Brace your­selves for higher pre­mi­ums

Business Day - Home Front - - HOMEFRONT -

WEATHER pat­terns ap­pear to be chang­ing, not just in SA but around the world. Ear­lier this year, we saw sub­stan­tial flood­ing in the south­ern hemi­sphere, which had sig­nif­i­cant con­se­quences for many peo­ple, es­pe­cially those in SA whose homes were lo­cated near large ex­panses of wa­ter, such as the Vaal River.

This was fol­lowed by two mas­sive earth­quakes in New Zealand and Ja­pan. While the lat­ter may seem im­ma­te­rial to con­sumers in SA, the re­al­ity is that all of these events will im­pact on our day-to-day fi­nances as the cost of in­surance is likely to rise as a re­sult.

While this is not just a South African prob­lem — the cost of in­surance is ex­pected to in­crease across all per­sonal lines glob­ally — it is im­por­tant for South African con­sumers to start fac­tor­ing in a po­ten­tial in­crease into their in­surance pre­mi­ums in the near fu­ture, in­clud­ing their home, con­tents and car poli­cies.

Con­sumers are al­ready set to ab­sorb sub­stan­tial price in­creases this year, with the huge pro­posed in­crease in elec­tric­ity prices by Eskom in July; fuel prices at nearly R10 per litre; and the prospect of in­ter­est rates ris­ing to­wards the end of this year. It is there­fore es­sen­tial that con­sumers also be­gin to fac­tor in the like­li­hood that they will need to pay higher in­surance pre­mi­ums as well.

In fact, South African con­sumers could see a dou­ble digit in­crease in the cost of their in­surance pre­mium on the back of losses sus­tained in the first quar­ter of this year. The fi­nan­cial im­pact from the earth­quake in Ja­pan and New Zealand will ini­tially be taken by rein­sur­ance com­pa­nies, who ef­fec­tively in­sure the risk taken on by other in­sur­ers. How­ever, these com­pa­nies will need to raise their pre­mi­ums to re­coup these losses.

The re­al­ity is that rein­sur­ance is a global in­dus­try and when rein­sur­ance com­pa­nies suf­fer a catas­tro­phe, it has a ma­jor im­pact on in­surance pre­mi­ums across the world. Just like lo­cal in­surance com­pa­nies, if rein­sur­ers are forced to pay out on sub­stan­tial claims such as the nat­u­ral dis­as­ters we have seen this year, the cost of re­cov­er­ing these losses will be passed back to their own clients.

This means that when rein­sur­ers de­cide on their an­nual round of re­newals to­wards the end of the year — their ver­sion of the an­nual pre­mium in­crease that is charged to the gen­eral in­surance mar­ket — this will be­gin a se­ries of price in­creases that will, in the end, be paid for by the con­sumer.

Rein­sur­ers have al­ready es­ti­mated the fi­nan­cial im­pact from the earth­quake, with Mu­nich Re ex­pect­ing a loss of €1,5bn, Swiss Re es­ti­mat­ing its loss at $1,2bn and Han­nover Re ex­pect­ing a loss of €250m.

The cul­mi­na­tion of the Ja­panese earth­quake and tsunami fol­low­ing so quickly af­ter the New Zealand earth­quake and the flood­ing in the south­ern hemi­sphere, means rein­sur­ers are likely to have se­ri­ously de­pleted, if not en­tirely used up, their catas­tro­phe re­serves, sim­ply from events that oc­curred in the first quar­ter of the year.

There is no doubt that rein­sur­ers will be able to ab­sorb these losses, how­ever; if they are forced to use a sig­nif­i­cant por­tion of their cap­i­tal re­serves to do so, they will have to find a way to re­coup this money through higher pre­mi­ums, which will ul­ti­mately have the ef­fect of rais­ing the price of in­surance glob­ally.

For con­sumers, who are al­ready likely to face a tough time in the months ahead as costs con­tinue to in­crease, the dif­fi­cul­ties fac­ing the in­surance in­dus­try may not seem all that rel­e­vant right now, but it is vi­tal that ev­ery­body takes se­ri­ously the im­pact of ris­ing in­surance costs, not only so that they are pre­pared when the in­evitable oc­curs but also to en­sure that there is no temp­ta­tion to cut back when it be­comes a re­al­ity.

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