Fitch: SOAT: Concerning Profitability Trend, Effective Measures Needed
OREANDA-NEWS. Sustainability and profitability of compulsory auto liability auto insurance (SOAT) in Colombia will depend on insurance industry's effectiveness to stop claims upward trend, which is mainly affected by technical fraud, increased share of motorcycles on the overall fleet, local currency devaluation and medical inflation, according to Fitch Ratings. This business line profitability has also been affected by inflexible pricing coming from regulated tariffs, which makes the segment's profitability highly dependable on efficiency and tight expenses control.
SOAT is an insurance coverage with a high social impact operating in a large number of countries in the region (Costa Rica, Chile, Brazil, Ecuador, Peru, Bolivia and Colombia), totaling premiums of USD2 billion as of 2015. Colombia is one of the countries with greater development of this insurance, where premiums reached COP1.93 billion as of December 2015.
SOAT has played an important role to insurance penetration and promoting insurance culture in Colombia. This business line maintains an important participation in the industry with 8.8% of the total written premiums as of December 2015 (8.2 % as of December 2010), and has been one of the most important growth engines of the industry. During the last three years (2015-2012), this segment recorded a consistent and sustained growth average of 13% on written premiums and 17% on insurance policies (average 2013-2015). SOAT has also a significant influence on the market's profitability ratios; given it is a fully retained business that represents a substantial portion of retained premiums (10.2% December 2015) and paid claims (11% December 2015).
The technical profitability of this segment, records a negative trend since 2012, when SOAT's technical results started to be increasingly deficient. Closing 2015, SOAT's technical losses reached COP250.000 million, 68% higher than 2014, which represented almost 4 percentage points of the industry's combined ratio that stood on 113% at December 2015. This negative performance was partly affected by the IBNR reserves adjustment under the new regulation, which according to rating agency estimations, impacted the technical result in about COP100.000 million at 2015. Notwithstanding, SOAT's viability is also being affected by several structural factors.
Technical fraud is one of the main factors that have affected SOAT's loss ratio. This situation is generating an overcharge of medical expenses for events that, even in some cases, are not caused or related to traffic accidents. According insurer's association estimates, detected fraud cases have generated claim's overcosts between COP80.000 million and COP100.000 million in 2015.
According to Fitch, the growing incidence of fraud is mainly due to a liquidity problem in the Colombian health system, along with two major changes in the segment's claims scope and operation during the last three years: increase of the coverage of the SOAT from 500x to 800x the minimum monthly wage and elimination of "in situ" accident declaration. These changes have opened the possibility and generated perverse incentives to declare a common accident as a traffic accident under the SOAT coverage.
Likewise, the loss ratio has been also affected by a major change in the country's vehicle fleet composition during the last five years, which evidence a greater and growing share of motorcycles. According to agency estimations, motorcycles represented 56% of the fleet as of December 2015 and the risk profile of this type of vehicle is greater due to the higher accident frequency and severity. The insurer's association estimates that 80% of the SOAT's total paid claims correspond to motorcycles, which clearly highlight their high risk and importance on the total loss ratio. Given the slower growth rate in car sales, Fitch expects a further increase of motorcycles' share in the overall vehicle fleet, which is expected to have a negative impact on the segment's profitability.
In addition, the shock of external factors such as medical inflation and the sharp local currency devaluation had increased the cost of claims, particularly in medicines and osteosynthesis, which has not been compensated with a proportional price adjustment that is indexed to minimum wage variation.
Moreover, SOAT's profitability has also been affected by high levels of acquisition costs. Given that pricing is regulated, product commercialization plays an important role for market agents. However, Fitch anticipates an improvement of this factor in the long term as a result of the policy virtualization, which will increase the sale process efficiency, reduce evasion and could improve market's grasp to distribution costs.
The measures taken by the industry have pointed to recover the technical profitability of this segment focusing on two strategies. On one hand, a large number of companies that subscribe SOAT have implemented measures to improve distribution channel's management and profitability, and have identified the need to modernize their technology platforms for a more efficient sales workflow and to implement information technology strategies. On the other hand, the insurer's association joint work with the Colombian Financial Supervisory Authority and the Health Ministry, is taking place in order to find ways to improve claims control, avoid technical fraud and recover the technical profitability.
Fitch doesn't expect a quick recovery of SOAT's technical profitability, given that most of measures required to improve some of the structural factors will be implemented within the next 18 months. Moreover, Fitch believes that segment's sustainability and profitability challenges will persist. An adequate control and a proper claims' monitoring, while maintaining an efficient operation, is essential in order to recover the technical profitability of a high relevance segment for the industry.