Understand What Hurts Your Short Term Insurance Premium

We faithfully pay our short term insurance premiums every month. Yet, very few of us have any inkling as to what is happening in the background; just how the external risks and factors influence the amounts we pay. Being aware of the status of these factors will enable you to take precautionary actions, which in turn could improve your personal risk profile and reduce the premiums you pay.

We take a look at three of the factors that have a direct bearing on our premiums. These are: the status of the insurance industry, our country’s crime rates and the accidents that take place on our roads.

The status of the South African Short Term Insurance Industry

According to the 2007 SAIA (South African Insurance Association) Annual Review, the short term insurance industry is in really good shape: premiums and underwriting profits are up, while claims percentages are steadily coming down.

In the five years from 2002 until end 2006, the net premium income of short term insurers nearly doubled from R16 680 million in 2002 to an impressive R31 093 million by the end of 2006. The underwriting profits reported over the same period increased by 500%, from R377 million to R2 482 million per annum. More upside is to be had in terms of claims: from 2002 until end 2006, the number of claims as a percentage of net premium income reduced by 6% from 71% to 65%.

On the downside, the problem of insurance fraud is escalating instead of improving. Industry estimates are that 6% to 10% of all claims submitted by policy holders are fraudulent, which translates into at least R2 billion lost due to fraud each and every year.

Although a healthy short term insurance industry means healthy competition in the form of better service, better rates and better premiums, we have to bear in mind that not even the healthiest short term insurance industry in the world will be able or prepared to absorb all the losses sustained by fraudulent activities on the part of their policy holders. Regardless of whether you are honest or not, a portion of your short term insurance premium is calculated with the risk of fraud in mind. And, as the incidences of fraud increase, so could your premium.

The impact of crime on the South African Short Term Insurance Industry

The South African Police Services’ official statistics are used by all the insurers’ underwriters when they calculate the impact of crime on the short term insurance industry. The three main crime categories used are vehicle theft, car hijackings and household burglaries.

Between 2001/2002 and 2004/2005, crimes in all three these categories reduced substantially. In 2005/2006 and 2006/2007 burglaries continued with its downward trend, while vehicle theft and car hijackings showed a marginal increase. According to the latest 2007/2008 statistics released by SAPS, car thefts reduced by 7.9% and burglaries by 4.7%; hijackings are however still on the up, showing a further increase of 4.4%.

All round, these statistics are quite encouraging. An increase in the prevalence in crime usually finds its revenge in our pockets. If the SAPS figures are considered to be accurate by the short term insurance industry, then the risk of crime should either remain at the same weighting or be accorded a more favourable weighting than that employed during the previous year.

The impact of road accidents on South African Short Term Insurance

Road accidents remain a plague, and very little can be said to cast an optimistic light on the matter. South African drivers are by and large inexperienced – a situation that is greatly aggravated by the increase in adverse weather conditions and the fact that the road infrastructure has substantially deteriorated over the past couple of years due to a lack of maintenance. Although recent figures are not available from the Department of Transport, it is estimated that the number of accidents on our roads are still escalating by between 2% and 3% year on year.

The financial impact of accidents is severe. Accidents cost South Africa more than R38 billion every year and account for nearly 50% of all the claims submitted to the short term insurance industry.

Considering that repairing motor vehicles that have been involved in accidents has become an expensive affair and that even the bottom-of-the-range vehicles now make use of electronics and relatively pricey safety features, it goes to say that considerable increases – across the board – can be expected in our motor vehicle insurance costs.

To summarise

In other words, the main adverse conditions that you need to take note of right now are the increase in fraudulent activities, hijackings and road accidents.

As an individual short term insurance policy holder there are many things you can do to improve your personal risk profile in these respects. Advanced driving courses, improved vehicle and home security measures, and informing your insurer of your preparedness to take polygraph tests should you need to claim, are likely to enhance your profile and keep your short term insurance premiums in check.

Speak to your existing and other insurers to find out how well they will be prepared to reward your efforts.