Santam short term insurer

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Operational review

PERSONAL LINES

WHAT WE DO AND HOW WE DO IT
The Personal Lines business constitutes a significant and strategic portion of Santam's overall premium income. Our core product has evolved from the original Santam "MultiPlex" policy that introduced comprehensive short-term insurance to the South African market to a broad and sophisticated multiproduct and multichannel distribution offering that provides household, motor, personal accident and liability cover and that includes a wide range of value-add products to our clients.

In partnership with our intermediaries, we service our clients across South Africa and Namibia. Our products and services are managed and distributed through:

  • our traditional intermediated Personal Lines business in our Broker Services business unit;
  • an outsourced Portfolio Administration business; and
  • through a direct business, MiWay.

In the traditional Personal Lines business we have a very broad footprint in South Africa, partnering with an over 4 000-strong nationwide network of intermediaries who promote our range of products and ensure unparalleled reach and access to expertise. We support our intermediaries by means of our two dedicated contact centres which provide quotations, issue new policies and handle the general policy maintenance and renewal functions for existing policies. Our intermediaries comply with the Financial Advisory and Intermediary Services Act (FAIS) as required by law. For more information on how we interact with intermediaries, please refer to material issue "A sustained intermediary base" in the Sustainability Report available on our website at www.santam.co.za.

Portfolio Administration is a differentiated solution offered through identified intermediaries that allows the white labelling of partner brands and the provision of differentiated product and service offerings. With strong support from national intermediaries and banking partners, Portfolio Administration remains the largest single personal lines channel within Santam. The tailored offerings to in excess of 300 000 clients remain supported by Santam's sophisticated web-based pricing tools, and dedicated second-level underwriting support, as well as leveraging from Santam's procurement efficiency.

MiWay is a direct insurer underwriting predominantly personal lines short-term insurance business. It was launched in 2008 and has reached critical mass in a relatively short time given the subdued environment following the global financial crisis. The company deploys state-of-the-art call centre and information technology. Current services include short-term insurance, motor warranty and credit life.

WHAT MAKES OUR OFFERING RELEVANT?
We tailor our products to suit the particular needs of our clients and challenge the market perception that short-term insurance products are commoditised in the Personal Lines segment. We are sensitive to the advantages that economies of scale allow, but we are always aware that each client is an individual with individual needs. Our core MultiPlex, MultiBonus, MultiMotor, MultiMax and MultiHome policies each offers unique benefits to their target segments and can themselves be tailored through flexible excess structures and voluntary policy benefits to suit each individual client's needs. The core Santam product suite is further enhanced by in excess of 20 product and service solutions offered through Portfolio Administration partners that ensure unique flexibility and distribution reach for Santam. Our products are backed by our superior claims handling and payment ability, which our clients and intermediaries recognise as a core strength of Santam's.

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WHAT WE ACHIEVED IN 2011
The Personal Lines segment delivered improved growth in 2011 compared to 2010, as the benefits of the segmentation model came through and the fundamentals of the market started to recover, combined with the positive impact of growth achieved in MiWay.

Gross written premium income in the Broker Services environment increased by 7%. Within Portfolio Administration, gross premiums remained flat, although this was in line with expectations given our ongoing focus on the profitability of this business. MiWay growth continued to excel, achieving a net growth of 67% for the year. Overall, Personal Lines showed net growth of 15% in net premiums for the year. The claims ratios achieved in the business unit were very good.

During the year, the segmentation model that had been implemented in the previous year was further enhanced. The aim is to give the best premium the first time. Accordingly, low-risk clients enjoy lower premiums than their counterparts with higher inherent risks.

The conversion rate for Broker Services showed an improvement of 15% in 2011 over 2010.

At the same time, the lapse rate improved by almost 4% from the previous year, which provides evidence that the focused initiatives having been put in place to improve client retention within the contact centres are paying off. The segmentation model was extended during the year to align adjustments with renewal premiums according to each client's underlying risk and claims experience as opposed to applying the same premium increases across all client segments. The average premium increase on renewals for the year was less than 3% for Personal Lines.

In line with continued investments to improve the quality of the contact centre experience for intermediaries, the Broker Services business unit has experienced an increase in the number of quotes being generated. The workforce management system is well entrenched and has led to improved intermediary satisfaction as measured by surveys conducted during the year. These improvements also reflect the continued efforts by Santam to support its intermediaries.

