SAIA

South African Insurance Association

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Chief Executive’s report and short-term market

Introduction

At time of writing this report, we have just less than 60 days to go to the kick-off of the 2010 FIFA Soccer World Cup, being held for the first time on the African continent. While, hopefully, there will be no major insurance issues arising from the event, all business will be affected in one way or another. It will be difficult to move around the cities, and keeping staff focused on the job at hand will be challenging. Nevertheless, we at the SAIA will be joining in the excitement of the event, which in all likelihood will happen in our country only once in our lifetime. It is likely that Government will virtually down during this period, so there won't be much new emanating from that source for us to consider. However, given our workload and the number of new tasks we have assumed, there will be no time to slack off, so SAIA will remain hard at work.

It has become our custom to create a theme for the SAIA's Annual Reviews. We try to make these themes symbolic of where we believe SAIA is in terms of its development and the position in which the short-term insurance market finds itself. This year we have chosen the theme "Laying foundations for the future". This theme was chosen because we believe that of late we have become involved in issues and initiatives that will lay the cornerstone for the future of the short-term insurance industry. Although the market is tough, it is an exciting time for those who represent and promote our industry, and the association has much work to do.

Key Strategic Areas

During 2006 and in early 2007, the SAIA's Board conducted two strategy-planning sessions, which resulted in a realignment of the SAIA Key Strategic Areas. It was agreed that the SAIA would focus on those Key Strategic Areas, and find an exit strategy for areas not considered being key.

Initial Key Strategic Areas

The initial Key Strategic Areas, adopted by the Board at its meeting on 3 April 2007, were:

  • Image & Reputation
  • Legislation & Regulation
  • Operations; the Intermediaries Guarantee Facility (a short-term insurance company issuing credit guarantees), the South African Pool for the Insurance of Nuclear Risks (an insurance pool providing capacity for insuring nuclear risks at Koeberg and Pelindaba, and the Insurance Data System)
  • Transformation

In due course two new Key Strategic Areas were added, namely:

  • Motor Insurance
  • Reinsurers

During 2009 the SAIA picked up three new projects, all of which the SAIA Board has agreed are Key Strategic Areas for the industry as their impact on the industry over the next five years will be significant.

They are:

  • South African Insurance Industry Data Sharing Initiative
  • Solvency Assessment and Management (SAM) initiative of the Financial Services Board (FSB)
  • Sustainability / systemic risk issues / environmental issues

Previously, the crime portfolio had been considered key, but following a SAIA Board decision, the South African Insurance Crime Bureau (SAICB) was created and most crime issues were moved to the new institution. SAIA does, however, still deal with some crime advocacy issues.

Transformation

The transformation portfolio has become a frustrating one.

Despite enormous efforts on the part of all involved, I regret to say that the various constituencies of the Financial Sector Charter (FSC) Council have failed to reach consensus on the outstanding issues regarding the ownership pillar. This is despite the ministers of Finance and Trade & Industry urging all to find solutions, and the attempts of two separate facilitators.

At time of writing, I believe that the FSC Council constituencies will not reach consensus on outstanding issues and that the ministers will have to make a call regarding the way forward.

The bottom line is that we do not have a charter gazetted as a sector code, the default Department of Trade and Industry (DTI) Codes therefore apply to the industry, and the elements that make the FSC unique among charters are in danger of being consigned to the scrap heap. This will be a disaster for all involved, because these elements, which the financial sector can uniquely address, have been enabling fundamental transformation in the lives of all South Africans. Here I am talking about the developments in products aimed at extending the range of financial products to encompass a far larger segment of our population, the efforts to extend financial literacy education to more South Africans, and the efforts aimed at empowerment financing.

I, among many, hope that whatever the outcome, the gains made in these areas are not lost and that whether the FSC is gazetted or not, we can find a way to continue with the development of access products and with our consumer education initiatives.

During the period under review, the SAIA did successfully conclude its work on developing a proposal for enterprise development. This proposal details the steps required to establish a programme to assist in the development of black-owned motor body repairers. This would allow insurers and other institutions to channel funding into a programme to ensure that they obtain the necessary credits for enterprise development in terms of the FSC. In addition, the programme would assist insurers to create a base of suitably qualified black-owned service providers to assist in the procurement area. Following the conclusion of the phase of this project, which has seen the completion of the development of this proposal, the SAIA Board has recognised that it is not the core business of insurers or the SAIA to be involved in the development of motor industry service providers. As such, the SAIA is seeking to find partners within the motor sector that could take over the role of championing this project.

