Catastrophic results in the motor market are seen as the main challenge for South African insurers today. In the past, motor loss ratios were fairly consistent with an average of about 74%, but they have been markedly deteriorating since 2005, states Axco’s new non-life report on South Africa. The reasons are probably typical of an emerging economy.

Unlike many other countries, in South Africa it is not escalating liability losses that concern insurers, because they are covered by a state scheme, financed by a levy on petrol. Instead, rising claims are largely the result of motor own damage.

Over the last few years, the South African economic boom has created a new, affluent, mainly black middle class. This has led to a dramatic increase of new cars on the roads. The number of registered vehicles increased from 7.2mn in 2005 to 8.0mn in 2007, but infrastructure development has not kept up. There are not enough new roads, and old ones are often in a state of disrepair.

As previously disadvantaged groups become more affluent and get cars, a significant number of new drivers are over 30. With large numbers of inexperienced drivers and overcrowded roads, accidents are frequent and often serious, but current rating systems take age, but not lack of driving experience into account.

Also, imported cars have become much more common. Of approximately 72 models available in South Africa, a number are now very expensive imported makes. It has been estimated that to rebuild an entire car using spare parts would cost 200% of the original purchase price. Because spare parts for international models have to be shipped from abroad, damaged vehicles spend more time off the road, so costs for replacement cars also increase.

Although results are bad, competition remains fierce. There seem to be movements towards more disciplined underwriting, but the South African market is characterised by a strong broker position and a continuing increase in the use of underwriting agencies. It remains to be seen how insurers will tackle this issue.