The issues being addressed by the Client Complaints business unit are analysed to address efficiency and identify recurring issues. Once implemented, these service improvements - with improved awareness and recognition following the Santam brand repositioning - are making it easier for intermediaries to sell and maintain client loyalty.

As mentioned in the Chief Executive Officer's report, the 2010 acquisition of MiWay has been well embedded in the business during 2011 as a way of strategically transitioning the Santam group as a multichannel distributor. MiWay's unique client experience offering resulted in continued aggressive growth, adding significantly to Santam's overall personal lines growth despite tough trading conditions as a result of new entrants and competitive pricing from established competition. Just over 2% of new policies originated from previous Santam clients. Key to its success is a transparent online compliments and complaints forum - the first of its kind in South Africa - where it actively encourages clients to speak out about their service experiences.

A number of exciting growth opportunities have been identified during the course of the year. Significant expansion of both physical infrastructure and employee numbers took place in 2011 to support the growth strategy.

The fact that MiWay offers a different business model, segmentation, risk profile, lapse percentages and churn rates, offers lucrative support to Santam's strategy of growth through diversification. We are confident that the business will continue to co-exist well with, and complement, the intermediary businesses model within the group.

WHAT WE WANT TO ACHIEVE IN 2012
We will continue to focus on the implementation of enhanced processes and efficiencies to enable improved intermediary and client interaction with the aim to further improve conversion and lapse rates.

The Portfolio Administration business unit is well positioned for 2012 as it maintained the benefits of its turnaround in 2010 and 2011 and is now able through technology developments to better manage and drive data sharing, validation and pricing with outsourced partners.

Santam is implementing a full e-business strategy that will improve service levels to both intermediaries and clients.

We also aim to expand into the emerging market in South Africa over the next few years through the identification and development of appropriate affinity partnerships.

COMMERCIAL AND AGRICULTURE

WHAT WE DO AND HOW WE DO IT
Our Commercial Lines business unit comprises our business portfolio which services small to large enterprises and the Commercial Portfolio Management unit. This unit services business clients on Santam's systems and on an outsourced basis. We provide flexible and unique commercial insurance solutions that are tailored to suit the needs of entrepreneurs and businesses.

Our flagship products are marketed under the Commercial MultiPlex and MultiMark brands which have add-ons engineered for specific industries. Within our agricultural offering Hail and MultiPeril Crop Insurance are the most important covers. Santam Agriculture provides specialist insurance products to farmers and the agricultural industry through our network of intermediaries. We offer a total agricultural risk management solution to agricultural producers and underwrite the specific commercial risks facing our clients and agriculture businesses in farming communities.

We collaborate closely with our Risk Services team to design and price products to underwrite specific specialist products.

We are represented throughout South Africa and Namibia by our network of intermediaries and our commercial portfolio management partners who effectively distribute our products. Dedicated key account managers and relationship managers ensure that we provide the highest quality service to our intermediaries.

Commercial Lines
We follow a client-centric approach by rating commercial risks according to a number of tailored risk profiles. Our key account managers and relationship managers provide guidance and advice to our distribution partners.

We continually engage in innovative processes and we strive to continually improve our service. We believe that this will enable us to maintain our leadership position in the commercial insurance segment.

We have a well-established pricing model which we continually refine to ensure that our results are more resilient in negative underwriting cycles. Our underwriting and distribution teams work closely together to enhance the effectiveness of our underwriting processes.

The nature of the commercial risks that we insure is quite diverse. Our ability to be flexible in a rapidly changing environment is key and means that we are also more resilient to withstand the impact of substantial losses such as those resulting from the recent floods around the country.

Agriculture
Our Agriculture business unit focuses on agricultural assets and crop insurance. The team responsible for agricultural assets provides strategic guidance to those business units responsible for the distribution and underwriting of our agricultural products.

The crop team provides crop distribution, policy administration, claims, finance and IT, risk and insurance services as a stand-alone business unit. But they collaborate closely with the agricultural assets team to co-ordinate marketing, distribution and product development initiatives.

