Continuing weakness in rand raises serious concerns

Specifically the motor insurance segment, which comprises of about 45% of South Africa’s entire short-term insurance industry. According to Nico Esterhuizen, Programme Manager for Solvency Assessment Management at the South African Insurance Association (SAIA), while it is likely that short-term motor insurers will absorb cost increases caused by inflationary pressures, consistent weaker foreign exchange rates mean that the effects on the industry will be negative in the long-term.

“The competitive nature of motor insurance will prompt insurers to do everything possible to keep premiums stable. However in the long run, insurers might have no other choice but to increase premiums in order to maintain profit margins.”

According to Dawie Buys, Manager of Insurance Risks at the SAIA, over the past five to six years 70% of the total cost of motor claims have been accident related, with 70% of the total cost of repairs being spent on car parts. “South Africa sources most vehicle parts from overseas and with the increasing exchange rate, the cost of importing these parts will continue to escalate. This will have a compound effect on insurers’ loss ratio.”

He explains that in South Africa where vehicles are under warranty, the industry is restricted to using Original Equipment Manufacturer (OEM) parts – which can only be sourced from OEMs via their dealer networks and only accredited motor body repairers may repair such vehicles. “During the warranty period, Certified Alternative Parts (CAP) or second-hand parts may therefore not be used as it will invalidate the warranty. In other countries such as in Europe and the United States of America consumers are protected by law, and if they use alternative parts when these are deemed non-safety critical, the warranty may not be invalidated by the OEMs.

“OEM parts are more expensive when compared with CAPs. As the cost of these parts increase due to the weakening rand, it places further strain on motor insurers to maintain profit margins. This will remain an issue until the law is changed to allow consumers the right to use CAPs or second-hand parts while the vehicle is still under warranty.”

He says that to further absorb costs, insurers can manage their supply and repair chain costs as efficiently as possible, which includes tow truck operators, motor body repairers and dealers. “In addition, the SAIA and its members identified some time ago that the sustainability of affordable motor insurance needs to be addressed at industry level. Several industry projects and initiatives are underway to address the issue, including a call for compulsory third party motor property insurance, supply chain initiatives, the possible introduction of an insurance group rating system and the cost of vehicle parts.

“At the end of 2014, the SAIA and the National Association of Automobile Manufacturers of South Africa (NAAMSA) agreed that the insurance and motor industry should jointly investigate ways to address the cost of original equipment vehicle parts, which will ultimately benefit consumers. During 2015 a joint SAIA/NAAMSA Task Team met regularly and have agreed on various initiatives to improve price inefficiencies in the vehicle parts environment. The SAIA believes this process will assist in the reduction of the cost of repairs.”

Furthermore, Buys says that the cost of claims can be managed with crime initiatives, including ensuring that insurers prescribe that certain vehicles have tracking devices as part of underwriting requirements. He adds that the SAIA also has a good relationship with the NAAMSA regarding vehicle security issues, and jointly manage a vehicle security system list which controls the security of vehicles that are manufactured or imported into South Africa.

He says the association also works closely with the South African Insurance Crime Bureau (SAICB) as well as Business Against Crime South Africa (BACSA) to combat vehicle crime. He adds that together they are currently fighting the cloning of vehicles, as well as utilising the automatic number plate recognition programme to prevent stolen vehicles from leaving the country and to assist with the recovery of stolen vehicles. He says that this is especially relevant in the wake of the recent confirmation that vehicle and truck hijackings have increased significantly.

“By working together with the industry, NAAMSA, BACSA and the SAICB, the cost of motor insurance can be more effectively managed, despite the challenges encountered as a result of currency risk and increasing levels or crime,” he concludes.