South Africa’s insurance chief executives are upbeat about industry prospects
01 October 2012 | Magazine Archives FAnews & FAnuus | Features / Profiles | Gareth Stokes, FAnews
The rough and tumble world of short-term insurance claims resulted in underwriting margins coming under pressure through the first half of 2012. Chief executives at leading domestic insurers have warned brokers that premiums will have to rise… For an overview of the South African short-term insurance market we turn to the June 2012 South Africa Market Watch, distributed by Marsh Africa.
The South Africa Market Watch is compiled by Marsh Africa (incorporating Alexander Forbes Risk Services) to reflect experiences in the local insurance, re-insurance and underwriting manager space. "Our State of the Market is made up of three sets of criteria under the headings results, stability and underwriting,” says Jurie Erwee, CEO of Marsh Africa.
Under the first heading, the publication considers insurer marketshare as well as underwriting and corporate profit. "We consider the insurers’ annual trading results and look at the fortunes of specific insurance companies relative to the market as a whole in any one period,” notes Erwee.
Slow and steady is best
The stability criteria deal with the financial soundness of insurance stakeholders. Marsh keeps a close watch on capital, reserves, solvency margins and credit ratings and believes that small positive increments in these numbers are positive for the industry.
Underwriting conditions reflect in measures of reinsurance, capacity, retentions, sums insured, limits, deductibles, claims, rates, premiums and policy coverage. Erwee observes that extreme discrepancies in any of the underwriting criteria point to a hardening or softening of market conditions over the previous year.
A word from Insurer CEOs
What shape was the domestic insurance market in as we entered Q3 2012? There are none better qualified to answer this question than the men at the helm of the country’s largest short-term insurers. They shared their views in the Marsh Africa publication.
Ian Kirk, CEO at Santam, believes insurers must adapt to industry challenges and manage the risk factors under their control. "The past year was challenging but, ultimately, a successful one for Santam on a number of fronts,” he says. He singled out strong underwriting margins and premium growth (particularly in the first half of FY2011) as highlights.
Weathering the economic storm
"Limited exposure to the Euro-zone crisis, our leading presence in South Africa, and a growing focus on Southern Africa, India and South East Asia, enabled us to turn in a solid overall performance despite investment returns being hit by global financial market turmoil,” says Kirk.
A major challenge for domestic insurers is the steep hike in reinsurance costs in the wake of previous natural disasters such as the earthquakes in New Zealand, floods in Thailand and Australia and the earthquake and tsunami in Japan. (The total global economic loss due to natural catastrophes is estimated at $400 billion in 2011 against an average $86 billion per year in each of the preceding six years).
What does FY2012 hold in store?
"The outlook for the South African insurance industry in 2012 must be seen in the rather bleak world economic context,” says Kirk. "When businesses are struggling and individual disposable incomes are under pressure, there is less money to spend on insurance and industry premiums come under pressure”.
Kirk says that although there will be no general increases at the insurer, only better quality risks would escape rate increases. The recent weakening of the South African rand (which drives costs in the motor book) combined with increased competition from non-traditional insurers, will push claims ratios up and put pressure on underwriting margins.
He is confident that disciplined underwriting policies will help the group to meet its financial objectives for 2012. He says Santam will address emerging threats and focus on its operational efficiency to ensure profitability across its insurance lines. Santam expects 2012 to be another "knuckle down ride” during which intermediated insurers will achieve modest new business and margin growth.
New business through innovation
Mutual & Federal meanwhile believes that innovation is the key to industry survival. Peter Todd, CEO at the insurer, says that the industry needs to be creative in order to reach a new generation of technology-aware consumers.
"Our industry is being driven largely by trends of increased consumerism as well as technological developments that impact every area of our business, whether personal lines, commercial or corporate insurance,” he says. Consumers are demanding improved service delivery, better understanding and more convenient ways of doing business at competitive prices.
Legislation will impact on the industry too. Aside from the Consumer Protection Act (CPA) and Financial Services Laws General Amendment Bill (FSLGAB), Todd expects that binder regulations – which manage fees to intermediaries for binder functions – and outsource regulations – managing fees to intermediaries for non-binder functions – will have a major impact on the industry through 2012/3.
A legislative puzzle
Another piece in the legislative jigsaw puzzle is the Solvency Assessment & Management (SAM) regulation aimed at promoting prudentially sound insurance industries in the interest of customers. "SAM requires that we fully understand our risks to ensure the industry has adequate capital to cover all its liabilities,” says Todd.
Mutual & Federal says that its customers remain central to its 2012 focus. "We will be building customer metrics and improving the quality of customer engagement, particularly through broker partnerships, with the ultimate purpose of making it easier for brokers and customers to do business with us,” concludes Todd.
Progress despite adversity
"Turbulent economic conditions coupled with the worldwide natural catastrophes that occurred last year made 2011 the most expensive year on record [for insurers globally],” says Edwyn O’Neill, CEO at Zurich. "In spite of this, Zurich South Africa has shown concrete progress towards meeting its stated objectives”.
The group describes 2011 as a year of stabilisation during which it made great strides and advancements in achieving profitable growth, improving customer and broker centricity, enhancing operational excellence and developing its people.
Zurich may have to wait a year or two more for this focus to yield benefits. "Globally, economists are cautious about the recovery of growth in 2012,” says O’Neill. "With interest rates at an all-time low, this presents a particular challenge to insurers who earn a significant portion of their income from investments”.
Responsible risk management
The group will offset the likely contraction in consumer spending by protecting its capital base. "We have a governance process with clear responsibilities for risk taking, including the managing, monitoring and reporting of risk,” he says.
Zurich South Africa has identified a number of new growth opportunities from launching new products and entering new markets as well as new customer and broker segments, through to the implementation of new claims and underwriting service enhancements.
Hot topics
The Market Watch identifies a number of topics affecting insurance brokers and the short-term insurance market in general.
Consequences of global warming
A major concern for both domestic and international insurers and re-insurers is the impact of global warming. Record flooding, unseasonal rain and violent storms are all consequences of the phenomenon and impact on insurers through higher claims and increased reinsurance rates.
Financial and economic crises
There is no escaping the impact of the global financial and economic crisis either. Insurers across the board are feeling the pinch due to reduced premiums and declining investment incomes. "Recent financial bailouts in Europe, coupled with austerity measures, reflect that the above crises are not fully past yet,” observes Marsh.
Too many laws
Regulation remains a huge challenge for the insurance industry. From January 2012 insurers must consider the Capital Adequacy Requirement calculations to enhance insurer solvency. (This will be implemented over 2012/14 in preparation for the full SAM program in 2015).
Insurers have to consider the Consumer Protection Act, New Companies Act, Protection of Personal Information Act, Binder Regulations, Underwriting Manager Regulations, Policyholder Protection Rules, Third Party Cell Captive Regulations and Treating Customers Fairly Regulations to name a few.
Broker developments
Marsh says there were some significant moves in the broker space over the past year or two. Marsh acquired Alexander Forbes Risk Services to launch Marsh Africa, Aon acquired Glenrand-MIB and Jardine Lloyd Thompson UK opened a local office.
Conclusion
"The trend in profitable quarterly insurer results looks likely to continue unless widespread and costly disasters take place at significant claims magnitude,” concludes Erwee. He says there will be favourable underwriting for well-managed risks, but cannot deny that insurers expect underwriting margins to diminish this year over last.