The SAIA has continued with its successful consumer education programme. This is the sixth year of this programme and to date, together with our partners, we have collectively spent over R53 million. Further information on this programme is contained in the Image & Reputation section of this report.

The SAIA Manager: Transformation resigned during the course of 2009, and the SAIA Board has taken the decision to place the appointment of a replacement on hold until the future of the FSC is more certain.

Given the lack of positive outcomes in the Transformation portfolio, we have not included a separate section for Transformation in this Annual Review.

Image & Reputation

The Image & Reputation team has been hard at work to ensure that the industry is represented in the best possible way. We have launched a new targeted publicity campaign, which has led to a new focus on the positive aspects of the industry in the press.

However, the greatest impact in this area has been the launch of our new Code of Conduct. Our previous Code of Good Business Practice was seen to be somewhat ineffective in achieving its objects. During the course of last year the SAIA Board decided that it was time to develop a Code that was far more all-encompassing, thereby setting the industry more firmly along the path of self-regulation. Given that the new Code is so much more substantial than the one it has replaced, the Board has agreed that the new Code will run for at least a year, after which it will be reviewed.

This portfolio has been ably managed by our former Manager: Image & Reputation, Viviene Pearson, with the valuable assistance by our Public Relations Officer, Adéle Joubert. Viviene has recently been appointed as our Manager: Motor, and we are actively seeking to replace her in the important Image & Reputation portfolio.

More details on the activities in this area are covered in the Image & Reputation section of this Annual Review.

Legislation & Regulation

For many years now the Legislation & Regulation portfolio has been extremely active. The year under review was no exception.

At time of writing, the regulations governed by the Insurance Laws Amendment Act have still not been released for comment by the Financial Services Board (FSB), despite many people, including industry representatives, having been hard at work. It is anticipated that the impact of the new binder regulations could have far-reaching consequences for the industry, so these are eagerly awaited. The regulations on the medical schemes' demarcation side seem even more distant, with delays in the process of consultation through National Treasury.

Under the Legislation & Regulation section of this Annual Review full coverage is given to the many pieces of legislation that we have reviewed.

The Legislation & Regulation portfolio was managed by my Deputy Executive, Refilwe Moletsane. With the appointment of our new Manager: Legislation & Regulation, Karen Naidoo, during the course of the period under review, many of the matters have been passed on to her.

I am sure that this area of our business is going to remain extremely busy for the foreseeable future and Karen and our willing supporters from the ranks of our insurance member companies are not going to have an easy time.

Finance & Operations

The areas of operation that were previously managed by the SAIA remain under our control, namely the insurance company Intermediaries Guarantee Facility (IGF), the South African Pool for the Insurance of Nuclear Risks (SANP), and the Insurance Data System (IDS). The nuclear pools side has seen a major change with the creation of a separate legal entity to perform the administration of the pools, called the South African Nuclear Pool Administrators (Pty) Ltd.

Charles Hitchcock, our Manager: Finance & Operations is responsible for these operational areas.

Motor

In my Chief Executive's Report contained in last year's SAIA Annual Review, I spent quite some time raising concerns about road safety issues. These issues are still very much in the spotlight, with the road safety situation not having improved at all over the period, in fact in the eyes of many the situation has become more dire.

In light of motor insurance being the largest class of business, with the highest cost of claims – at times proving problematic for many of our members – the SAIA Board agreed at its meeting of 20 August 2008 to add motor insurance as a Key Strategic Area.

In reality, even though Motor was not originally identified as a Key Strategic Area, SAIA had continued to focus on motor insurance, and many of our activities were motor related.

For example, we have for the past seven years supported the activities of Business Against Crime South Africa (BACSA) with a substantial annual donation, which reached R1.7 million in the current year. We have also been involved with BACSA in many of its initiatives.

Recognising the increased focus on motor insurance, SAIA has developed a strategy specifically to deal with motor insurance. This strategy, which was adopted by the SAIA Board at its March 2010 meeting, seeks to address the causes of claims which result in the greatest losses to the industry, namely those of road safety. While incidences of vehicle theft have been greatly reduced over the years, there is no room for complacency concerning crime. The combating of vehicle crime will remain a key focus for us.