Adequate pricing of risk is important in running a profitable crop insurance book in the longer term. However, our ability to accurately and fairly assess crop losses incurred has a greater impact on the reputation of our company and the overall performance of the book. Our team is able to cover all aspects of the life of a policy - from adequately covering the risk of new business to assessing liability at the time of a claim pay-out.

WHAT MAKES OUR OFFERING RELEVANT
We continuously make investments to improve our employees' commercial business acumen and their commercial skills and competencies. We provide a broad range of services such as training of and accreditation for our intermediaries.

Clients are improving their knowledge of insurance and are increasingly demanding information and active participation in the acquisition process. Our strong relationship with our intermediaries enables us to address these demands.

Our segmentation models allow us to reflect the specific risks associated with each client. We only take on risk with a full understanding of the exposures. In the short-term insurance industry the regulatory environment and market conditions often change. We ensure and embed our relevance and competitive edge in the marketplace by assisting our intermediaries to continue adding value to their clients.

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WHAT WE ACHIEVED IN 2011
Even though commercial insurance continued to come under pressure off the back of the slow economic recovery, the Commercial business unit showed premium growth of close to inflation (CPI) and the Crop businesses showed positive premium growth of 34%. The performance was underpinned by the strong fundamentals in our business model:

  • Our aggregate number of policies in the commercial and agriculture asset segment increased in 2011. This is pleasing against the context of the market which was characterised by cautious decision-making among corporates to purchase new assets such as vehicles, plant and machinery.
  • Increasing commodity prices, including maize prices at the beginning of the season, led to an increase in the sums insured and an increase in the number of hectares covered, both of which drive crop premium growth. However, this has led to heightened levels of competition in the segment.

The business unit delivered a pleasing increase in profitability which was underpinned by another year of improving overall claims ratios. The low frequency of large flood and fire claims in the commercial portfolio during the year contributed to the strong performance. This reflected our conservative stance and our careful selection, assessment and pricing of the risks that we take onto our book. The business unit was relatively unaffected by the severe floods in a number of regions, including the northern Cape at the beginning of 2011, and the drought conditions that occurred in other parts of the country.

While clients became increasingly sensitive to pricing when renewing commercial products, we achieved a 3% reduction in lapse rates during the year. We believe that this demonstrates that our intermediated business model and the specialist attention that we provide to our commercial clients had a material impact, including the key account management structures that we implemented in the previous year. To continue delivering on our growth objective in the current market that is characterised by pedestrian premium growth, Santam needs to secure new units of business to grow the business. As a result of churn rates that tend to be higher among new clients, we have a continual focus on maximising our conversion rates. To this end, we have an ongoing focus on understanding and measuring our conversion rates for new policies across each of the risk segments. We prioritise the conversion of quotes into policies in the lower-risk segments although we price appropriately in the risk segments.

We have had pleasing successes in our Commercial Lines as a result of refining our strategy to secure business from large commercial clients by refining our approach to closing opportunities in this segment. This initiative has already delivered significant benefits as the success rate for clients in this band increased substantially during the year. Santam was voted as South Africa's leading short-term insurer by independent intermediaries in both the Commercial and the Corporate Insurance categories of the Financial Intermediaries Association (FIA) of Southern Africa insurer of the year awards in June 2011 for the third consecutive year. This is particularly pleasing as it shows that our intermediaries, who are a vital component of our business, have once again shown their confidence in Santam. We will continue to make investments to support this crucial aspect of our business proposition.

WHAT WE WANT TO ACHIEVE IN 2012
The Commercial and Agriculture business units are on a solid footing for the year ahead, underpinned by the close collaboration with the Claims Services and Risk Services business units. The Claims and Risk Services business units are enablers of the products and services that we sell through our intermediaries. Facilitated by our extensive investments in systems, we are able to track the performance virtually real time, and as a result we have the ability to manage the businesses very tightly.

The key account managers are better equipped than ever before to secure new business, following specific initiatives to enhance their skills. This, together with the segmentation model which is now well entrenched, positions the business unit well for 2012, regardless of the tough market conditions.

Service levels in the contact centre were improved resulting in better turnaround times, and we are confident that we will make further progress in this regard in 2012.

