A broad brushstroke view of the insurance industry
Attendees at the 2012 PSG Konsult Seminar, held at Sun City on the 9th and 10th of May 2012, were greeted by an impressive speaker list. Aside from presentations by various PSG Konsult executives they had the opportunity to listen to the likes of cricket
His first order of business was to consider the trends impacting global insurance businesses, beginning with the oft-discussed economic power shift from developed to developing markets. “One of the major trends is the rise of the emerging market,” said Van Zyl. Multinational financial services companies are acutely aware of the growth opportunities afforded by younger populations in countries such as India, China and Africa. Large insurers know that business in their primary markets is stagnant – and investors have picked up on this fact too. That is why, given similar profits, insurance companies in the emerging world carry double the valuation of their “old world” peers.
Leveraging our frontier market status
South African insurers are in a fantastic position to benefit from the emerging market trend as they already have a strong foothold in one of the world’s most popular “frontier” markets, Africa. Over the next decade local insurers will push into neighbouring territories, while international banks and insurers will make their presence felt within our borders and throughout the rest of the continent as well.
A second trend impacting the insurance industry is the empowerment of the consumer. This trend exhibits locally in legislation in both the financial services and general consumer space. The Financial Advisory and Intermediary Services (FAIS) Act and Consumer Protection Act are just two examples. “The consumer is king – and it doesn’t matter how you look at it – this will increasingly be the case,” said Van Zyl. Today’s consumer demands greater transparency and better value for money. Thanks to the advent of social networking (through online technologies such as Twitter and Facebook) these consumers have the power to bring large brands to their knees. “If you do the wrong thing your client might begin targeting your company on social networks,” he said.
The rise of technology and consumerism will change the insurance industry as much as any other factor from the past. Cloud computing, tablets, smart phones and the myriad social networking tools on offer today were only conceived in the last 10 years. A major consequence of technology is a shift from the intermediary-based distribution model to direct sales. We are moving from an age of distribution dominance to distribution destruction, opined Van Zyl. At present some 90% of all personal lines short-term insurance in the United Kingdom is sold directly! This trend will undoubtedly play out in the South African insurance market going forward.
Lessons from Greece
In an interconnected world each economy’s wellbeing is closely linked to the next. Although Greece represents an insignificant part of international trade that country’s post-recession debt woes had a massive influence on global economic expectations. The country’s virtual collapse has forced banks and insurers to reconsider the notion of the risk free rate of return typically associated with government paper. The global financial crisis has forced governments, central banks and financial sector regulators to turn the screws on banks and insurers.
“Although insurance companies did not collapse the world, they played a big part in the culture we witnessed during the credit crunch,” said Van Zyl. Even so, governments’ response to the crisis will change how insurers operate. Low interest rates, tight liquidity and rigorous solvency requirements will impact the profitability of insurers. New rules implemented by governments will increases costs, change the way in which insurers develop and distribute product, and alter how management teams view capital and return on equity. Higher capital requirements will drive up cost throughout the product chain. “In order to achieve the required business volumes intermediaries will have to lift their business and focus on the higher end of the value chain,” he said.
An ongoing skills crisis
Another major trend impacting financial services companies is the skills shortage. “The [insurance] industry is struggling with a scarcity of talent, not only in South Africa but everywhere in the world,” noted Van Zyl. He urged insurers to do everything in their power to retain good talent, but admitted it was difficult to prevent talented individuals from seeking better opportunities. A skilled workforce is critical to reputation; and reputation is critical to writing new business in the financial services sector.
Consider, for example, the negative public perception of the life industry that resulted from a raft of determinations by the Pension Funds Adjudicator between 2001 and 2004. The industry took a massive knock, and it took years of determined effort before the “cloud” lifted. “When you work in the life or short-term insurance industry you are selling a promise rather than a physical product… The reputation of the person sitting across from the consumer is critical to clinch the sale,” observed Van Zyl. It takes huge amounts of money to build a brand and only one or two unhappy consumers to undo it!
Editor’s thoughts: Sanlam’s Group Chief Executive, Johan van Zyl, singles out emerging markets, consumerism, technology and regulation as major trends impacting insurance businesses worldwide. The first trend will determine where companies do business, while the remaining three will influence product design, distribution and target markets. Do you think the South African personal lines insurance sector will be dominated by direct players a decade from today? Add your comment below, or send it to gareth@fanews.co.za
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