The Motor portfolio was managed by Refilwe Moletsane, along with her other duties. With the increased importance placed on this portfolio, the Board recognised that it was not possible to continue to manage this in a part-time capacity, so in order for SAIA to properly address this important area, the Board has approved the appointment of a SAIA Manager: Motor. Viviene Pearson, previously our Manager: Image & Reputation, has moved into this position.

Reinsurers

The SAIA is fairly unique among insurance associations in that the reinsurers active in the market are members of the association. In many other markets this is not the case.

Previously, although reinsurers were members of the SAIA, they were also members of the South African Reinsurance Offices Association (SAROA). Following the demise of SAROA, the SAIA Board agreed on 7 April 2009 to add Reinsurers as a Key Strategic Area.

Work being done in this area focuses on issues that are specific to reinsurers in the market, and we are busy developing a strategy paper that will address reinsurers' concerns.

The reinsurers have also been heavily involved in the new investigation into fire and emergency services.

As this is a fairly new committee, still finding its feet, we have not included a separate section in this Annual Review for the Reinsurers portfolio.

South African Short-term Insurance Industry Data Sharing Initiative

The Insurance Laws Amendment Act requires that insurers have access to their clients' data. Currently, not all insurers have access to full sets of data. This is specifically true where insurers use brokers with binders, or where there are large administration houses involved in processing policy information.

Therefore, the SAIA and the Financial Intermediaries Association (FIA) have embarked on an endeavour to tackle the significant challenge of data sharing between the insurers, brokers and other providers, that if not resolved will lead to a significant increase in cost and possible non conformance to the envisaged new legislation.

Present forms of data sharing are time consuming, costly and ineffective. (See current model below).

The project proposes a model to streamline inter-connectivity between the parties via a data exchange capability (hub or switch) in order to improve the speed, accuracy and effectiveness of data interchange thereby reducing operational costs.

The proposed future model is shown below:

The mission statement for the project is 'A connected insurance market place that enables informed risk taking and ensures sustainability'.

To ensure best practice, the project has adopted the Acord global standard for use in defining the data interchanges.

I have been responsible for this project, however with the increased momentum and workload on the project the SAIA Board and the FIA Board have approved the appointment of a Programme Manager. The cost of the person will be jointly shared by the SAIA and the FIA.

Solvency Assessment and Management Initiative of the Financial Services Board

During November 2009, the Financial Services Board (FSB) advised the SAIA that it was in the process of developing a new solvency regime for the South African short- and long-term insurance industries, to be in line with international standards. This new regime will be called Solvency Assessment and Management (SAM).

The short-term insurance industry had already been involved in working with the FSB towards a revised capital regime for the short-term insurance industry, under the Financial Condition Reporting (FCR) banner. The FSB has advised that this work on FCR will be superseded by and incorporated into the SAM project.

The basis of the SAM regime will be the principles of the Solvency II directive, as adopted by the European parliament. This will be adapted to South Africa's specific circumstances where necessary.

As an overarching principle, the recommendations arising from the SAM project should meet the requirements of a third country equivalence assessment under Solvency II.

The Solvency II directive was adopted by the European parliament on 22 April 2009 and endorsed by the Council of Ministers on 5 May 2009, thereby concluding the legislative process for adoption. The implementation date for EU countries is October 2012.

The FSB aims to promote the soundness of insurance companies through the effective application of international regulatory and supervisory standards. In line with this objective, the FSB aims to introduce a solvency regime along the principles set out in the new Solvency II directive shortly after the date of Solvency II implementation in the EU.

Solvency II is based on three pillars:

  • Pillar I – Quantitative requirements, dealing with such issues as the valuation of assets and liabilities and the setting of capital requirements This can be based on a standardised model prescribed by the supervisor or an insurer's own internal model, approved by the supervisor
  • Pillar II – Qualitative requirements, including standards and guidance on governance, internal controls, risk management and supervisory processes.
  • Pillar III – Reporting and disclosure

Recognising the importance of this project, the SAIA Board has approved the appointment of a Project Manager to run this.

Sustainability / systemic risk / environmental issues

The area of sustainability / systemic risk / environmental issues is the latest Key Strategic Area to be added by our Board.

While the SAIA has not specifically run a project such as this before, much of the work we have been doing over many years could be considered as part of an initiative to ensure the sustainability of the short-term insurance industry. Examples include the work done to prevent vehicle crime, the work done to create a transformed industry through the Financial Sector Charter, the work done on consumer education and micro-insurance, the initiatives investigating the state of the fire and emergency services, the two data sharing initiatives, and the preparatory work for the Solvency Assessment and Management initiative of the Financial Services Board.

