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South Africa Insurance Report Q1 2011
Business Monitor International, Feb 2011, Pages: 57
The South Africa Insurance Report provides industry professionals and strategists, corporate analysts, insurance associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on South Africa's insurance industry.
South Africa’s insurance companies continued to face a number of challenges in 2010. For the industry as a whole, but especially the life insurers, the Solvency Assessment and Management (SAM) regime that the Financial Services Board (FSB) wants in place by 2014 presents financial and administrative challenges. Over the long-term, though, the SAM, which is the local variant of the Solvency II regime being introduced in the insurance sectors of Europe, should result in a stronger industry in South Africa.
For non-life insurers, difficulties over the last year or so have come from the patchiness of the economic recovery, higher losses (sometimes as a result of one-off events) and fairly low underwriting margins by historical standards. The published results from the three largest non-life companies for H110 suggest that overall premiums have stagnated over the last two years or so. This indicates that 2009-2010 was a very different period to 2006-2007, when the non-life segment achieved double-digit growth. Nevertheless, if BMI’s forecasts for economic growth in South Africa turn out to be accurate, and our prediction of a moderate rise in non-life penetration comes to fruition, the segment could return to double-digit growth from 2012.
Conversely, the figures from the Association for Savings and Investment South Africa (ASISA), the trade association for South Africa’s life insurance companies and asset managers, suggest that 2010 may be seen as something of a year of respite after a very challenging 18 months to the end of 2009.The good news is that financial markets have been far less volatile than they were in Q408 and Q109. The bad news is that customers have become risk averse. In its South African Insurance Industry Survey 2010, KPMG notes that sales of single premium products have fallen. The lapse rate has also continued to rise. It appears that life premiums increased by about 8% in the year as a whole. This is a marked, positive turnaround after 2009 and an outcome that is in line with the trend that prevailed prior to 2008.
Concentration in the Market
Although none mention it, it is possible that the structure of the market has helped participants to maintain prices and margins compared to what they might have been. Both the life and non-life segments continue to be dominated by companies from South Africa’s large domestic financial services groups. In the life segment, the largest players are Old Mutual (the owner of Nedbank and much else) and Sanlam.
In the non-life segment, Mutual & Federal, Santam and the local operations of Zurich account for nearly 40% of total premiums. Absa has non-life and life subsidiaries. FirstRand Group is represented by Momentum Group (life insurance) and OUTsurance (non-life). Standard Bank owns Liberty Group, a major life player. Nevertheless, there are several substantial independent companies, including Discovery, which focuses on health insurance, Metropolitan and Hollard, a private company expanding into Australia and elsewhere.
A key development in the life segment has been the proposed merger of Metropolitan with Momentum. Metropolitan will make an all-share purchase of Momentum. FirstRand will then distribute its shares in Metropolitan/Momentum to its own shareholders, who will dominate the share register of the combined company. The deal will create a new and large listed life insurer out of two broadly complementary businesses, with an embedded value of around ZAR30bn. Metropolitan has traditionally focused on the low-to-middle income segment of the retail market, while Momentum has concentrated its activities in the upper-income segment. The transaction should unlock the value of the investment in Momentum held by FirstRand’s shareholders and give them a controlling interest in a stronger business.
The responses to a challenging year vary. However, in general the impact of the downturn on profits was softened by at least one of the following: lower claims; lower administrative costs; corporate restructuring to emphasise more profitable lines and businesses; restructuring to reduce volatility of earnings; growth in healthcare products (thanks partly to the Government Employees Medical Scheme, GEMS); foreign expansion (usually into embryonic markets elsewhere in Sub-Saharan Africa, but also into Australia’s non-life segment); and, perhaps most importantly, higher investment earnings.
Of the insurers that emphasise niche businesses, it is possible that the one affected least by the downturn was Guardrisk, part of Alexander Forbes (a broker of short-term insurance and provider of various risk management solutions). Guardrisk is one of the world’s leading providers of captive cell solutions to its clients. Guardrisk grew by virtually all measures in the year to the end of March 2009 as its customers sought the advantages of underwriting their own risks through captives.
The comments made by leading insurance companies in the H110 reporting season suggest that the second half of the year will be seen as a testing period, even for the major players. In the non-life segment, the comments of Santam’s chair and CEO, published in September 2010, are particularly significant: ‘General consensus is that economic growth is expected to be fairly flat for the remainder of the year, with domestic insurance industry premium growth most likely below the nominal growth of the economy. It is anticipated that the market will continue to be soft, both for commercial and personal lines business, as the recovery of the domestic economy is slower than anticipated. BMI remains concerned over the low levels of disposable income of individuals, and earnings pressure on businesses, which make achievement of an appropriate risk rate challenging.’ This is one of the clearest explanations of why non-life penetration is likely to continue to fall over the short-term. Another contributing factor is the tendency of the largest non-life insurers to abandon low profitability business – even if this results in a diminution in premiums in the short term.
Nor have there been significant changes to the challenges within the life segment that were listed by Old Mutual in its 2009 annual report. Job losses have led to a reduction in disposable incomes. While a strong regulatory regime has boosted consumer confidence in insurance and long-term savings products, it has (since the beginning of 2009) forced brokers to book a part of the commission that they own over the life of policies – rather than booking all commission upfront. Insurance products are in competition with non-financial alternatives such as real estate. Rising unemployment and high levels of household debt have constrained the ability of ‘mass market’ customers to buy life insurance and other long-term savings products. At the top end of the market, retiring baby-boomers have begun to run down their accumulated savings. However, sales to ‘retail affluent’ customers (middle-income black South Africans) have been booming.
At the time of writing, BMI has been able to ensure that this report includes actual data for 2009. BMI has also been able to use data published in relation to H110 to adjust our estimates for the year as a whole. BMI estimates total premiums of ZAR258,591mn. This includes non-life premiums of ZAR62,433mn and life premiums of ZAR196,158mn. In 2015, the corresponding figures should be ZAR272,568mn, ZAR107,942mn and ZAR164,626mn. In terms of the key drivers that underpin the forecasts, non-life penetration is expected to rise from 2.38% of GDP in 2010 to 2.55% in 2015. Life density is forecast to increase from US$541 per capita to US$565 per capita over the same period. BMI’s proprietary Insurance Business Environment Rating for South Africa is 65.9 out of 100.
Issues to Watch Overseas Expansion
Although a number of niches are growing rapidly, the South African insurance sector as a whole is fairly mature, particularly in relation to GDP per capita. The structure of the industry is such that players cannot look to expand by way of mega-mergers. An obvious solution for the South African insurers is to draw on their strong balance sheets in order to expand outside the country.
Claims Costs the South African Insurance Association
(SAIA), the trade association for the non-life insurers, has emphasised the need to reduce the number of deaths on the road. Further initiatives by the industry to lower the incidence of accidents could be beneficial.
Lapses and Surrenders
Figures from the ASISA show that lapses of life insurance policies fell from ZAR38bn in 2008 to ZAR32bn in 2009, a little over the level of 2007. This is another sign of the overall resilience of the industry in 2009, although lapses and surrenders in 2008 and 2007 may have been inflated by one-off value enhancements. A continuing fall in the level of lapses and surrenders of life policies would be a positive sign.
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