The three traditional insurers rely on insurance brokers for the bulk of their business. And every year, it becomes clearer that these big three - Santam, Mutual & Federal and Zurich SA - are struggling with a broken business model, at least in their core personal lines, motor and property books.
The insurers often give their "pen" to brokers, who are given the freedom to choose their own risks. As most brokers focus on the quantity and not the quality of business, the losses on these group schemes have often been high.
In the six months to June Zurich had the worst result, with an almost unheard of 9,6% underwriting loss, paying out in claims almost 110% of what it collected in premiums. It made underwriting losses in all its major lines of business, with its motor losses up almost 120% to R83,7m.
All three insurers have a reputation for paying claims diligently, but none more than Zurich, from its days as SA Eagle. Which means it pays claims even its peers would repudiate.
Mutual & Federal gives only limited information as it is now a wholly owned subsidiary of Old Mutual and is no longer listed. But it can't be a coincidence that as it was reporting a 2,7% underwriting loss for the six months to June 2013 there was a change of management, with Peter Todd handing the reins to Old Mutual insider Raimund Snyders.
It will take years for M&F to make its personal lines (retail) business consistently profitable. It will get easier victories in the less competitive African market. And in a vote of no confidence in its short-term subsidiary, Old Mutual will not be using the M&F brand as it builds short-term insurance operations in the rest of Africa. It will use the Old Mutual brand instead - not even a compromise brand such as Short Mutual.
Snyders will be spearheading the Old Mutual group's expansion of short-term insurance into Africa. "If we just think SA is the business, we are thinking small," says Snyders. He has some insight into the opportunities of Africa as he was previously head of African operations for the whole Old Mutual group. He says that he hopes to be selling motor and property insurance soon to 200m people in East Africa and 240m people in West Africa under the Old Mutual brand.
Back home he says that he is prepared to cancel lines of business in which the claims experience is too high, such as poor-quality books of motor business from second-tier brokers. Market share will be secondary to profit on his watch, he promises.
In the long term, M&F will benefit from its investment into its unusual direct business, iWyze. This is not a clone of direct insurers such as Outsurance, insuring Volvos and BMWs, but focuses primarily on the bottom end of the market. Old Mutual's mass market group schemes sales force is the most important source of leads. iWyze made a loss of R85m but it is getting some traction from the Old Mutual mass market sales team.
Santam is without question a far better-managed business than Zurich or M&F, and it has proved that a broker-based insurer can still be highly profitable. Santam CE Ian Kirk says that Santam would consider a 6% underwriting margin to be satisfactory, as this is the average return it achieves through the underwriting cycle. The insurer ended up with a 1,3% underwriting surplus, positive if only just. There was an underwriting loss in personal lines, which fell from a R120m profit to a R9m loss.
Yet when the leading direct insurer, Outsurance, reports its results next week, its underwriting margin is expected to be north of 18%. Santam finance director Hennie Nel says that the largest single contribution to the depressed margin was the losses from crops, which were affected by hail in the east and drought in the central and western regions. Crop insurance made a modest but respectable R34m surplus in the first half of 2012. A year later there was a R112m loss.
Santam has maintained its dominance through its successful underwriting managing agencies (UMAs), such as Stalker Hutchison Admiral in liability, Mirabilis in engineering and Emerald on corporate property.
But commercial and corporate business also suffered, with the underwriting surplus down about two-thirds to R119m. The liability book, for years a cash cow for Santam, has seen its surplus fall more than 30% to R67m. This is 10 times what Zurich made, while M&F has not disclosed this detail.
But there were bright spots for Santam: the engineering portfolio's surplus was up 25% to R59m in a period when the counterpart at Zurich fell into losses. Zurich has no plans to set up a direct business, says CE Edwyn O'Neill. It is hoping to increase business through alternative distribution such as UMAs.
Zurich is benefiting from its position as part of a large multinational, with corporate related premiums up 48% to R236m. But in its bread and butter business, the commercial sector, its premium increased just 2% to R1,3bn, while in the unprofitable personal lines its premium income was up 14% to R514m. Zurich's personal lines underwriting loss has not been disclosed.
Zurich might have a future in the corporate market, with its powerful parent, but looks doomed to keep writing the business no-one else wants. Snyders says it is important for the traditional insurers to continue to support the value proposition of buying insurance through brokers. "There is a difference between a low price and value for money," he says.
- | 12 September 2013 | FinancialMail
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