Nevertheless, the Board has agreed that we need to adopt a more formal approach to these issues, so during the course of 2010 we will be working towards creating of a strategy to be presented to our Board.

State of the market

Over the last two years, copious volumes have been written about the worldwide financial sector crisis, with its repercussions still dominating global financial markets.

The South African financial sector has been left relatively untouched by the meltdown in foreign markets, and while the performance of equities during 2008 impacted on the bottom line of some of our members, we did not see a headlong rush to government to seek bailout funding. The solvency of short-term insurers, which showed a dip in 2008, has returned to long-term levels and has remained good. On the positive side, our member companies are well capitalised with sound solvency margins, so there has been no panic among insurers, just relief that they have been able to ride out the storm.

Each year, with the permission of the Financial Services Board (FSB), 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 2009'.

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. However, the downward trend of the last few years has continued, and margins are now getting close to previous long-term levels. As a result, insurers are looking for a turnaround in their underwriting results.

The position of cell-captive insurers is still positive with premiums remaining strong, albeit without the growth shown in previous years. Profitability remains strong.

Overall, the position for niche insurers is extremely positive with strong premium growth for several years, with solid profits. However, it must be noted that the reporting element of the FSB covers many classes of business, and that some of the pockets within this broad category have shown signs of stress, particularly caused by the state of the economy.

Typical insurers

Industry results – 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 2004 to 2009. The figures are unaudited.

2003 2004 2005 2006 2007 2008 2009
Net premiums R'm 19774 24211 26828 31093 34351 37556 39512
Underwriting profit/(loss) R'm 1381 2932 2542 2482 2169 2327 1722
Underwriting and investment income R'm 2554 4303 4304 4588 4851 5064 4741
Claims (as % of earned premiums) 67 59 63 65 66 66 67
As % of net written premiums:
Management expenses and commission 26 26 26 25 27 27 28
Underwriting profit/(loss) 7 12 9 8 6 6 4
Underwriting and investment income 13 18 16 15 14 13 12

Net premium increase

(year to year)
17 22 11 16 10 9 5
Surplus asset ratio (median) 45 37 40 42 43 40 43

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

Five of the twenty-five insurance companies classified as typical insurers reported an underwriting loss for the year ended December 2009 compared with four (of twenty-five) who reported an underwriting loss for the nine months ended September 2009.

Four of the twenty-five insurance companies reported an operating loss for the year ended December 2009 compared with three (of twenty-five) for the nine months ended September 2009.

Statutory surplus asset ratios

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

Number of insurers

Dec
2004

Dec
2005

Dec
2006

Dec
2007

Dec
2008

Dec
2009

Below 15%

1

1

0

0

1

0

Between 15% and 20%

0

1

0

1

1

0

Between 20% and 25%

0

1

3

0

1

2

Between 25% and 30%

3

3

3

6

2

1

Between 30% and 40%

8

5

4

2

8

7

Between 40% and 50%

1

2

4

5

4

5

Between 50% and 100%

5

6

4

5

4

8

Above 100%

1

1

3

3

3

2

Cell-captive insurers

Industry results – 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 2004 to 2009. The figures are unaudited.

2004

2005

2006

2007

2008

2009

Net premiums R'm

3 486

4 239

4 144

4 511

5 460

5 368

Underwriting profit/(loss) R'm

220

529

568

224

295

410

Underwriting and investment income R'm

506

857

980

810

1 079

1 150

Claims (as % of earned premiums)

56

52

52

62

67

62

As % of net written premiums:

Management expenses and commission

34

28

31

33

25

27

Underwriting profit/(loss)

6

12

14

5

5

8

Underwriting and investment income

15

20

24

18

20

21

Surplus asset ratio (median)

46

56

59

60

56

64

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

Of the eleven operational cell-captive insurers, one has reported an underwriting loss and none an operating loss for the year ended December 2009 compared with two of eleven who reported an underwriting loss and an operating loss for the nine months ended September 2009.

The following table indicates the spread of the statutory solvency percentages of the cell-captive insurance companies.

Number of insurers

Dec 2004

Dec 2005

Dec 2006

Dec 2007

Dec 2008

Dec 2009

Below 15%

0

0

0

0

1

0

Between 15% and 20%

0

0

0

0

0

0

Between 20% and 25%

0

1

0

2

1

1

Between 25% and 30%

3

0

1

0

1

1

Between 30% and 40%

0

2

1

2

2

2

Between 40% and 50%

4

0

1

1

0

1

Between 50% and 100%

1

6

4

2

3

2

Above 100%

1

0

2

3

2

4

Niche insurers

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 2004 to 2009. The figures are unaudited.