SPECIALIST BUSINESS

WHAT WE DO AND HOW WE DO IT
Specialist business provides a full insurance solution to clients and intermediaries that includes the insurance of complex and niche risks which require skilled resources to assess and quantify the risk and exposure.

Our industry segments include, among others, construction and engineering, travel insurance, motor, aviation, marine, taxi, transport, corporate property, specialist liability, bonds and guarantees, body corporate and sectional title levy guarantee, hospitality, high net worth and personal accident.

To service the industry segments in which we are active today, Santam created local underwriting capacity to insure risks of a complex nature, some of which were insured in the London and overseas markets. Today we have 14 unique businesses that represent Santam either as outsourced underwriting specialists or in-house purpose-built business units which source their businesses via the intermediary. These businesses operate with the appropriate reinsurance capacity which is sourced from local or international markets and which contributes to our unique capability to ensure a sustainable solution.

These unique businesses distribute our niche products either under their own banner or directly as a specialist Santam business. In both cases the policy of reference is always underwritten on the Santam licence.

In this bespoke environment, product development, pricing, underwriting and claims services are a key competitive advantage.

We have a close and symbiotic relationship with these specialist partners, where we design and price bespoke products to underwrite the specific risk which is relevant and competitive in the marketplace. Our products are specialist by nature and require the skills and financial know-how to ensure a sustainable solution to the client and Santam. Having the right people to drive these ventures is paramount.

Our business unit operates in two segments: namely: those businesses that require specialised underwriting skills such as engineering, liability, aviation and marine; and niche markets where we can provide specific products outside of the commoditised products in sectors such as hospitality and leisure, high net worth and sectional title.

We have a two-tiered approach of delivering a combination of organic and acquisitive growth. We continually evaluate the market to identify opportunities to grow our market share, deliver increased profitability and continue enhancing the specialist nature of our business. Achieving the right balance between these factors is a function of ensuring that we select the right risks to underwrite and then develop targeted and niche products to insure these risks.

What makes our offering relevant
Our value proposition is distinct and highly tailored to the needs of each client. This is in stark contrast to the traditional insurance solution that sells an end-to-end basket of products. We have a single-minded focus to provide specialist products which are client-driven. This focus allows us to extend and diversify our business model.

Our ability to attract and develop the necessary skills in our management and employees provides us with a distinct differentiator from others in our field. The scope and magnitude of our segments is unique in the South African context. Our team has the know-how and experience to price, underwrite and service the bespoke products that they bring to market.

Our financial strength underpins all underwriting activities, and all policies are issued under a Santam underwriting agreement. Our security and statement of financial position offer our clients the peace of mind they require from an insurance policy. We have stringent underwriting criteria to make sure that each risk is appropriately underwritten. We have the specialist skills in our target segments to underwrite the risks that our clients bring to us. Combined with our well-established reinsurance relationships, we offer wider cover to large companies who need to manage specialist risks.

This ability is also based on our in-depth understanding of each client - we are able to identify those clients that better manage their risks. It is our duty to select, influence and make the risks insurable for us and affordable for our clients. This is possible with the assistance and intermediation of our intermediaries who are partners in the relationship with our clients.

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WHAT WE ACHIEVED IN 2011
Our premium growth of 13% was within our targeted range, with total premiums amounting to R3.5 billion. Although the market was tight, particularly in terms of organic client growth, we benefited from our highly diversified revenue streams coupled with our growth strategy, which addressed both organic and acquisitive growth.

The acquisition of Mirabilis Engineering Underwriting Managers which took effect in March 2011, delivered on our acquisitive growth objective. Other areas of the business, including Emerald, our corporate property underwriter (acquired in 2010), started to gain traction. However, we were not completely immune to the market, and our niche segments serving the construction and hospitality and leisure were under pressure during the year. The logistics sector, which targets import and export clients, was also impacted by constrained global trade in line with the state of the economy.

Reflecting the tough global economy, competition has become more aggressive, resulting in pricing pressures across all lines of business. The marine and liability insurance segments were particularly affected.

A highlight of the year was the acquisition of a majority stake in Mirabilis Engineering Underwriting Managers (Mirabilis) that strengthened our existing capability and service offering to the engineering sector and engineering insurance industry nationally. The transaction was structured as a merger between our Construction and Engineering Underwriters (CEU) underwriting management business and Mirabilis. We own 55% of the merged entity (Mirabilis Engineering Underwriting Managers) which is the largest engineering underwriting business in the country.

