How will South Africa’s risk profile change in 2014?
If one had to look at the insurance sector, both in the life sector and in the non-life sector, the South African sector was largely dominated by many themes during 2013 which affected the performance of each sector accordingly. There is a possibility of this carrying over into 2014; however, a big factor to consider this year is that it is an election year. Although the African National Congress is expected to win the election, dissent towards the ruling party’s regime has been shown and it will be interesting to see exactly how much power they are able to exert.
While acting in complete isolation in a market which presents its own unique challenges, it is easy to compare the performance of the South African market to that of larger global markets. South Africa is currently the continent’s largest economy, and although the growth from other markets such as Nigeria and Kenya threaten to overtake that of South Africa, the maturity of our market places us firmly as a market which offers first world insurance products.
Playing a similar game
It is then fair to draw certain comparisons between the local market and its international counterparts. But, it is important to note that the South African financial services sector is not influenced by the international financial services sectors. Yet the South African and UK markets carry similar trends. Market analyst heavyweight Standard & Poor recently released their Insurance Industry Country Risk Assessment (IICRA) which could have very easily been a South African story.
According to Standard & Poor Associate Director Mark Nicholson, one of the key findings in the report is that the UK non-life sector carries relatively moderate risk.
This is being driven by a number of factors. The most important of these factors is that there are unpredictable settlements in the UK motor sector, which is the market’s biggest non-life sector. "Over the past ten years or so, there has been rising claims inflation over motor body injury claims. Impaired results of motor insurers have also led to uncertainty over how issues will develop in the future,” says Nicholson.
Similar factors are affecting the South African motor sector. There is evidence that insurers have to deal with increased claims that are both accident and non-accident related. This is being driven by the severe thunderstorms which caused significant hail damage in Gauteng both in 2012 and 2013. But while this is labelled as a moderate risk in the UK, it could be argued that this should be slightly upgraded in the South African market if one takes into account that there is the added worry of a large number of unroadworthy vehicles on South Africa’s roads, a risk which is significantly reduced in the UK market.
Interesting position
There is a slightly bleaker outlook for the life sector in the UK where there is a good possibility of increasing risks. Because life insurance is a very specialised market, it leads itself to be more intermediated than direct. Because of this, Standard & Poor Director Simon Ashworth says that there will be higher barriers of entry into the UK from an operational perspective. Access to distribution in terms of product sales is key in the UK life sector. This means that it will cost a lot to establish a business which may be off putting to companies who are sitting from the outside looking in.
"Volatility is slightly lower in the UK life sector than the non-life sector. This is being driven by asset liability management given some of the long term instruments that life insurers use to price liabilities,” says Ashworth. This means that UK insurers are able to price their risk appropriately, an aspect where South African insurers are behind the curve.
Propensity for change
From what we have seen, the risk carried by the South African market on the non-life side is comparable with that of the UK with the slight possibility of being higher. From a life perspective, South Africa faces similar challenges than those of the UK market, with the added challenge of access to a population base where the majority is largely uneducated.
One aspect we have to take into account is how this will change over the coming year. The UK market will remain stable provided a perfect storm doesn’t hit the market. Ashworth points out that this will be caused by changes in shock in the UK’s gross domestic product (GDP), economic contraction and regulatory change that adversely affects sales volumes.
If this is the case, then South Africa must prepare itself for this storm. There are always GDP fears in an election year and the South African economy is preparing itself for some tough times ahead as the Rand continues to be one of the world’s poorest performing currencies. The Financial Services Board has also started rolling out key new legislation which may have a significant impact on the financial services sector. For better or worse.
Editor’s Thoughts:
It is clear that while the South African financial services industry is comparable with major international markets, the propensity for change in these markets is significantly less than the propensity for change in the local market. This significantly increases South Africa’s risk. Are insurers ready for the roller coaster? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
