Insurance industry achieves growth despite tough economic conditions

Despite the well documented fact that the insurance industry is under severe pressure during current economic conditions, the sector is experiencing admirable growth and will continue to do so as the public becomes more educated on products within the financial services industry.

This is according to ratings agency Global Credit Ratings who do an annual analysis of the industry in order to gauge its profitability and to identify trends which will influence the industry going forward.

Direct growth

One of the underlying trends which Global Credit Ratings has noticed is the growth of direct insurers. According to the company's current Short-Term Bulletin, direct insurers currently hold a 15% share of the overall market. While this may seem insignificant, it is worthwhile to point out that the growth of these players can only be described as robust.

Global Credit Ratings Regional Sector Head, Mark Chadwick points out that this growth continues to outstrip the broader market.

"The emerging middle class is a major driver of this growth and will continue to do so as young, tech savvy buyers who are used to buying products direct from the source will bring this trend into the insurance industry. This is being done in an attempt to bring down costs,” says Chadwick.

He adds that companies within this sector are now targeting these clients as they become the industry's new buying power. "There is a very positive sentiment for direct insurers as their business model is seen as a flexible structure within which they can operate. And although the direct market does have higher premiums, because of the technological advances that they have adopted, they are able to price their risk very accurately,” says Chadwick.

Fighting the threat

While the growth in the direct market poses a threat to intermediated players, there are measures which can be put in place to neutralise this treat.

"Over the past few years, intermediated players have lost market share and have lost quality business. There is also the fact that the loss ratio in intermediated players is significantly higher than that of direct players. This will need to be resolved if they want to slow down the growth of the direct market,” says Chadwick.

In order to achieve this, the intermediated players need to modernise and adapt their business models so that they closely resemble those of direct players. This will bring them to a comparable footing which will see them well placed to make necessary technological changes.

"Key to the success of the direct model is that they have embraced and adapted smart technology which allows them to accurately price their risk. Intermediated players need to embrace technological platforms which will allow them to capture accurate risk data and granular risk data. This will also allow them to price their risk accordingly,” says Chadwick.

He adds that this will however prove to be a major challenge for intermediated players. "Players in this market will have to make major changes as applying pricing to a massive book of business, where you may not necessarily have the level of detail needed to make that pricing accurate, is dangerous,” he says.

Intrinsic value

While there are significant challenges which face intermediated insurers, Chadwick feels that the South African market will not go the way of the British market, where direct players make up as much as 58% to 60% of the market.

"The broker model in South Africa will always be extremely relevant. It is for them to work on their technological systems where they will be able to achieve pricing flexibility.

There are obvious avenues that intermediated players can target. Firstly, they need to increase their penetration into the growing middle class. Although going direct does cut costs, the value of having an adviser/broker who has the necessary industry experience cannot be underestimated. A broker/adviser provides the best advice on a product which will be tailor made to fit client's needs. This is a major reason why there are no direct players in the retirement sector. If clients trust an adviser to give advice on the best retirement vehicle to suit needs, shouldn't they turn more towards brokers to advise on the best medical scheme or short-term product?

This is where telematics will play a big role in the industry. The public needs to look past their fears of telematics being used as a big brother watching their every move. Telematics looks at aspects which give insurers a complete driver profile which will allow them to tailor make a package which suits a driver. Why should a 40 year old family man who drives responsibly and is off the roads at night pay the same rate as a 40 year old that is unmarried, drives aggressively and still enjoys a night on the town with the boys?

Working past the cynicism of the public which automatically tells them that telematics will be used to repudiate claims is the key to successfully rolling out telematics products in the industry.

Editor's Thoughts:
Intermediated insurers will always have an important role to play in the insurance industry. However, this does not mean that they can become complacent and not make the necessary changes to neutralise the threat of direct players. Some companies are taking these steps but more needs to be done in order to solidify their legacy. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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