While many products and services have seen steep increases in the country over the last five years, some rising costs – such as insurance premiums – have been more noticeable on the pocket.
According to Malesela Maupa, head of insurer relationships at FNB Insurance Brokers, there are often clear reasons for these increases – and in some cases they can easily be avoided.
“Understanding some of the common factors that impact the price of premiums can help businesses plan ahead for unavoidable increases when drawing up their budgets,” he said.
“Although the factors may vary depending on the nature of the business being insured, they provide a good guideline of what insurers take into account when considering increasing premiums.”
Below, Maupa unpacks five reasons why insurance premiums have doubled over the past five years.
Claims frequency and severity
“There has been a substantial increase in the frequency and severity of losses in the past five years, which has had a huge impact on risk underwriting and insurance premiums,” said Maupa
Insurers operate on a principle of insurance that is very simple, where they pool premiums from many clients with exposure to similar risks and pay for losses experienced by those clients in the same category.
“However, for insurers to be profitable, they work on acceptable loss ratios ranging from 60% to 70% between collected premiums and claims paid. These loss ratios have been on the increase as a result of a rise in claims paid,” he said.
The average cost of claims has considerably increased over the last couple of years due to technological advances, the cost of materials used to make products more durable, complex and expensive repair methodologies, modern methods of construction, more technical expertise requirement to be compliant and increasing building rates.
According to Maupa this is linked to the Consumer Price Index (CPI) which has increased from 85 index points in 2014 to 105 index points in 2018.
Maupa said that tough economic conditions have placed an enormous strain on business’ balance sheets, and thus they cannot carry higher excesses which pushes premiums to be higher as insurers will be picking up more small value losses that occur more frequently.
“Furthermore, during tough economic conditions there is often an increase in the number of liquidated companies or companies reduce or cancel insurance covers to try to survive. This ultimately reduces the pool of clients paying premiums and results in clients paying higher premiums,” he said.
Extreme weather conditions
Recently, South Africa has experienced an increase in the number of catastrophic losses due to extreme weather events affecting businesses and ultimately insurers and re-insurers.
“This has significantly increased the re-insurance premiums insurers have to incur and unfortunately this cost is passed on to customers,” Maupa said.
Changes in legislation and regulations
One of the biggest factors on the cost of premiums is that the regulatory environment has become more stringent and, to comply, businesses have had to incur more costs.
“For example, a huge proportion of the commercial property insurance market is dominated by real estate, and with an increasing requirement for well designed, environmentally friendly properties and building methods, fire-resistant properties and energy efficient properties have fortunately reduced premiums from a risk management perspective.
“However, the cost of the materials used and technical expertise required to build and manage these properties has been increasing and insurers utilise these high values to charge premiums on these properties,” he said.