Insurers feel the pinch of junk status freefall

South Africa is nearly a month into its downgrade to junk status; and while many may argue that they haven’t felt the worst effects of it yet, there may be some turbulent news on the horizon. A recent article pointed out that Standard &Poor’s (S&P) global ratings axe has now fallen on four locally based listed insurers following its recent decision to cut the government’s foreign-currency rating to non-investment grade.

currency rating to non-investment grade.

Old Mutual Life Assurance Company of South Africa, Sanlam, Liberty and Santam had their national scale ratings cut at least one notch — although all remained above investment grade.

S&P kept SA’s sovereign local currency rating at investment grade, although it was lowered by a notch to BBB-. FAnews spoke with Neil Gosrani – Director Insurance Ratings at S&P Global Ratings – to find out what this means.

Mixed bag

The general consensus when asked about how the downgrade will affect insurers and consumers is that there is no set answer. While the South African Insurance Association feels that we will be fine as long as we are not downgraded according to localised debt, Gosrani was a bit more pragmatic in his outlook.

“Much of this will depend on how the Rand performs against international currencies, because South Africa is a net importer of motor vehicle parts, motor insurers could find that they will either be robust during this period or struggling with the effects of increased costs. Some of this can be absorbed by the insurer, while others may have to be passed on to the consumer,” says Gosrani.

Another factor that needs to be taken into account is the economic situation in South Africa. South Africa has been struggling with a depressed economy for a while now, which – as Gosrani pointed out – means that consumers have less money to spend on certain insurance policies.

The road to here

The reason why S&P downgraded the insurers mentioned above is worth noting. Gosrani says that the insurers were downgraded based on the risk that they are taking on and whether the company feels that insurers can meet commitments when it comes to these risks.

Because the South African insurers who were affected have to be bankrolled by South African banks, the downgrade was unavoidable. Other insurers who were downgraded included AIG, Allianz Global Corporate Solutions and Hannover RE; these insurers can source additional funding from parent companies. However, they were downgraded because the country that they operate in has to be within six levels of their parent companies.

An important question that was put to Gosrani is whether the decision to downgrade the insurers was independent from the decision to downgrade the country.

“If we look at the decision to downgrade South Africa, it was the decision to fire Pravin Gordhan as the Finance Minister. S&P was only going to asses South Africa’s position in June, but had to call a special meeting where the decision to downgrade was taken. If an insurer can show that S&P has to change its decision to maintain a negative outlook, we will hold a meeting to change the rating of that insurer,” says Gosrani.

Combatting the effects

After the downgrade; insurers have been sitting down, taking stock, and asking how they can combat the worst effects of the downgrade.

“This is a difficult question,” says Gosrani, “it is largely dependent on the business that BREAK the insurer writes. If it is a multi-level short term insurer (doesn’t only write one line of business), then other business lines may cover for the ones that are doing bad. For investors, they can have a look at the assets that are holding and reallocate them to markets where they will see better returns on their investment,” says Gosrani.

While he wouldn’t commit as to whether companies who write multiple lines of business will cope better than insurers that write single lines of business, he did say that some direct insurers in South Africa may struggle because other lines won’t be able to rescue lines of business that are struggling.

He was also unclear as to what the impacts on insurers will be if they have to spend a protracted period in junk status. He did say though that insurers have got set plans when it comes to dealing with periods of downturns in writing new business, and these plans are stress tested on a regular basis.

Editor’s Thoughts:
The fact that the performance of insurers is independent from the performance of the country is good news. However, the fact that local insurers are purely bankrolled by South African banks when it comes to funding is not. Measures need to be put into place to change credit ratings, and it seems that the ball is in the insurer’s court to achieve this. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.