Don’t ignore a top contender

04 February 2016 Jonathan Faurie
Jonathan Faurie, FAnews Journalist

Jonathan Faurie, FAnews Journalist

One of the basic principles of a free market economy is that there needs to be equitable access to services/products across the board to any member of the public regardless of their financial wellbeing. However, as South Africa has discovered over its 22 year free market economy journey (which was ushered in with the birth of democracy), this maxim is sound in principle but difficult to implement in practice.

If we focus on the effects that this has on the financial services industry, we see a large number of companies fighting for a small pool of business. In an economic environment that is constrained, is this sustainable?

Broaden your horizons

Common sense says that the answer to the sustainability question is no; clients can only have so much cover before they are over insured. This has a significant impact on brokers and insurers alike who are hungry for new business.

Does this mean that 2016 will finally be the year of the inclusion of the lower income earner? Insurers in Zimbabwe are facing similar challenges to us; and at the 2015 Zimbabwe Annual Insurance Conference, outgoing President of the Zimbabwe Insurance Association, Dr Lovemore Gomera, made an impassioned plea for insurers to focus their efforts on lower income earners.

“Strengthen your balance sheets and improve you product offering by tapping into the vast resources in the greater community. Strategic partnerships can play an effective role in boosting of human capital and growth of the insurance industry and ultimately the economy,” he said.

This has been a significant concern in the South African industry in 2015 with many industry analysts questioning the ability of insurers to effectively design products that can cater for lower income earners. Even insurers themselves are voicing their concerns about the challenges of bringing this sector of the population onto their books.

The challenge seems to be with the distribution model; but as we have seen from the success of a number of insurers, selling products to this market can be profitable.

Surviving a crowded room

Large amounts of companies fighting over a small pool of business will only increase competition in the industry. But are insurers ready for this?

This is another concern in Zimbabwe and was highlighted by Dr Gomera in his address. "Increased competition among financial institutions, higher capital requirement after the global financial crisis and increasing needs for customer protection force the insurance industry to seek more efficient ways of managing their businesses in order to generate sustainable profits to survive.”

“Challenging market conditions have become intense with most if not all insurance companies looking for all the feasible options for survival including consolidation with other insurance carriers, agent and broker networks and even non-insurance financial institutions."

Go forth

Dr Gomera said, that with so many Zimbabweans living in far flung areas of the country, the time has come, to not only explore if and how to create more smart partnerships, but to look more seriously at the scale and implementation of existing partnerships to build capacity. South Africa faces similar problems and one wonders how long it will be until we think in the same way.

“One area of opportunity lies in attracting capital from the nation by way of practical collaboration between rural organisations,” said Dr Gomera who added that “we need to also include development agencies and local players through mergers and acquisitions to stimulate growth and also facilitate exchange of knowledge, experience and expertise to gain better insights about new risks and vast opportunities to exploit.”

The crux of the matter

While this is understandable, we need to remember that variety is the spice of life. This is a key lesson that we learn from the US on a daily basis by virtue of the fact that they simply detest monopolies. While we are from that status quo, reducing the number of companies in the financial services industry does limit choice.

However, in some instances, there are few other choices. “Mergers and acquisitions should now dominate conversations in the Boardrooms. Executives and management must advise their Boards and shareholders on the effects of poor capitalisation. Weak balance sheets continue to adversely affect business growth within the Zimbabwe insurance industry hence the call for increased capitalization from the Commissioner (IPEC) and the Ministry of Finance,” concluded Dr Gomera.

But in an industry as developed as ours, is large scale consolidation the best thing? 

Editor’s Thoughts:
If we look to the future, it is hard to see how the lower income earning group can be ignored. But how can insurers find an effective way to distribute these products? Is consolidation the answer? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts


Added by Eric, 04 Feb 2016
I suppose if we look at what is starting to happen in South Africa, with property rights coming under attack from government, it is appropriate that we start looking at and taking lessons from Zimbabwe.

From a financial advisors point of view, the cost of doing business, makes it all but impossible to service the lower income market. A fact that will be even more amplified once RDR is implemented and being ignored by all those making policies, while getting their substantial salaries every month!
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