Why insurance premium increases are unavoidable

Santam’s executive head of commercial and personal intermediated business, Andrew Coutts, has issued a communication to intermediaries setting out the factors that have made premium increases unavoidable.

Coutts said households and businesses have experienced immense economic hardship over the past few years. To help alleviate this hardship, Santam “implemented very low premium increases, provided premium relief and relaxed many underwriting conditions”.

During this period, claims inflation continued to grow at levels much higher than premium increases. The higher costs of individual claims were, however, offset by a lower claims frequency, and the low premium increases effectively passed on the benefit of the lower risk environment to clients.

“But, due to a multitude of drivers, the risk environment and frequency of claims have changed significantly, regrettably resulting in the need to now implement the incremental premium increases,” Coutts said.

Coutts listed climate change and cybercrime as the top two drivers of premium increases.

The frequency of catastrophic events caused by climate change is increasing. South Africa has not been exempted from this trend, with high extreme weather claims at the end of 2021 and in the first quarter of this year, along with the floods in KwaZulu-Natal in April and May.

The cost of catastrophic events is increasing because of economic and population growth and urbanisation. The 10-year moving average of insured losses is increasing by between 5% and 7% a year.

When it comes to cybercrime:

• Internet users in South Africa are set to increase to 65% of the population by 2030, and the demand for digital channels will increase.
• Data will become an individual’s and a business’s greatest asset.
• South Africa was the African country most affected by cybercrime in 2021, with 230 million cyber-threat detections.

Local and global economy

Coutts said the challenging local and global economic environment further impacts on the increase in baseline levels of risk. Although economies move in cycles, current economic conditions have created a perfect storm, he said.

In South Africa, the Consumer Price Index (7.8%) and the Producer Price Index (18%) are at 30-year record levels, while the rand has lost more than 20% of its value.

The economy is being hampered by persistent load shedding and disruptions to key supply chains.

The economic problems in South Africa are being exacerbated by global factors, which include the slowdown in global growth, surging inflation driven by food and energy scarcity, and the war in Ukraine.

Claims frequency, severity and cost

“The combined effect of increasing risk and challenging economic conditions has resulted in an unprecedented impact on insurance costs, reflected in substantial shifts in claims frequency, claims severity and average cost of claims,” Coutts said.

The frequency of claims was higher than in 2019 and in 2020/21. This was a result of:

• The year-on-year increase in road traffic volumes;
• Power surge claims; and
• Significantly higher rainfall.

Not only were claims more frequent but they were more severe because of:

• The spike in thefts of high-value vehicles;
• Vehicle collisions occurring at higher average speeds;
• The decline in fire protection services;
• The decline in road and rail infrastructure;
• Lower compliance with building regulations; and
• The decline in storm-water management infrastructure.

The cost of the average claim has surged because of:

• Disruptions to supply chains;
• The increases in the value of second-hand vehicles;
• Extended average car-hire days;
• The higher rand cost of imported car parts, electronics, plant and machinery; and
• The increase in fraudulent claims (syndicates and the opportunistic inflation of claims).

Cost of reinsurance

While systemic risk is growing, reinsurance capacity is decreasing as reinsurers seek to manage increasing volatility, global and local political uncertainty, inflation and sanctions following the war in Ukraine, Coutts said. Reinsurers were increasing premiums while narrowing their cover.

“The significant increase in the complexity of risk necessitates the need for advice, the effective selection of cover to manage cost, and the management of risk. The purpose and value of insurance have never been more real or more valuable. The substantial challenges presented by an increasing risk environment form the foundation for providing incremental client value and realising the incremental growth of our intermediated insurance value proposition.”