Local insurers remain upbeat about industry prospects
South African short-term insurers have come under pressure through the first three quarters of 2012 as underwriting margins come off the boil. The likes of Santam and Mutual & Federal seem almost certain to report FY2012 underwriting margins below the imp
The South Africa Market Watch is compiled by Marsh Africa (incorporating Alexander Forbes Risk Services) to reflect experiences in the local insurance, re-insurance and underwriting manager space. “Our State of the Market is made up of three sets of criteria under the headings results, stability and underwriting,” says Jurie Erwee, CEO of Marsh Africa. Under the first heading, the publication considers insurer market share as well as underwriting and corporate profit. “We consider the insurers’ annual trading results and look at the fortunes of specific insurance companies relative to the market as a whole in any one period,” notes Erwee.
Insurance company CEOs speak their minds
The persons best qualified to express an opinion on the “State of the Insurance Industry” are the chief executives that are steering our insurers through today’s murky economic waters. They shared some of their views on a tough 2011 and prospects for the future in the Marsh Africa publication. (We place three insurer “views” under the microscope today – and three more in the October 2012 FAnews Magazine).
Nic Kohler, CEO at Hollard, said that the group was set for another record year (to June 2012) following a “pleasing” 2011. And he was no alone in commenting on the impact of regulatory issues on the broader insurance industry. These included the Binder Regulations, the presentation of a roadmap for Treating Customers Fairly, the publication of the National Treasury Micro-Insurance Policy document, the completion of the first phase of the Quantitative Impact Study pertaining to the Solvency Assessment and Management process, the final implementation of the Financial Services Charter and the end of the transitional period for FAIS qualifications!
“The increased compliance burden flowing from these regulatory proposals present challenges for both insurers and intermediaries and come at a significant cost which could stifle innovation and competition and, ultimately, affect affordability to the detriment of the consumer,” said Kohler. “The cost and resource requirements of these developments could well drive further consolidation in the product provider market over the medium term”. Hollard observed that consolidation is already taking place in the distribution space, most notably among the larger domestic and international intermediary groups.
Africa features on insurers’ future plans
What does the future hold? It seems Africa is a destination of choice for insurers thanks to its low but stable interest rates, lower levels of household and moderate disposable income growth. A renewed confidence in emerging markets is behind several local and international insurers more aggressively pursuing growth opportunities in Africa, India and China.
“The emerging economies have contributed significantly to the post-crisis expansion of the world economy,” said Kohler. “However, even in these economies the growth outlook is moderating due to weak export prospects, rising inflation and potential asset price bubbles”. Neither developed nor emerging economy will escape the fall-out from European solvency issues and other global financial system challenges. South Africa’s prospects will no doubt be influenced by the global environment!
Going forward Hollard expects highly competitive conditions in the local insurance space characterised by increasing price-based competition over coming years. They expect declining underwriting margins over the short term too. The dynamic environment will result in direct insurers making further inroads into personal lines and as well as the small-medium commercial space. On a more positive note Kohler expects the ever-changing landscape to present a number of attractive insurance opportunities going forward.
Feeling the pinch as margins get squeezed
“Last year saw pricing in the insurance market remain soft as rates continued to decline and profitability remained under pressure,” said Mike Durek, CEO of Chartis. “High levels of consumer debt impacted insurers’ ability to further penetrate the insurance market”. The Chartis 2011 “experience” was much the same as its peers – it traded profitably despite the challenging market conditions and slow economic recovery.
“The group was able to post profits by maintaining our underwriting discipline, retaining our key brokers and clients and ensuring effective expense management,” said Durek. He hoped that 2012 would be as fruitful. In this regard the business has already got off to a good start, with positive Q1 2012 results despite “soft” pricing in the domestic insurance market.
Chartis remains committed to growing its book of business profitably, providing excellent service and achieving operational efficiency. “We expect to see continuous incremental benefits from the on-going economic recovery in the country,” said Durek. “The market continues to be dominated by excess capacity and reducing rates while some companies seem intent on gaining market share at the expense of underwriting discipline”. He warned, however, that current pricing trends were not economically viable or sustainable over the longer term.
Motor book still a thorn in the side...
Adam Samie, CEO of Lion of Africa, said the group’s 2011 performance was negatively impacted by a deteriorating claims trend in its motor portfolio, both in the personal lines and commercial space. It took sustained underwriting intervention by underwriters and actuaries to halt the slide by Q4 last years… “Our experience underlines the difficulty many underwriters endure in managing a profitable motor book and poses many questions as to the general sustainability of motor insurance in its current form in South Africa,” said Samie.
It also proves how a poor performance from one category in a multi-line insurance business can weigh the rest of the group down. Lion of Africa’s corporate, engineering and local authority market segments produced an excellent result last year. What can insurers expect through the remainder of 2012 and beyond? “I see little change in the economic environment during 2012 and, indeed, the next few years,” says Samie. “The general slowdown in the local economy puts pressure on pricing of risk for local clients as the market competes for business, especially in the personal lines segments”. Clients will benefit in the short-term as increased competition brings prices down, but could face shocks further down the line.
Samie believes that Lion of Africa’s future strategy will be guided by the new rules of market conduct emerging under the FAIS Act and accompanying regulations. “Regulation will increase the pressure on intermediated companies to improve efficiency through optimum utilisation of IT infrastructure and improving the quality and the range of services to intermediaries and their clients,” he said.
Concluding remarks
“The trend in profitable quarterly insurer results looks likely to continue unless widespread and costly disasters take place at significant claims magnitude,” concludes Erwee. He says there will be favourable underwriting for well-managed risks, but cannot deny that insurers expect underwriting margins to diminish this year over last.
Editor’s thoughts: There you have it… It appears that a well-managed short-term insurer can generate solid profits regardless of the tough prevailing economic conditions. Would you agree that increasing levels of regulation and competition are the major challenges to short-term insurer viability going forward? Please add your comment below, or send it to [email protected]
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