R1.5bn. While there have been big storms before, and nobody can with certainty ascribe these storms to climate change, insurers are becoming increasingly concerned about the potential impact of climate change on claims.
We are engaging with government about the need to expand the reach of agricultural insurance to emerging farmers, yet at the same time multi-peril crop insurance is under pressure.
The SAIA has started to engage on these matters through the industry Strategic Risk Forum, but clearly more needs to be done.
8 . OTHER AREAS
Other areas raised by industry CEOs include risk management at municipal level, engagement with industry associations in the rest of Africa, and improving security. Africa is an important market to our members and we are redefining our role on a wider context.
While these are important issues, time does not permit further elaboration on these.
The Board of the SAIA has a way to go before finalising its priorities, but the process has begun.
Over the years the team at the SAIA has continually reinvented itself, as priorities have changed. The current areas of priority at the SAIA are:
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Governance Risks (legislation and regulation)
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Insurance Risks (motor, property, agriculture, marine, engineering)
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Transformation & Social Risks
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Stakeholder relationships and communications
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Reinsurers
While these current priority areas are not too far off the list identified by the CEOs, there will need to be some different emphasis going forward.
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Thanks again!
ENDS
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SUSTAINABILITY OF MOTOR INSURANCE
During the mid-1990s vehicle crime was increasing at an alarming rate, to the extent that it was seen as potentially impacting the future sustainability of motor insurance. For most motor insurers, vehicle crime accounted for around 80% of the cost of motor claims. As motor insurance is the largest class of short-term insurance, this was clearly heading for crisis territory.
Major stakeholder groupings came together, under the leadership of the SAIA, in order to create strategies to deal with this major threat to our business. Out of this emerged Business Against Crime South Africa. The strategies included improved vehicle security, vehicle tracking, microdotting, improved border control, better policing, and a best practice model for vehicle licencing departments.
We now see the situation totally reversed, with the major threat to motor insurance business being crashes and the cost of vehicle repairs. For most insurers vehicle crime now accounts for less than 20% of the cost of motor claims.
As we did in the 1990s, we now need to bring our collective power to bear in matters of road safety. Through the suggestion of the SAIA, I am pleased to report that Business Against Crime is now developing a strategy to deal with road safety.
Furthermore we need to engage with government to ensure that we bring South African in line with most other countries by re-introducing a system of compulsory third party property insurance. It is clearly not equitable that only around one-third of motorists carry the major burden of the cost of crashes.
Dealing with these two factors alone would have a massive positive impact on the sustainability of motor insurance, and help us to increase the pool of insured vehicles on the road from the current paltry 35%.
Other important areas are issues around motor body repairers, and the need to put in place an enterprise development initiative in order to assist the growth of small black owned panel shops, alternative parts and issues around motor warranties.