Leveraging off our new status as a leader in the construction and engineering sector, we launched a new performance guarantee offering, focusing on the construction guarantee market. We brought on board external skills for this start-up business.

The financial turnaround of the corporate property business following the acquisition of Emerald in 2010 turned in another sound set of results. This demonstrates its sustainable business model and the value brought to this business since its acquisition.

We continue to benefit from our two-pronged value proposition: the loyalty of our intermediaries to the individual specialist brands remains strong and is leveraged by the strength of Santam's paper that is underpinned by our excellent credit rating which has remained unchanged despite tough economic conditions. This has provided us with a competitive advantage in the tough current market. Our individual specialist units have gained a leading reputation for their specialist industry and underwriting skills, which is backed by reliable service.

Although the claims ratio experience increased from 2010, we continue to deliver attractive and above average returns to Santam. In particular, improved returns in the corporate property, travel and marine sectors during the year were dampened by lower margins in the Liability and Engineering businesses. Despite these impacts, our performance for 2011 was more than satisfactory, having built a solid platform with the excellent results in 2010.

Also housed in the Specialist business are Santam's affinity business activities and Centriq Insurance Company. Centriq specialises in risk finance, cell captives, underwriting management agencies and affinity business. It continues to operate as a stand-alone business.

During the year, we refocused our affinity business. Our relationships with our major shareholder, Sanlam, and wholly owned Centriq provide us with a tangible differentiator in this segment as we have the capability to develop and distribute lifestyle and white-labelled products that encompass the partner brand requirements. We also have the structures to design these products and services based either on Centriq's cell captive model or by assuming the underwriting for the associated risks and paying a fee to our partners. We have started to roll out initiatives for selected retailers in South Africa, providing them with an additional revenue stream and a mechanism to build affinity with their clients.

WHAT WE WANT TO ACHIEVE IN 2012
We are confident that we are well positioned to maintain our growth trajectory, underpinned by the acquisition of Mirabilis which will be in effect for the full year in 2012. We have analysed our offering and identified several opportunities to enter new market segments which we will pursue selectively, either by acquiring existing businesses or by recruiting the specialist people to start up these new businesses.

We have also identified opportunities to supplement our growth by taking greater underwriting exposures in Africa, which should deliver further diversification benefits. Our African initiatives will be aligned with the group's strategy to grow its exposure in these markets while we will also provide specialist underwriting to meet our existing clients' requirements for specialist insurance in Africa. Our stance in relation to these new initiatives will remain cautious, ensuring that we have a solid understanding of the inherent risks and applying our South African technical skills to ensure our success with these initiatives.

In 2012, we will also focus on ensuring that our internal structures and capability are optimised. We are reviewing our operating structures to provide our specialist focus areas with solid support structures that enable them to focus on their core businesses.

CLAIMS SERVICES

WHAT WE DO AND HOW WE DO IT
Claims Services administers the process of assessing and paying out claims to policyholders. The experience during the claims process is the biggest determinant of how our clients feel about being insured with Santam.

Our priority is to ensure that our clients have a pleasant experience when interacting with us at the time of a claim. Our main objectives are to provide our clients with quick turnaround times, quality client service and a fair settlement in their time of need.

WHAT MAKES OUR OFFERING RELEVANT

We are continually making investments to ensure that our operating model is relevant and cost-effective. Our strategic intent of delivering quality service to our clients is at the core of our business and our claims service is currently a competitive advantage for Santam.

A key element of client service is the turnaround time on claims. We continuously introduce new mechanisms to offer our clients a quick and efficient interaction with Santam. We also have a constant focus on improving efficiencies by closely overseeing the claims management and direct claims costs.

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WHAT WE ACHIEVED IN 2011
Claims Services delivered against its target and objectives for 2011.

  • We maintained agreed service levels.
  • We contained our claims handling cost within agreed targets.
  • The investment in the last three years in the Insurance Services Transformation Project (ISTP) which will conclude in early 2012, has been effective in helping to reduce the average claims cost.

