Economic pressures influencing insurance product development…
It is common knowledge that South Africa has incredibly high road fatalities – a great burden to government and the health profession.
Ubiquitous road awareness campaigns have failed to curb the prevalence of road deaths and it has recently emerged that these campaigns are not having the desired impact.
Simple cost-benefit analysis postulates that these campaigns should either be modified for targeted audiences or alternatively, we should explore more effective road awareness programmes.
According to Vera Nagtegaal, Executive Head of Hippo.co.za, the proposed demerit system for SA road users, in theory, could significantly reduce road fatalities by imposing punitive action on motorists who do not adhere to the rules of the road.
However, implementation of the system lies in limbo. This, after the system was adopted under the Administrative Adjudication of Road Traffic Offences (AARTO) Act 19 years ago. Yet, promulgation of the system is unlikely to take effect any time soon, despite AARTO’s insistence that it will be implemented in the near future.
“When the demerit system does come into effect, however, the ramifications for consumers and industry will be far-reaching,” points out Nagtegaal.
Economic pressures influencing insurance product development
Although personal nominal income has risen gradually over the past three years for most South Africans, real income has not. Inflation has risen at a rate that has outstripped annual personal income growth. Left with less discretionary income, consumers have influenced the product offerings of the insurance sector, prompting them to broaden their product offerings to include lower insurance premiums. But, the reality is that many motorists simply cannot afford insurance at all.
Nagtegaal says that the pinch felt by consumers has proliferated into the insurance sector. “The stagnant South African economy over the past 12-24 months has influenced the local insurance industry, putting pressure on what has become a highly competitive market.”
The challenge with the current industry landscape is the considerable pressure felt by insurers aggressively competing on a premium basis. This, at a time when profit margins have fallen as insurers absorb additional costs to keep their customers. Product innovation and agility has increasingly become a key success factor as the various industry players, both old and new jostle for market share.
Furthermore, there has been a growing demand for a reduction in insurance premiums by motorists, as changing market dynamics led to the dissolution of barriers to entry. This has resulted in more insurers entering the market, creating a highly competitive sector as consumers become progressively price (premium) sensitive.
Does the demerit system have merits?
Despite its good intentions, the demerit system can also pose a significant threat to the insurance industry, which traditionally has low penetration among motor and other vehicle class owners. A few years ago, the Automotive Association (AA) estimated that 65% of all vehicles on our roads are uninsured.
Nagtegaal explains that implementing the demerit system has numerous implications for the insurance industry. “The suspension of a motorist’s license is likely to increase their insurance premiums or excess, influenced by greater perceived risk on the insurer’s part.”
This poses further applicable considerations: How will an insured motorist afford higher premiums or excess when their license gets suspended? Will the motorist with the suspended license forfeit their insurance cover and thereby be precluded from obtaining vehicle insurance from any other service provider? How will this affect the insurance industry at large? A reduction in the industry’s size will invariably lead to job losses – how will these individuals be absorbed into the labour market?
Campaigns need better targetting and better consultation with industry
The top priority is reducing South Africa’s stubbornly high road fatalities and accidents. According to Nagtegaal there have been several deficiencies in road awareness campaigns launched over the years. “These campaigns have simply targeted motorists instead of incorporating education programmes also aimed at teaching pedestrians about road safety and taking responsibility for their individual conduct when making use of road facilities.”
Pedestrians accounted for the largest proportion of total road fatalities in 2016 at 38%, according to the Road Traffic Management Corporation (RTMC). Road casualties among passengers and drivers came in at 33% and 26% respectively.
Nagtegaal points out that what is evident is that a more holistic educational approach is needed to eradicate reckless driving by motorists, and encourage pedestrians to exercise greater caution when crossing our roads. But beyond consumer education, the demerit system warrants better engagement with the entire industry.
She says that this is clear from the proposed demerit system – the process still requires further consultation with relevant stakeholders and key among them is the insurance industry.
“The process must identify reasonable implementation phases that will not inhibit the operation of the insurance industry nor cause irreparable damage to it. On the other hand, the loss of lives on our roads has become a national crisis that we can no longer ignore. Together, I do believe that we are able to find a workable solution that helps address both of these challenges,” she adds.