The Life Offices' Association (LOA) held their 2007 conference at the Sandton Convention centre on Thursday, 26 July 2007. Presenters at the morning session were asked to share their views on the topic of convergence as it applied to the life assurance industry.
Sanlam Chief Executive Officer Johan van Zyl was quick to supply a concise definition of the term. Convergence is the "blurring of conventional boundaries separating the traditional providers of once-discrete financial services such as life assurance, short-term insurance, banking, health and general retail."
In layman's terms it refers to the process of consolidating a variety of financial services products under a single brand. FAnews Online takes a quick look at what convergence means to the South African insurance industry and how Sanlam has adapted its strategy to deal with the resultant changing business landscape.
Local companies quick to follow international trends
Global convergence, said Van Zyl can be ascribed to a number of recent financial services developments. These include the globalization of financial services sectors, advances in information technologies and increased consumerism. Of these, the impact of consumerism is probably the most significant driver of change in the local industry.
Convergence in the global financial services environment has not gone unnoticed by South Africa's traditional life assurance companies. They have rapidly expanded their product offerings to maintain market share and boost operating profit. In Sanlam's case the company has rapidly diversified from a predominantly life assurance business to a business offering a range of products in non-life categories.
Van Zyl showed a slide which summarised a number of 'convergence' transactions concluded in the domestic insurance market in recent years. These included the acquisition in 2006 by Liberty Group of the remaining 62.6% of Stanlib held by minorities, Sanlam's acquisition of 100% of African Life in 2005 and Old Mutual's purchase of Skandia in the same year.
Factors driving convergence at Sanlam
Van Zyl identified a number of factors which were driving convergence at Sanlam. These include client centricity, increased consumerism, making use of cross-pollination opportunities, the need to diversify the total service portfolio to reduce risk, the need to enter new growth markets, the need to counter disintermediation and divesting from ABSA.
Many of the factors mentioned above are rooted in the phenomenal regulatory pressures the life insurance industry has been forced to face in recent years. Doubts cast over the industry have necessitated that insurance companies search for new products and growth opportunities to offset slower sales growth from their traditional products.
The importance of client centricity is best illustrated by considering the number of single-product clients on various life insurers' books. As an example, Van Zyl split Sanlam's business into various categories and revealed that for some product classes as many as 70% of customers only held one product. This opens huge opportunity for cross marketing in the months ahead.
Non-life business contributing more profit than ever before
Despite troubles on the regulatory front, Sanlam has been rewarding shareholders handsomely of late. The group has managed to double profits in the last five years and continued to outperform in its sector. However, nothing is more telling than an analysis of the composition of these strong profits.
Since 2002 Sanlam has gradually weaned itself from the traditional life assurance market and secured ever greater profits come from its non-life operations. "Originally (in 2002) close to 70% of the profits came from life insurance and last year less than 50%," said Van Zyl. It is clear that Sanlam continues to benefit from its focus on a range of opportunities in the non-life financial services industry.
Van Zyl went on to point out that it is a fallacy that Sanlam is purely a life insurer. He believes the company is more a financial services business than ever before, sighting the major operating profit contributions coming from the asset management side.
Convergence is here to stay. South African life insurance companies will have to embrace a diverse range of products across the industry to ensure profit growth and avoid stagnation. Says Van Zyl: "Convergence is a reality. It is happening elsewhere in the world, it is happening in this country, and it has certainly been one of the major drivers of the success that Sanlam has seen over the last two or three years."
Editor's thoughts:
Sanlams CEO believes that in order to survive the current financial services landscape companies need to offer a range of services. This is evidenced by most of the larger traditional life insurers offering a wider range of financial products. Will this trend toward diversified financial services companies continue, or is there still place for niche suppliers in single industries? Send your comments to gareth@fanews.co.za
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