One of the distinct characteristics of the South African financial services industry is its competitiveness. Choosing an insurer seems like an easy choice, but the reality is that there are a few determining factors you as a broker make use of to decide who to build relationships with, and one of those factors is claims paying ability.
Ratings agencies are companies that review, amongst others, the insurance industry and challenges which are present in the industry. They then assign a risk rating to companies within the industry according to their ability to overcome these challenges according to their financial strength.
This may play a role in the profitability of a company as investors, as well as prospective clients, will be more likely to do business with insurers that carry a favourable risk rating than those who do not.
The rating process is structured to create an accurate, consistent framework for evaluating and ranking risks across various companies, industries and types of debt. The objective is to achieve a reasonable judgement on credit riskfinancial strength, not through a set formula, but rather through careful analysis of the critical strategic issues affecting individual organisations.
Research methodology
Ratings agencies use a few distinct methods to rate insurers. This includes aspects such as industry analysis, company analysis, due diligence and dissemination . Insurers are then reviewed on a regular basis to see if their risk rating needs to be changed.
This will help the ratings company to establish the inherent risks of an industry or company which plays a role in the decision making of international and local investors who want to enter into the financial services industry. Once a rating has been publicly released, a rating agency will continuously monitor the company’s performance. Global Credit Ratings (GCR) CEO, Marc Joffe, points out that although the process is time consuming, it offers many benefits.
Challenges restrict short-term industry growth
Because of the frequency of the claims registered in the short-term sector, it is important that the industry is free of as many challenges as possible in order to secure its sustainability. A key role of rating agencies is to identify these challenges in order to bring them to the attention of insurers. Insurers can then implement mitigation strategies or improve their performances across these key areas of their bisiness.
One of the biggest challenges identified in South Africa is adapting to the regulatory framework and insuring business is priced correctly in a highly competitive market. Joffe points out that the industry has been, and will continue to be, for the short term to meduim term at least, dominated by the large multiline insurers.
Revenues are also under pressure. Although some insurers implemented rate increases during the second half of 2013, some of these increases have yet not filtered down to the policyholder.
Performing well in a challenging market
Again, ratings agencies play a significant role in identifying these challenges which help them determine the risk an industry holds. “Penetration of the non-life sector equated to 3%, which is relatively on par with the global average. Although, it does lag behind the developed world’s average of 3.6%. Premium density, which is the uptake of insurance products within a country, is approximately $200 per capital, which lags behind the developed world’s average of $1 500. Both measures contribute to an overview of the level of development of the industry within the local context,” says Joffe.
Being on par with international markets
Despite the challenges faced by companies in an economic climate which is largely fragile, Standard & Poor Associate Director, Neil Gosrani, says that the local life industry compares well with its international counterparts.
“Both the life and non-life industries are seen as profitable and well regulated. We believe underwriting management agencies are a potential risk, but industry controls manage that risk. We do not see any overt risks from the products sold and view the risk from extreme events such as natural catastrophes as neutral. The key issue in our assessment of the insurance industry is the wider macro environment (political and economic risks) and the impact on future growth." Gosrani concludes.
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