An industry punching well above its weight
The insurance industry plays an important role in providing financial security to the public. Both the short-term and the life sectors work hand in hand to create an industry framework which offers the public a peace of mind that should a significant event happen to them, be it death, disability or unemployment, they will be protected.
This obviously hinges off the fact that these industries are well capitalised and stable in terms of participation from the public. This can be a problem in countries where insurance is mainly seen as a grudge purchase, but what is the true extent of the problem?
Polishing the looking glass
One of the key indicators of the health of an industry is to look at the ratings received from ratings agencies. Standard & Poor (S&P) recently released its assessment of the non-life sector in South Africa, and their moderate risk rating of the country has not changed.
This is based on factors such as the country’s economic climate, its political climate, the country’s financial sector and the payment structure within that sector. This puts South Africa in the same category as Brazil, China, Italy and Spain.
Neil Gosrani, Associate Director: Financial Services Group at S&P’s Rating Services, points out that the economy affects the strength of the financial sector. While other economists expect the South African economy to be downgraded sometime over the next year, Gosrani says that this will not happen and that the insurance industry should remain pretty stable.
“Economic growth in South Africa is weak. This is based on measuring growth against other developing markets. While they are experiencing five percent growth, South Africa has to be content with two percent. This feeds through to the insurance industry,” says Gosrani who adds that insurance is the last thing a person, who is battling to make ends meet, wants to think about.
Punching with the heavy-weights
However, not all is doom and gloom. Another key indicator S&P looks at is industry risk, where Gosrani says that South Africa is doing really well.
One of the factors contributing to industry risk is the return on equity. This is based on the ability of insurers to pay out clients when it comes to claims. South Africa carries a positive rating in this indicator where it rubs shoulders with established markets such as Australia, Hong Kong and Switzerland. What is surprising is that the UK and the US are rated as neutral in this indicator.
“The ability of the South African market to pay out claims relatively easily despite the fact that the non-life sector is under pressure gives further weight to the first world-third world dichotomy that exists in the South African market,” says Gosrani. The first world-third world dichotomy Gosrani refers to is that the South African insurance sector is a well-developed sector that could exist in a first world country, yet it is found in a third world (developing) economy.
Keeping the scales in balance
One of the other key contributors to industry risk is barriers to entry. The South African insurance market is fragmented in that no one company has enough influence on the market to move it in a particular direction, but we also do not want to get to a stage where there are too many companies in the industry fighting over the same piece of profitability pie when there is limited growth in new business.
Again, this has a lot to do with the political outlook of the country, and despite the new wave of regulation that is hitting the South African insurance industry, Gosrani points out that the entry of King Price into the market as well as the imminent entry of a new re-insurer into the market is an indication that barriers to entry in South Africa are balanced in the right direction.
“Solvency Assessment and Management (SAM) will have an impact on the market in that a lot of insurer’s activities will become onerous; not only from a cost perspective, but from a compliance perspective. While there has been a train of thought that this would encourage market consolidation, particularly among smaller insurers, we do not expect this to be the case. Smaller insurers who are already established in the market know what is coming and have been able to get in line with the requirements. They have made the necessary investments in technology systems, so they should be able to cope. This may not be the case for smaller insurers looking to come into the market after SAM comes into effect,” continues Gosrani.
Legislative protection
South Africa is facing a tsunami of regulatory reform and is playing catch up with the rest of the world. Gosrani points out that currently, South Africa is rated as moderately strong when it comes to its institutional framework, which means that the public is protected against poor business practices which may occur in the industry.
“The South African Reserve Bank (SARB) has done a good job in regulating the bank while the Financial Services Board (FSB) has done a good job in regulating the financial services sector. This will change under the Twin Peaks model where the FSB will be responsible for market conduct regulation of all financial institutions, including the banks. It will be interesting to see how this pans out. While there are some concerns on the regulatory tsunami, it will be good for the industry in that it makes the industry resilient and robust,” concludes Gosrani.
Editor’s Thoughts:
An industry is only as good as the regulation that governs it. So the proof of the pudding will be in the eating. We have heard stories coming from the UK and Australian markets which have just gone through similar regulatory reform; let us hope that South Africa can avoid the challenges that were experienced in those markets. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
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