Redefining the world that we live in
Since the 2008 Global Financial Crisis (GFC), the world is a significantly different place than it has ever been; especially when one considers the economic hierarchy that we were used to.
While South Africa admirably weathered the storm created by the GFC, the local economy has struggled to find its footing in the post GFC world. An article in the 2016 KPMG Insurance Survey points out that economy will grow by less than one percent this year, the worst performance since the 2009 recession.
Top of the charts
South Africa was until recently known as the continent's second largest economy, but data released by the International Monetary Fund (IMF) in mid-April suggests that it is now placed third behind Egypt when considering the international standard of gross domestic product (GDP) in US Dollar terms.
We need to look for places where we can recover lost ground. This in itself is not easy when unemployment levels are as high as they are and the rand weakens against international currencies, which has an effect on inflation.
Poor household outlook
“The reasons behind weak consumer sentiment includes high levels of household debt ( about 78% of disposable income), persistently high unemployment rates (averaging 25%), rising consumer price inflation and an associated increase in interest rates. Another contributing factor includes the downbeat perspective of the country’s economy and politics heading towards 2017,” says Lullu Krugel, Director: Financial Risk Management at KPMG.
Because of this, there will be little employment growth in 2016. Real disposable income will grow marginally at best and at a rate significantly below an average of 2.7%/y seen between 2010 and 2015. This is setting off alarm bells for the local insurance industry.
Declining investment income
Christie Viljoen, Manager: Financial Risk Management at KPMG, feels that this is one of the biggest worrying factors for the insurance industry.
“Insurers make a significant portion of their income from investment revenues. During an economic downturn as currently seen in South Africa, the returns on shares listed on the stock exchange are below the long-term trend. While equities do not directly mirror economy dynamics, many – like the Johannesburg Stock Exchange (JSE) – are very reliant on the health of a few core industries for their performance,” says Viljoen.
He adds that in a weak commodity price environment, the fate of under pressure mining companies remains integral to return on investment on the JSE.
Weaker demand
“Cash strapped households and businesses have a weaker ability to fund insurance premiums and therefore display a reduced demand for this non-essential product,” says Krugel, “in turn, insurers will have to work harder - at a lower rate of profit - to retain existing customers and secure new clients.”
She adds – on a positive note – that an increase in price competition could make it a bit easier (cheaper) for households and businesses to afford insurance.
The net effect of this supply-and-demand dynamic will however take some time to play out. For insurers, this could imply changes to some of their business models and ownership structures to cope with a weak economy.
Operating costs
An insurance company is an employer and consumer of goods and services just like any other enterprise would be.
“In South Africa’s current context, this implies increases in the cost of labour and electricity above the consumer price inflation rate, while company revenues might not grow at the same pace,” says Krugel.
She adds that the structure of South Africa’s labour market and utilities industry does not leave much room to manoeuvre for private companies on the cost of workers and energy. This results in operating budgets being strained by stagflation (high inflation and low growth).
Mitigating factors
Both Krugel and Viljoen have identified other mitigating factors which will affect the industry.
- Weather-induced economic weakness: A weak economy could result from a phenomenon that in itself could put pressure on the insurance industry. In the case of South Africa during 2016, the country’s worst drought in decades is playing a role in the overall economic malaise. However, it is also a point of great concern for insurers due to the failure of crops and some farms in their entirety.
- Social unrest: Strain on fiscal finances as a result of the weak economy could translate into increased unrest in low-income areas where residents are highly dependent on the delivery of public services for their existence. This, in turn, could translate into protest action, which in the case of South Africa is too often accompanied by damage to private and public property.
Editor’s Thoughts:
The role of the intermediary is key during this time as they are the spokespeople of insurance, the person who shows the value that insurance can offer to them. As for overcoming industry challenges, it is time to go back to the drawing board to find new ways in which to do business smarter. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