It is particularly pleasing that the systems that we have implemented are world-class and create a tangible differentiator for Santam. These achievements were underpinned by solid progress on existing initiatives and on new projects that were started during the year to transform our procurement environment:

  • We introduced a claims card for settlement of claims as an alternative to cash settlements. This is a first for the insurance industry in South Africa. The Visa debit card allows our clients to procure goods at any Visa-approved vendor. When clients use preferred suppliers a discount is available which has been negotiated for them by Santam, while Santam benefits from volume rebates.
  • We launched Santam's Car Labs in Cape Town and Pretoria. These motor body repair facilities have the dual benefit of enabling us to research mechanisms to become more efficient while curtailing our repair costs - both of which should limit premium increases in the future. These facilities are conveniently co-located with two of our drive-in assessment centres and provide our clients with a drive-in service for damaged vehicles.
  • We expanded our drive-in assessment centre network from 6 to 15 and have revamped the look and feel to fit in with our new corporate identity.
  • We implemented the Santam Glass Lab; through this initiative we researched alternative sources for quality motor vehicle glass. We initiated a pilot project whereby alternative glass is offered to clients at one of our two Glass Lab fitment centres. We incentivise clients to fit alternative glass by discounting the excess payable
  • Predictive Analytics, a tool used to classify claims based on inherent risk, has now been entrenched throughout Claims Services While this has led to lower costs, it has also enabled more consistent and accurate claims assessments.

We continued to develop new mechanisms to handle our salvaged motor vehicles which also had a positive impact on motor claim costs during the year. The introduction of a new assessment channel for claims with a high-merit risk to prevent significant payouts on fraudulent claims has already started to show benefit through savings in repudiation of fraudulent claims. This effort supports an industry-wide drive to reduce the impact of fraudulent claims, which are estimated by South African Insurance Association (SAIA) to amount to approximately 15% of the total premiums paid in South Africa. SAIA has established a database where all such claims are recorded - the objective being to reduce the prevalence of fraud in short-term insurance. Santam is participating, not only in support of its commitment to good corporate citizenship but also as a result of the longer-term economic benefits that will result as these risks are filtered out of its insurance book. This will result in deserving policyholders being rewarded with lower premiums. Our ongoing efforts to continue improving our core competencies and positioning have been recognised by our business partners. During the year we won a number of awards for a variety of achievements reflecting the quality of our service, our ability to innovate and the strength of our reputation:

  • The South African Motor Body Repairers Association (SAMBRA) voted Santam the Insurer of the Year.
  • Santam claims card has won the category for Best Corporate Prepaid Programme at the 2011 Global Prepaid Awards in London for the innovative way in which we utilise prepaid card technology to pay its claims.
  • Predictive Analytics has received worldwide recognition by being selected to participate in the IBM Smarter Planet initiative. It was showcased in the IBM Analytics conference in Las Vegas 2011 and recognised as a reference site for the software vendor worldwide.

WHAT WE WANT TO ACHIEVE IN 2012
We have completed our cycle of major investments to create an efficient and high performance business platform. Therefore our focus for the year ahead is on further cost savings relating to claims management and direct claims costs. We also plan to continue to fine-tune our operations to continually improve service quality.

In our pursuit of these objectives, we started engaging more actively with a number of suppliers in 2011, building closer partnerships with our supplier network. With our centralised procurement initiatives, we have substantially improved our ability to direct our procurement spend. In 2012, we will bring this to bear to further reduce costs.

We will maintain the pace of investment in our people and we are also planning to bolster our contact centre capability so that we can deliver further benefits to our clients in the form of quick and effective claims processing.

RISK SERVICES

WHAT WE DO AND HOW WE DO IT
Santam's core business is to provide short-term insurance products that meet our clients' needs. Risk Services is core to the business and is responsible for:

  • the design, development and pricing of existing and new products for all lines of business;
  • ensuring optimal underwriting processes and margins;
  • the risk and capital management of Santam's short-term insurance solutions;
  • oversight of the group's reinsurance activities;
  • the management of the group's overall risk pool by maintaining appropriate reinsurance and risk diversification; and
  • developing and ensuring the adequacy and relevance of measurement tools to assist the group in analysing and understanding the risk pool in which it operates.

Risk Services also supports the distribution environment through risk assessment and by developing underwriting rules that ensure that Santam's products are suitable for the segments in which they are sold.

