Industry must surf tidal wave of crime
The short-term insurance industry is facing many challenges brought about by South Africa's transformation. LEE-ANNE SMITH looks at how the industry is adapting and dealing with problems like rising crime
"It is difficult for the insurance industry to come up with innovative solutions to address the massive crime wave that is rocking the country," says Rory Gainsford, general manager of operations at Fedsure General. "There is a limit to what we can do with what is really a government and police problem. Until the unemployment situation improves and the current attitude towards crime control and heavier sentences is addressed, the industry is limited in what it can offer. All we can do is insist on better levels of protection for businesses, houses and motor vehicles."
Steve Whitty, managing director of Glenrand Insurance Brokers, agrees that the insurance industry can only treat the symptoms of crime, but believes it could also co-operate more in pooling and sharing important information, especially with the strides it has made in the information technology arena.
Bram Field, executive chairman of Compass Insurance, says short-term premiums will continue to rise while crime and violence escalate.
"Perhaps it is time . . . we use the money being spent on commissions of inquiry, seminars and investigations towards putting in place a larger police force and impose heavier sentences, with faster court action, and above all, take positive action in curtailing the number of firearms so easily obtainable by the criminal element."
He says more people are dispensing with insurance cover mainly as a result of the increasing cost. In 1974, annual insurance premiums represented 1,2% of annual salary. This figure increased to 9,8% in 1996.
However, he says it is short-sighted to cancel insurance as serious losses resulting from fire, storms, and burglaries can be financially crippling.
"What is called for over and above an aggressive fight against crime, is for insurers to make cover against catastrophe risks more affordable (this is already being done) and also for consumers to adopt their own stringent risk-management principles," says Field.
Whitty says rates in the corporate market are soft with plenty of additional capacity from overseas companies. "South Africa has been through its worst history of fire losses in recent times so this time next year insurance companies could be faced with an entirely different agenda from a re-insurance point of view."
Keith Kennedy, general manager operations at Guardian National, believes that if crime could be tackled successfully so that claims were reduced, market forces would bring premiums down.
"What we see and hear in the media about crime, especially white-collar crime, is only the tip of the iceberg. It's time companies took a firm stand."
Turning to those who put in fraudulent claims, he says: "People forget the basic principle of insurance - that the many pay for the misfortunes of the few. If premiums go up as a result of genuine losses it is one thing, but when fraudulent claims contribute to pushing premiums up, it is quite another. In the event of multiple claims, the insurance company has every right to impose higher premiums or cancel cover as it has a duty to protect the pool of policyholders."
Unprecedented crime levels have spawned a new underwriting agency whose core business it is to cover companies against theft by employees. Gregg Smith, managing director of Fidelity Guarantee Acceptances, says conventional insurers transact this business but the extent of crime is leading many companies to rely on the expertise of specialist fidelity guarantee underwriters.
"Fidelity guarantee business has generally been transacted unprofessionally by the South African industry with most of the cream flowing into overseas markets. Conventional insurance companies do not always have the necessary expertise to address this market, and if cover is available at all, it is generally so expensive that it is unaffordable for many companies.
Brian Peck, managing director of Prestasi Brokers, says challenges faced by the short-term insurance industry can be summed up as a result of the evolution of the spiralling of these interconnected issues:
The average premium began to rise faster than the average individual's ability to pay and precipitated a fundamental shift in the market. More consumers either dropped out of the market or reduced the amount of risk they asked insurers to carry (either self-insuring, risk managing or not insuring at all) which caused the pool of premium income to shrink.
In addition, in an era of escalating claim frequency and amounts, insurers were forced to become more stringent with the settlement of claims in order to keep loss ratios in line with finer pricing of more flexible agreements.
"More expensive insurance resulted as an element the market began inflating claims to 'compensate' either for a prior loss not covered or simply to justify the payment of substantially higher premiums. A more sinister fraudulent element, in conjunction with criminal elements, came to the fore, with people being paid an incentive to allow crime to take place if they had insurance in place to cover the loss.
"Insurers were again forced to respond with more sophisticated pricing, underwriting and claim adjudication procedures to prevent such abuses from taking place, and the consumer now resents the process of both buying and having to claim on an insurance policy," he says.
Peck says there are three major areas of focus where insurers are bringing visible change to the consumer marketplace: "The first is bringing down the costs of acquiring and servicing the business; the second is ensuring that risks are priced and underwritten using the most advanced techniques; and thirdly ensuring the costs of settling claims are managed as closely as possible."
Traditional thinking about the uses of short-term insurance has begun to change, both in terms of the services provided and the market's demands, says Judi Priday, managing director of Quantum Insurance.
"Insurance is increasingly seen as a financial service and is inextricably linked with banking and other financial products. The international market is beginning to merge banking and insurance industries closer together and is investigating alternative ways of managing and financing the risk in conjunction with the insured, offering an all round financial service as opposed to conventional insurance services.
"I believe we must align the South African industry with international trends," she says.
The needs of the corporates can be met by risk financing mechanisms which encompass participation in both the benefits and disadvantages of the cover. There is now no risk that cannot be insured but the cost of certain insurance is still prohibitive. "The challenge in this market must be to offer a product that the company requires at a reasonable cost," she says.
The insurance industry still has a way to go in meeting the needs of customers. The key is to be aware of international trends, remain service-orientated, flexible and sensitive to the challenges facing customers, says Priday.