The insurance sector is divided into two very different groupings - the insurance underwriters and insurance brokers. The underwriters use their capital to offer property and casualty insurance to the public and to corporate clients. These include two of the most successful companies on the JSE, Santam and Mutual & Federal (M&F), as well as (the almost untradable but nonetheless successful) SA Eagle. And they continue to go through a purple patch. All three shares are up 40% over the past year. M&F trades at R33 and it is hard to believe that just two years ago parent Old Mutual offered shareholders R17,50 to buy the share - and there has been a 350c special dividend in between.

The underwriting ratios have undoubtedly peaked, though they were still almost double the long-term averages at both Santam and M&F. In the first quarter of 2006, mainly because of heavy rains in Johannesburg, M&F's underwriting ratio fell to 3,7%, just below the long-term average, and there was an indication of a softening of the market - its gross premiums were up just 4% to R2,2bn in the three months to March 2006.

MD Bruce Campbell says though the weather and other factors outside management control have a critical impact on underwriting results, the group has helped to make underwriting more efficient by investing in business intelligence and management information systems.

And it has contained claims costs by managing the supply chain better, and being more selective in the people it will use for panel-beating and towing services.

Santam CE Steffen Gilbert says that as the market softens there will be increased competition for market share.

He says it could be disastrous if short-term insurers do not adhere to disciplined underwriting and cost-based pricing in this more competitive environment.

It will be particularly tough, he says, as new entrants in the short-term insurance industry are likely to be more aggressive - the established players will need to rely on their brand and distribution to protect them, rather than nakedly compete on price.

Over the long term, the short-term insurance business model has provided very attractive returns. Not only does it have shareholder capital which grows in line with the JSE, but it benefits from a free float of premiums - it earns income on claims which have been made but not paid.

It is no accident that property and casualty insurance and reinsurance forms the core of Warren Buffett's Berkshire Hathaway business.

The other grouping - which is proving much less attractive to shareholders - is the insurance brokers, of which Alexander Forbes and Glenrand MIB are listed. They are going through similar pressure to what the life assurers went through last year.

It is not their short-term insurance broking that has come under the spotlight so much as their role as pension fund administrators.

Alexander Forbes made the high-profile appointment in November of Peter Moyo as MD of its African businesses (including SA).

Alexander Forbes is the largest pension fund administrator in SA, with 1,4m active members and 730 funds. It was accused in media reports of "theft" for having taken fees from banks for "bulking" accounts. Bulking is the process by which administrators negotiate with banks to treat each retirement fund's current account as part of a larger group, in order to set a higher interest rate that the bank will pay.

Moyo says there is nothing wrong with bulking. "It is good for our clients as they get a better rate of interest on their current accounts - many of our smaller clients would be lucky to receive any interest on their current accounts if we did not bulk.

"At no time did we take money out of the accounts, so we resent the accusation that we are thieves."

Moyo says that if a pension fund is well run it should not have significant assets in its current account in any case. All assets should be invested with asset managers. However, money which is released for benefit payments needs to travel through a current account.

He says there was a failure of governance. Before 2003, Forbes did not disclose to clients that it received a fee (some might refer to it as a kickback or rebate) for bulking current accounts.

Forbes introduced new service-level agreements in late 2003, which disclosed the nature of the bulking arrangement and that it received payments for it: most clients agreed to this arrangement.

But Moyo says the practice of taking fees was ended in September 2004 with the introduction of the Financial Advisory & Intermediary Services Act, which requires intermediaries to divulge fees. Forbes is co-operating with the Financial Services Board's (FSB) review of bulking. But there is no doubt that it has dealt a blow to public confidence in pension fund administrators.

Mark Arnold, COO of Glenrand MIB Benefit Services, one of the five largest private pension fund administrators, says pension funds could make a case that administrators who had not bulked accounts, and so given them a better rate of interest, were in breach of their fiduciary duties.

Glenrand is doing its best to capitalise on its rivals' woes with an advertising campaign in which it claims to have no skeletons in its cupboard or can of worms to open, but it has by no means been cleared by the FSB for its own practices. Glenrand adopted a "local is lekker" approach when it sold its interest in London-based Glencairn three years ago.

It was a strategy that did not prove to be appropriate for its most profitable subsidiary, Reinsurance Consultants & Intermediaries (RCI), which needs international partners to operate effectively. RCI was recently sold to London-based brokers Willis.

Forbes has been a great deal more aggressive on international expansion. It bought wholesale insurance broker Nelson Hurst in 1997.

Over the past two years this business has proved to be a headache. After taking a R111m hit in the previous results for one-off costs in what it now calls International Risk Services, there was a further 71% decline in the September 2005 interims.

International operations contributed just R54m, or 13% of Forbes's trading profit, their lowest contribution for more than five years. This decline can't be blamed on the exchange rate, as the average rand/sterling exchange rate in the six months to September was the same as it was in the same six months last year.

But group CEO Rael Gordon says, however, that the international businesses remain core, and he will remain based in London to oversee an expansion of the international footprint.

Gordon says the insurance cycle has turned down and rates are falling. By contrast, while the local financial services business is facing the bulking crisis, International Financial Services has experienced a 50% increase in profit.

The jewel in the crown for Forbes is multi-management business Investment Solutions, which should overtake both Risk and Financial Services to be the biggest contributor to group profit.

It is already the top money-spinner in SA, and assets under management are well over R100bn.

But this business has also been caught up in the investigations surrounding the bulking issue. It has been argued in the press that Alexander Forbes consultants did not act entirely objectively when they placed business with Investment Solutions and might have been paid undisclosed incentives to do so. It is entirely possible that Investment Solutions will be forced to repitch for all the business it received from Forbes if the consultants are found to have been acting in a biased manner.