Yes, short-term insurers can afford to pay out business interruption claims – study

Short-term insurers can afford to pay out business interruption claims a study for Insurance Claims Africa (ICA) has found following a large number of claims from small and medium sized enterprises (SMEs).

Dr Roelof Botha, economic advisor for the Optimum Investment Group and Keith Lockwood, faculty member of the Gordon Institute of Business Science, investigated whether the industry has a sufficiently sound financial disposition to afford to pay out business interruption claims.

Botha emphasised the importance of prompt payment of these claims for the survival of smaller businesses with some forced into bankruptcy in the event of lengthy court cases that follow the route of appeal.

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Swift economic recovery

Although hardly any sector of economic activity remained unscathed by the extraordinary socio-economic disruption of the pandemic that confronted businesses around the globe, Botha points out that the worst of the macroeconomic effects of the pandemic were over in a matter of months.

He says substantial fiscal, monetary and financial support measures, progress with mass vaccinations and the enforcement of health protocols, as well as e-commerce all contributed to a V-shaped economic recovery in most countries, including South Africa.

“It has become clear that the damage inflicted on the South African economy in 2020 as a result of the Covid-19 pandemic turned out to be less severe than generally anticipated, with a swift rebound occurring during the second half of 2020.

“The IMF upgraded South Africa’s growth forecast for 2021 to 3.1%, with low interest rates, stellar growth in digital communication and retail logistics and signs of a new super-cycle for commodity prices having contributed to exceptionally strong growth prospects for 2021 and beyond,” he says.

According to Stats SA, the country managed to produce goods and services valued at close to R5 trillion during 2020, only 2% less than the GDP recorded in 2019 at current prices.

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What about short-term insurance?

Botha pointed out that in contrast to quantifiable evidence of a return to positive economic growth and renewed business confidence, spokespeople for some short-term insurance companies and so-called industry experts have been downplaying the extent of the recovery and the sound financial disposition of the short-term insurance industry.

He says in one instance a spokesperson recently referred to trading conditions in 2021 remaining competitive in a “negative economic growth environment”, which is in sharp contrast to the reality.

“McKinsey & Company also grossly exaggerated the impact of Covid-19 on the non-life segment of South Africa’s insurance sector in an article published in November 2020. At the time McKinsey predicted gross written premiums for general insurance (essentially short-term) to decline by 5%, in line with a forecast drop in GDP of between 8% and 10%, which was also an exaggeration, as South Africa’s GDP shrank by 7% in real terms and only 2% in nominal terms in 2020.”

Botha says the resilience of South Africa’s short-term insurance industry made a mockery of the McKinsey forecast, with premium growth of 5% in 2020 instead.

“The short-term insurance industry as a whole benefited from a combination of lower alcohol consumption, curfews and the decline in road traffic.

“As a result of these trends and the rapid return to pre-pandemic economic activity, the STI sector performed exceptionally well during 2020. Unlike long-term insurance, which experienced a decline of 39.4% in its current account income surplus, short-term insurance recorded positive growth for virtually all of the key indicators of financial performance, with its current account income surplus increasing by 19.4%.”

According to Botha, total short-term premiums received increased by 2.2% to a new record of more than R130 billion, while unappropriated profits increased by more than 20% to a new record of R53.5 billion. The total assets of the industry increased by 12% to more than R220 billion.

“Arguably the strongest vindication of ample scope for settling business interruption claims without unnecessary delay can be found in the decline of the claims ratio during the first three quarters of 2020 to a level of 51%, compared to a significantly higher ratio of 63% for the same period in 2019. It is also a point of concern to clients facing unnecessary delays in the settling of claims that the value of unpaid claims rose by more than 17% to a record high of R49.4 billion in 2020.”

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Key findings

The key findings from the study shows:

• Global economic recovery is gaining considerable momentum and the South African economy is no exception.
• Positive growth in short-term insurance for virtually all of the key indicators of financial performance.
• Covid-induced changes to consumer behaviour with substantially lower mileage driven, resulting in a sharp reduction in the claims ratio.
• No doubt over the affordability to pay out claims for business interruption, which may be on the verge of ceasing in the wake of an imminent full reopening of the economy.

Botha says that while short-term insurers agreed to relief payments for cash-strapped claimants with business interruption policies to relieve the financial pressure that many households have experienced during the pandemic, it needs to be extremely cautious not to damage its credibility by resorting to continued legal appeals over claims related to Covid-19.

According to Ryan Woolley, CEO of Insurance Claims Africa, “the gross inequity of the situation is blatantly prejudicial to claimants who are still awaiting settlement more than one year after the start of the pandemic”.