Why your short-term insurance premiums are skyrocketing

Oswald Kuyler – Head of Short-Term Insurance Solutions at Consult by Momentum

Brrpppp. It’s the 1st of the month, and the vibration of your phone alerts you to yet another debit order coming off your bank account. While it’s never your favourite time of the month – especially with the cost of just about everything going up – at least you know what to expect and have planned for it in your budget.

…That is, until you catch a glimpse of the screen only to find that your car insurance premium is suddenly a whole lot more expensive. What gives?

Oswald Kuyler, Head of Short-Term Insurance at Consult by Momentum, says that just as the average cost of our grocery basket has increased – with the consumer price index (CPI), which measures inflation, sitting at a staggering 7.6% – so has the price of our ‘insurance basket.’

“As a result of several macroeconomic factors – coupled with one or two ‘black swan’ events – insurers have seen a rise in their loss ratios, with many reporting a double-digit loss.

“While insurers, being in the business of risk mitigation, do plan for such scenarios, the extent to which all of these factors combined have impacted their operations was unprecedented. They need to recoup these losses, and we can expect that short-term insurance, such as household contents and car cover, will cost around 10 – 15% more over the next few months,” he says.

The Perfect Storm

The impact of climate change and global warming is causing extreme weather activity and flooding, cyclones and severe storms are becoming more prevalent, says Kuyler. “This has led to a rise in claims for damage to consumers’ vehicles, homes and goods.” The April flooding in KwaZulu-Natal, for example, was estimated to have caused damage and losses to insured assets exceeding R15 billion.

And the bad news is that this will continue, with the World Economic Forum’s 2021 Global Risks Report citing extreme weather events, climate action failure, human environmental damage and infectious diseases as the top four risks that are systemic in nature.

Supply Chain Chaos

Kuyler highlights that motor vehicle repair and replacement costs have increased, due to a significant strain on the global supply chain cycle following the pandemic. This drives up demand, which leads to a rise in the cost of every link in the supply chain. This has a knock-on effect on insurance costs.

We’re out and about

The pandemic and lockdown severely restricted human movement and social activity, and as a result, accident and crime rates dropped significantly. This meant that the risk of a motor vehicle accident or a home being burgled was lower, and as a result, insurers were able to offer premium reductions in some cases.

“As lockdown restrictions ease, people are out and about again, and with this comes more traffic on the road, a higher likelihood of accidents and an increase in crime. Insurers may seek interventions to align with a more economically-active economy, which could include rate adjustments, restrictions on cover, or increasing the client’s self-insure portion (excess).”

“South African Problems”

Then, there are also certain issues unique to our country that are driving up insurance costs for South Africans. Loadshedding, for one.

“Loadshedding has led to power surges that can cause damage to property and goods. Also bear in mind that extended periods of ‘planned darkness’ provide more opportunity for criminals, making households more vulnerable to theft.”

In addition, he flags that SA’s economic woes and turbulent political landscape have given rise to riots and looting, which is also associated with vandalism and damage.

Kuyler says that all of these factors have created a volatile cocktail for chaos, which insurers need to factor into their pricing models. “Bear in mind that your insurer, too, is insured through a reinsurer, which provides them with financial protection for risks that are too large for them to handle alone. In the case of certain events, they will bear a significant brunt of the blow, which will be reflected in their rates to insurers.

“This will, in turn, impact what your insurance company charges you; either in the form of a premium increase or through remedial actions, such as an increase in your self-insure portion (excess).”

Kuyler says that this is where a qualified and experienced professional can add significant value. “A financial adviser can play an important role in helping you navigate your finances. Their job is to keep abreast of changes in the insurance world that impact the finances of their clients, and they can guide you accordingly.

“They have the expertise to custom-build solutions for you. They’ll secure better rates and handle claims on your behalf, and most importantly, they have the necessary knowledge to prevent you from switching to an insurance product that is cheaper, but comes at the cost of your cover,” he concludes.

ENDS