The past year has been noted for rumours of the demise of the short-term insurance sector on the JSE.

There is continued speculation that Sanlam will buy out the minorities in Santam, the only share in the sector with a reasonable free float. It is a great cash generator, which it demonstrated with its ability to pay a R22 special dividend at the end of last year. But Sanlam always considers the price to be too high, even though it has fallen back to R80 from a high (adjusted for the special dividend) of R92.

There is no doubt, however, that Santam is core to the business. Liberty Life has also announced that it plans to set up a short-term insurance business, as has Metropolitan - though in both cases this might be in the form of a joint venture with an existing business.

One of the big "almost happened" corporate actions was the sale of Mutual & Federal (M&F). Old Mutual agreed to sell 70% of M&F to the Royal Bafokeng Nation for R27,50/share, but when the share fell to R24,50 they called the deal off.

Old Mutual CEO Jim Sutcliffe says the business remains noncore, but he expects that even after it is sold, there will continue to be a business relationship - the Old Mutual agency force generates about 5% of M&F's premium income, believed to be second only to Alexander Forbes Risk Services.

One of the anomalous cross-holdings in the sector was finally wound up when M&F sold its 11% holding in Zurich SA (formerly SA Eagle) to Old Mutual. It is now a portfolio holding of Mutual and could eventually be released into the market to increase Zurich's tiny free float - or else Zurich worldwide will make a bid to take its SA subsidiary off the market.

Short-term insurers still have a great cash-generating model. In good times and bad they make money from the free float - the interest they earn on claims made but not yet paid. And with interest rates increasing, income from the free float is increasing.

The core business of making money from underwriting risk is a different matter. It was too good to last. Three years ago several short-term insurers reported underwriting ratios (the profit from the insurance book as a percentage of total premiums) of more than 10%. Now they have been as low as 3% (for Zurich Insurance), with only Santam remaining above 5% at 6,2%.

Mutual & Federal showed a 4,6% underwriting profit but MD Keith Kennedy admits that this was flattered by the release of reserves, as the claims management process has become more efficient. The star contributor was Credit Guarantee - which insures against business debts - and with bad debts widely expected to increase this year, it is unlikely to help the bottom line as much this year.

As the FM wrote when annual results of the listed insurers were released, after a few years of benevolent weather, in 2007 there were hailstorms in Gauteng, bush fires in Mpumalanga and floods in KwaZulu Natal, Knysna and George as well as three times as many commercial fires as the actuaries had predicted.

But the biggest culprit is motor insurance, as driving standards slip and the cost of repairs increases.

Zurich CEO Nick Beyers says that the business lost R70m on its motor book - making a significant dent in company earnings, which were R290m for the year. Santam MD Ian Kirk believes it's possible that half the drivers in SA are unlicensed.

The increase in the number of fully imported cars has had a substantial effect on the cost of claims, as it means that spare parts must be imported in the event of an accident.

Kirk says one of the main causes of a downturn in the underwriting cycle is insurers are not tough enough in their dealings with brokers and end up taking on bad risks.

Santam has taken the decision to increase its share of the corporate market, which M&F is scaling down. "It is true that a large corporate claim can have a substantial effect on the total book," says Kirk, "but we cannot ignore the increasing number of infrastructure projects."

It is also a sector of the market that is not entirely price-driven. Santam has maintained a strong relationship with Transnet, for instance, in part because of its proven ability to pay claims quickly.

In personal lines, price is much more of a factor but there has been a steady increase in market share from direct businesses such as Outsurance and Dial Direct. The three listed insurers (Santam, M&F and Zurich) remain committed to a broker-based distribution model.

Says Beyers: "Our research shows that most people still prefer the personal relationship they can enjoy with a broker - and they appreciate this most of all when they make a claim."

Brokers can move business to the underwriter offering the best rates, while, of course, nobody at Outsurance or Dial Direct has any incentive to move business to another underwriter with keener rates. Beyers admits that the direct writers dominate the UK market, "but it is almost entirely focused on motor. In SA we are used to taking out homeowners and other insurance under one policy".

Santam tried to export the SA model to the UK and Europe, but it proved to be a flop. Kirk says the strength of Santam lies in the diversity of its book - during the year, the agriculture, engineering and corporate property books were disappointing, but liability, personal lines and alternative risk were strong.

The industry has lived through a number of regulatory changes, including the financial sector charter. The biggest specific challenge for short-term insurers is procurement. For most financial services businesses, procurement consists mainly of buying office supplies and IT, but for short-term insurers procurement covers a wide range of suppliers such as panelbeaters, motor parts providers, security companies and electronic goods and furniture suppliers. There is a large percentage of small and medium enterprises in these sectors.

"We need 50% BEE procurement in terms of the charter," says M&F boss Keith Kennedy. "And we hit 40% at the end of last year. "We are doing what we can as responsible citizens to bring on black business partners. We have helped set up new black-owned panel beating shops."