The South African Special Risk Insurance Association (Sasria) wants the government to provide an explicit guarantee that it will be its reinsurer of last resort while the state-owned insurer builds up its reserves.
On Tuesday, Sasria’s chief executive, Mpumi Tyikwe, briefed members of the National Council of Provinces’ Select Committee on Finance on Sasria’s annual report for 2022/23. Sasria was scheduled to table the report in Parliament by the end of September, but Tyikwe said it was still being considered by Finance Minister Enoch Godongwana.
Tyikwe said Sasria reported the biggest pre-tax profit in its 42-year history in 2022/23 – R3.614 billion – which was a huge turnaround from its biggest reported pre-tax loss of R24.294bn in 2021/22. The profit in 2022/23 exceeded the profit of R2.041bn in 2020/22 and R601 million in 2019/20.
Gross written premiums (GWP) grew by more than 40%, from R3.152bn in 2021/22 to R4.57bn in 2022/23, mainly because of premium increases.
Tyikwe said Sasria did not anticipate that its premium increases will be more than 15% year on year, but this depends on there not being another “significant event” that affects South Africa.
Despite the turnaround, he said Sasria will have to make a profit over a number of years to rebuild the reserves lost because of the unrest in July 2021. What was built up over 42 years from 1979 was destroyed in 10 days, he told MPs.
Sasria received a cash injection of R22bn from National Treasury to pay unrest claims.
Sasria has made proposals to Treasury so that it can rebuild its reserves because South Africa is likely to experience another “big event” in the next six to eight years, he said.
Tyikwe said Sasria would like to accumulate reserves of at least R30bn. The insurer currently has assets under management of R12.07bn, driven by premium increases and low claims, but this was far from what Sasria would like them to be, to deal with a future event.
“Our thinking is that as we receive premiums, pay our costs and claims, and build our reserves, the R12bn of own funds, we anticipate over six to eight years, assuming a loss ratio at 35%, then by year eight will have funds under management of R30bn. Then at that point, the state can consider not providing us with a guarantee.
“But given where we are, and where South Africa is, and how reinsurance views South Africa, it is critical for us to have this [guarantee] so that we can encourage investment in the South African economy,” Tyikwe said.
He said that in many countries – including France, Spain, and the United Kingdom – the government provides such a guarantee.
Another proposal to enable Sasria to rebuild its reserves was to suspend the payment of dividends to its shareholder, the state. Sasria paid R11.1bn in dividends from 1998 to 2021.
The unlimited guarantee the government used to provide was replaced by a R1bn guarantee when Sasria converted to a fully state-owned company in 1998.
If Sasria were to incur claims of R32bn today, as it did because of the July 2021 unrest, it would have to ask the government for recapitalisation of R27.5bn to restore its Solvency Capital Ratio (SCR) cover to 130% – if the event was not covered by reinsurance, such as grid failure. But if Sasria’s reinsurance CAT cover of about R5bn was factored in, it would require recapitalisation of about R21.5bn, Tyikwe said.
He said Sasria is looking to improve its financial viability in other ways, such as by containing costs to a maximum of 7% of GWP.
Longer-than-normal hard reinsurance market
Tyikwe told MPs that the top three risks facing Sasria are the protests that will result from state failure, the socio-economic implications of geopolitical instability (Russia-Ukraine, Middle East, United States-China), and South Africa’s extremely high level of youth unemployment.
Sasria is particularly concerned about the “ticking timebomb” of youth unemployment, and the public and private sectors need to act – not simply talk – to address this problem urgently, Tyikwe said.
Discontent among the youth (variously defined as including those up to the age of 35) has been a significant trigger for mass protests around the world – when the youth decide to change the trajectory of a country, for better or for worse, he said.
The increase in protests globally is one of the factors feeding into the hardening in the reinsurance market – another of the key themes in Tyikwe’s presentation.