2004

2005

2006

2007

2008

2009

Net premiums R'm

2 808

2 497

3 293

3 872

4 976

5 712

Underwriting profit/(loss) R'm

477

444

699

1 078

1 514

1 723

Underwriting and investment income R'm

1 067

1 081

1 308

1 779

2 839

2 617

Claims (as % of earned premiums)

55

51

48

43

40

41

As % of net written premiums:

Management expenses and commission

25

29

28

27

27

29

Underwriting profit/(loss)

17

18

21

28

30

30

Underwriting and investment income

38

43

40

46

57

46

Surplus asset ratio (median)

163

117

120

72

77

58

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

Seventeen of the thirty-four operational niche insurers have reported underwriting losses for the year ended December 2009 and eight have reported operating losses compared with fifteen of the thirty-four operational niche insurers who reported underwriting losses for the nine months ended September 2009 and eight who reported operating losses.

The following table indicates the spread of the statutory solvency percentages of the niche insurance companies.
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Number of insurers

Dec 2004

Dec 2005

Dec 2006

Dec 2007

Dec 2008

Dec 2009

Below 15%

0

1

0

0

0

1

Between 15% and 20%

1

0

1

0

1

1

Between 20% and 25%

1

0

0

1

2

1

Between 25% and 30%

0

0

0

1

0

2

Between 30% and 40%

2

0

3

2

4

5

Between 40% and 50%

2

3

3

5

4

3

Between 50% and 100%

5

9

6

10

9

8

Above 100%

17

17

19

14

13

13

Reinsurers

Industry results – Reinsurers (reinsurers, for the purpose of this report, are those insurers who offer specialised cover, only to primary insurers).
The table below sets out combined statistics (net after reinsurance) for reinsurers for the calendar years 2007 and 2009. The figures are unaudited.

2007

2008

2009

Net premiums R'm

1 899

2 388

2 314

Underwriting profit/(loss) R'm

192

37

55

Underwriting and investment income R'm

651

492

464

Claims (as % of earned premiums)

58

64

66

As % of net written premiums:

Management expenses and commission

30

34

31

Underwriting profit/(loss)

10

2

2

Underwriting and investment income

34

21

20

Surplus asset ratio (median)

146

149

243

Five of the eight operational reinsurers have reported underwriting losses for the year ended December 2009 and none have reported operating losses compared with six of the eight operational reinsurers who reported underwriting losses for the nine months ended September 2009 and none who reported operating losses.

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

Number of insurers

Dec 2007

Dec 2008

Dec 2009

Below 15%

0

0

0

Between 15% and 20%

0

0

0

Between 20% and 25%

0

0

0

Between 25% and 30%

0

0

0

Between 30% and 40%

0

1

0

Between 40% and 50%

0

0

1

Between 50% and 100%

3

2

2

Above 100%

4

4

5

Appreciation

Since his re-appointment as SAIA Chairman, Ronnie Napier has fitted into the role as easily as if he had never vacated the position. I appreciate his support, both to the association and to me personally.

The job of an insurance company Chief Executive is not an easy one. Despite this, our member companies' Chief Executives have found the time to serve on our Board and its committees. For this, we are extremely grateful. Without their guidance we would have no sounding board against which to verify our efforts.

SAIA is a small organisation that endeavours to make a big difference. For the 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 Key Strategic Areas. During the year under review, the Key Strategic Areas expanded and we once again suffered from staff shortages, which put immense pressure 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.

Here I must mention that the SAIA has two unsung heroes: Our Office Manager, Sonja Etsebeth, who performs sterling work ensuring that the office environment is suitable for our activities. This includes managing SAIA's IT infrastructure, no mean feat given the number of documents we receive and circulars we send. Recently appointed as our Committee Coordinator, Elsebe Vetten is responsible for co-ordinating the activities of our Board and all the Board Committees. It is not easy to find time in the diaries of our member companies' Chief Executives to attend SAIA meetings. These ladies, together with our office administration staff, make it possible for our issues managers to perform their duties without being burdened with an enormous additional administration load.

To each and every SAIA member, I express my sincere appreciation for the collective role played to ensure a successful year for the SAIA.

Barry Scott
SAIA Chief Executive