Artwell Dlamini
24 July 2008
Johannesburg — TWO short-term insurers, at least, have conceded that the credit woes of consumers are beginning to affect their vehicle insurance business, which accounts on average for 15%-20% of total premium income.
An analyst says short-term insurers' interim results next month may shed light on the state of premium income. What is certain is that short-term insurers have expressed concern about the credit crisis.
"I think every passionate South African is concerned. We are all facing economic pressures and many are significantly affected as they are bonded/lent to the hilt and rate adjustments affect their financial wellbeing," says Trevor Devitt, communication head at OUTsurance.
This indebtedness has contributed to dwindling vehicle sales. Danelee van Dyk, an economist at Standard Bank, expects vehicle sales to turn around only in 2010.
"Our business volumes are influenced by the slower car sales volumes," Devitt says.
Christelle Fourie, head of personal underwriting at Santam, also points out: "The number of new vehicles insured (replacements on existing policies and new policies) for the first six months of this year is 11% down on the same period last year."
However, she stresses this decline "has had a minimal impact on premium income as the overall number of vehicles has remained unchanged".
Car repossessions have surged too. Banks now repossess 6000 cars a month, WesBank said last week.
Commenting on the swelling vehicle repossessions, Devitt says "there have been increases in lapses due to people's financial pressures".
Yet he does not state how many clients the short-term insurer is losing because of repossessions. "I can't, however, state the extent to which vehicle repossessions contribute to this (loss of clients) since I don't have that detailed information."
Santam cannot confirm to what degree car repossessions have hit its business as well.
"Impossible to say," says Fourie. "We do not capture cancellation reasons that will enable us to confirm this, and, as a rule, in 30% of cases the debit order payment is simply stopped by the client without informing us of any reasons for the cancellation.
"We have, however, not seen any increase in the number of cancellations in the past three months," Fourie says.
Worse still, insurers have limited leeway in raising premiums as much as they would like.
"Premiums are largely based on claims costs," says Fourie. "As we have seen a substantial increase in accident-related claims repair costs and frequency of claims, this has resulted in higher premiums."
Devitt says: "We apply an annual inflation-linked escalation to premiums, so each year a client's premium will be escalated by the appropriate inflationary adjustment."
However, the analyst says the ability of short-term insurers to drive up premiums is inhibited by a slowdown in vehicle sales and rising car repossessions.
To cope, customers are now are looking at ways to reduce premiums to ensure continued affordability, says Devitt. "I cannot clarify the numbers".
For its part, OUTsurance has offered a range of cover options aimed at easing the financial burden on clients, says Devitt. For instance, the company covers vehicles for their retail value and clients reduce the market value, thereby reducing the premium.
The excess can also be increased to reduce the premium. "Many optional cover aspects can be removed to reduce premiums," Devitt says.
This may prove insufficient for distressed consumers.
Van Dyk says that consumers, who accumulated large debts before the onset of successive interest rate hikes from 2006 onwards, are now "overburdened".
"Since the start of the interest-rate tightening cycle in 2006, household debt has risen by about 39% and debt-servicing has grown by 128%," says Van Dyk. The capacity to service household debt has been diminished by the rapid acceleration in household debt, he says.
Faced with high interest rates, which have surged from 10,5% in June 2006 to 15,5% in June this year, consumers find it difficult to keep car instalments manageable. For instance, Van Dyk says, the monthly instalment on a R120000 car rose by R307 to about R2886 in June last year from R2579 in 2006.
Van Dyk says consumers are also "under increasing duress from the onslaught of high inflation, notably food and petrol prices, on their finances".
The 50c/l increase in the petrol price last month translates into an additional R100 paid by consumers, if they are to fill up an average 50l tank four times a month.
Consumers are also paying more for groceries, she says.
Despite these price pressures, wage increases have grown much slower than the increase in the inflation rate.
On the flip side, rising prices may seen consumers use cars less frequently.
"The increase in fuel prices should see motorists less often on the road, with a possible positive effect on the frequency of vehicle claims, which will hopefully result in lower or no further motor rate increases," Fourie says.
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