Apart from claims of $1.9bn arising from the 2021 unrest in South Africa, protests and unrest in other countries over the past four years have driven up reinsurance premiums: the George Floyd protests in the US in 2020 ($2bn in claims); the “yellow vest” protests in France in 2018 ($1.1bn); and demonstrations in Chile in 2019 ($3bn), in Colombia in 2021 ($3bn), and in Peru in 2022/23 ($1.3bn). Claims from the recent riots in France are currently at €750m.
Other factors that were resulting in higher reinsurance premiums are:
- High inflation in the developed world, which is pushing up the cost of claims.
- Higher interest rates in developed world, which make banks more attractive than reinsurers to investors.
- Climate change, which has resulted in a higher frequency of weather-related claims – claims of $110bn over the past three years compared to the historical average of $60bn.
- Expected losses because of the Russia-Ukraine war that have yet to be fully quantified.
Tyikwe, who has been in the insurance industry since 1998, said a hard market cycle normally lasts for two years. In his view, the current hard market will remain for at least six years.
Reinsurers believe mass unrest is imminent
In addition, there are issues specific to South Africa that are driving up reinsurance premiums.
“South Africa, from an insurance point of view, is a very difficult country to sell. Most reinsurers believe that the next catastrophic event after July 2021 is just waiting around the corner. They are anticipating it is going to happen sooner rather than later. We, in our planning, think it will not be as soon as they anticipate,” Tyikwe said.
The drivers of high reinsurance premiums in South Africa are the July 2021 riots, KwaZulu-Natal floods, Covid-related claims, inflation, grey-listing, unemployment, stagnant economy, rising levels of poverty and crime, uncertainty over the outcome of next year’s election, disruptions to the supply of electricity, and under-collection of tax.
“We think the higher premiums are undeserved. There is an overreaction in the reinsurance market. Hence, we are asking the state to intervene by issuing us with a guarantee.”
In 2020/21, Sasria paid R130m for R6.5bn in reinsurance cover for a placement of 100%, while in 2021/22, it paid R411m for R5.8bn in reinsurance cover for a placement of 65%. In other words, it paid a higher premium but received less cover.
In 2022/23, Sasria paid R363m for R5.1bn in reinsurance cover for a placement of 63.75%. The premium decreased, but the excess doubled to R2bn.
Update on unrest claims
Sasria received 17 589 claims valued at R31.577bn because of the July 2021 unrest. Sasria has finalised 17 234 of these claims and paid out R30.758bn, Tyikwe said.
Delays in finalising claims were because buildings were still under construction or because of legal disputes.
Sasria received 3 772 non-CAT claims valued at R1.249bn in 2021/22. Of these, 3 542 have been finalised, and R1.098bn has been paid out.
The outsourcing of unrest-related claims resulted in “fruitless and wasteful expenditure” because some claims were paid twice, by Sasria and by the insurer through which the insured was covered. Sasria identified 40 duplicate payments totalling R11.202m, plus service costs of R404 729. Sasria has recovered duplicate payments of R8.602m (including service costs).
Sasria’s “misinterpretation” of the tax laws – particularly VAT related to reinsurance claims – resulted in the South African Revenue Service (Sars) imposing penalties of R2.84m for late payment. This amount excludes the penalties of R17.5m (including interest) that Sars agreed to refund following representations by Sasria, Tyikwe said.
Major claim events so far
Sasria’s performance in the first quarter of 2023/24 was good, with premium income 29.5% higher than in the year before, a profit of R980m, an SCR of 230%, and a loss ratio of 16%.
If the loss ratio is below 55%, Sasria makes an underwriting profit, Tyikwe said. In 2021 the loss ratio was an unprecedented 1 056%. If the unrest had not occurred, it would have been 38.66%.
He said significant claim events in 2023/24 have been:
- the torching of trucks in July (12 claims valued at R10.36m);
- student protests against the National Student Financial Aid Scheme’s new payment system (20 claims, R13.32m); and
- the taxi strike and violence in Cape Town (413 claims, R35.74m).
Most claims in the current year have resulted from the co-ordinated attacks on heavy commercial vehicles.