WHAT MAKES OUR OFFERING RELEVANT
We have an excellent track record of underwriting which underpins our diverse product lines that fit a wide range of risks covered by the short-term insurance industry. These products are supported by specialised underwriting skills in the form of a team comprising some of the best technical experts in the industry.

Santam's ability to make a profit from underwriting activities depends on its ability to correctly price risks, and this requires a detailed understanding of all the associated exposures. Our success partly derives from identifying, segmenting, measuring and ultimately pricing these risks correctly in the market. It is vital that we understand which risks are over- or underpriced in the market, or those that we should not be insuring at all. In this way, we are able to balance growth and profitability.

The integration of our reinsurance programme, our risk appetite and our investment strategy enables us to effectively manage the capital that we hold against our portfolio of risks. As a result, we are in a position to optimise the capital that we hold. This has also helped us to price risk more effectively, which is critical in this highly price-sensitive market.

We formally engage with our colleagues in distribution and claims services at all times, allowing us to combine the experience of these three core areas of our business to obtain a consolidated view of the market.

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WHAT WE ACHIEVED IN 2011
In support of our mandate of managing the risk exposures of the group, Risk Services continued to strengthen its underwriting processes with initiatives to evolve and improve its approach to rating. While we prioritised initiatives that will sustain our leadership position in the market, we maintained focus on the group's strategic objective to pursue sustainable and profitable growth. We also remained cognisant of our goal to continually diversify our pool of risks to achieve consistent underwriting profits over time.

Underwriting
We embarked on projects to expand on the risk segmentation model that was implemented for pricing in 2010. This is now well entrenched in all our lines of business. To continue delivering on our growth objective in the current market characterised by flat premium rates, Santam needs to secure new units of business on a net basis to grow. As a result, we work towards maximising conversion rates and minimising cancellation rates, while still achieving the premium that we need to cover the risk and expenses. Therefore, we have an ongoing focus on understanding and measuring the drivers of conversion and cancellation rates for policies across each of the risk segments, and then responding appropriately.

I am pleased to report that conversion rates improved in all our targeted risk segments in 2011, while cancellation rates were reduced to the lowest levels in years. The result was record increases in the net number of policies added to our total book in both personal and commercial lines business.

Product development
Considerable progress was also made in the area of product development. The launch of a new Personal Lines product - MultiBonus - in the second quarter of 2011 generated significant interest, and take-up was ahead of expectations. The product is aimed at value-seeking clients and contains all the core personal policy features and options together with a cashback of 20% of premiums after two claim-free years. Ongoing effort went into the management and refinement of our core personal and commercial product suites. Adapting product options, limits, coverage and pricing structures requires ongoing analysis and changes. Every year our product and underwriting teams make extensive adjustments to ensure that our product range remains up to date and continues to meet the precise insurance needs of our large and diverse client base.

A number of initiatives also saw new products being launched in non-traditional channels, such as Incredible Cover which is being distributed in Incredible Connection stores. Considerable effort also went into a strategic project that will see the transformation of our product management and rating capability from an IT perspective. This will dramatically enhance our ability to respond to market needs and reduce time-to-market for new products.

SANTAM RE
Significant progress was made in establishing Santam Re as a meaningful market participant in the reinsurance industry in support of our strategy to diversify our premium base geographically. Santam Re carried out the groundwork to build its capabilities by increasing its expertise and skills pool, and improving its IT infrastructure.

Santam Re has already leveraged extensive opportunities within the group - from Santam, Sanlam Emerging Markets, Centriq and MiWay, and more recently outside of the group within South Africa. We plan to grow our International business over the next five years to meet our growth and diversification targets.

REINSURING OUR OWN RISKS
International catastrophe crises loomed large in the global reinsurance market in 2011, with environmental tragedies taking centre stage on a regular basis. This put upwards pressure on reinsurance premiums. However, we are satisfied that we secured adequate cover.

Managing the business within Santam's defined risk appetite is fully embedded in our day-to-day operations and we are confident that our controls and protections put our clients and shareholders in a very secure position.

We conduct regular detailed reviews of Santam's risk exposures relative to its defined risk appetite parameters, and report these to the board every quarter. This enables us to manage our risk exposures and solvency to within the agreed parameters.

Solvency Assessment Management (SAM) Project
The Financial Services Board (FSB) is in the process of preparing to implement new prudential regulations (planned for 2015) that will bring about a principles-based, risk-sensitive approach to regulating insurers' financial soundness and risk management. This is referred to as the SAM framework and has largely been driven by international developments, in particular the European Union's Solvency II directive.

One of the big four audit firms recently conducted a high-level gap analysis of our readiness to implement the new framework and we are pleased to report that, based on their findings, we are on track to comply well ahead of the planned implementation date.

Santam has for a number of years made use of an internal dynamic financial analysis model to help its strategic decision-making in relation to capital, reinsurance, investments, risk appetite, mergers and acquisitions, and so on. The new regulatory framework will provide for the formal recognition of such models for capital quantification purposes subject to a rigorous approval process, as an alternative to the use of the prescribed standard formula. The advantage of an internal model is that it better enables the specific circumstances of a company like Santam to be taken into account. To this end, we are pleased to report that Santam is one of only a handful of companies that the FSB has admitted to an internal model approval process that will be conducted in the next 18 months, ahead of implementation in 2015.

Santam recently participated in a quantitative impact study that was conducted by the FSB to test the impact of a trial standard formula on the capital adequacy of South African insurers. We completed this and also shared details of the comparative results produced by our internal model at the same date. In the course of preparing our responses for the study, we were pleased to find that our results were as expected and that the differences between the results produced by our internal model and the FSB's standard formula were reconcilable, giving us comfort that Santam understands its risks and is prepared for the implementation
in 2015.

SUSTAINABILITY AND CLIMATE CHANGE
Santam plays a leading role in the industry by collaborating with a range of stakeholders to identify, research, and understand systemic risks. Highlights of this process include:

  • A project completed in the southern Cape to understand flood risk in specific areas and using this to improve underwriting practices.
  • Seconding a senior Santam manager to the SAIA for six months to establish an industry-wide systemic risk initiative. SAIA has subsequently appointed a general manager to head up this function, and established a Strategic Risk Forum (which is being chaired by Santam executive John Melville). The focus of the latter is to identify key systemic risks that threaten to raise the cost of insurance to unacceptable levels in future, and collaborate with parties that can influence the drivers of these risks to reduce the exposures.
  • Santam completed a study called the Eden study (in partnership with the CSIR and UCT) into the key systemic drivers of fire, flood and sea surge risk in the Eden district in the southern Cape. This also included an assessment of our sphere of potential influence and how we should collaborate with relevant parties to reduce the drivers of risk over which there is some control. The findings were published and presented at a side event at COP17 in December 2011.
  • Santam became the first African member of ClimateWise in 2009 and is currently a member of its managing committee. ClimateWise is a global collaborative insurance initiative through which members aim to work together to respond to the myriad risks and opportunities of climate change.

The United Nations Environment Programme (UNEP) Finance Initiative (FI) is a global partnership between UNEP and the financial sector working together to understand the impacts of environmental, social and governance (ESG) considerations on financial performance. Santam joined the UNEP FI in 2010 and is represented on its Insurance Commission which developed the Principles for Sustainable Insurance (PSI). The PSI is a set of globally applicable best practice principles for the insurance industry, including actions to facilitate the systematic consideration of ESG risks and opportunities in insurance companies' business strategies and operations. Santam's internal systemic risk forum, chaired by the head of enterprise risk management, brings together all internal stakeholders to address systemic risk for the company (see detailed risk report in the Corporate Governance Report).

At the underwriting level, Santam continues to encourage its clients to apply best practice risk management principles to reduce their own risks.

WHAT WE WANT TO ACHIEVE IN 2012
Looking ahead, we are confident that the initiatives that we have worked on in 2011, both in the underwriting and reinsurance functions of Risk Services, will deliver benefits to support a further year of delivery from an underwriting and premium growth perspective.

The time and effort that we have invested in developing our models is also paying off. This will further enhance Santam's ability to price risks accurately to sustain and grow our underwriting profits.

In 2012 we are also expecting to see further progress on the transformation of our product management capability, a process that was commenced in 2011. This will dramatically enhance our flexibility and improve speed-to-market for new products.

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