My, my, how times have changed... Development of the South African insurance market

This year is the 50th Anniversary of the formation of the Insurance Institute of South Africa (IISA). This provides a convenient opportunity to discuss the development of the South African insurance market, especially the short-term market.

An insurance market requires a developed economy in order to flourish. It can be argued that insurance really started to come into its own after 1760 with the beginning of the industrial revolution.

Commissioning take off

Before that, economies were mainly agricultural in which case marine insurance would have been the main form of insurance. Marine insurance was important because international trade required insurance for ships and cargo. As the industrial revolution got underway cities developed with factories and this required insurance for the economy to develop. Without insurance, economic growth would have been significantly impeded.

It is not surprising to note that insurance in South Africa only started to develop after the arrival of the British in 1795. They departed in 1803, but returned to stay a few years later.

During the interim period, the Cape was under the control of the Batavian government and a concerted effort was made to place the Cape on a sound economic footing. A report was commissioned to set-out a blue print for economic development. This report noted that South Africa did not have any insurers and therefore encouraged their formation. This did not happen for some time. What did happen was that the economy under the British started to take off and a significant number of foreign insurers started to appoint South African agents.

International expertise

It is important to note that insurance expertise came from abroad, not locally. This would continue well into the 1970s. These insurers came from all parts of the world, but predominantly from the United Kingdom. What is noteworthy is the speed at which insurers spread round the world, including South Africa.

As the volume of business increased, the next logical step was for foreign insurers to open permanent branch offices in South Africa. The first company to do so was the Royal Insurance Company, established in 1845, a year after the UK passed legislation allowing the formation of companies. By this time, South African insurers had been formed by expatriates, not South Africans. The first was the SA Fire & Life in 1831 and later, the Old Mutual in 1845. The SA Fire & Life was formed by Thomas Le Breton, while Old Mutual was formed by John Fairbairn. The Afrikaans companies Santam and Sanlam were formed later in the early 1900s.

A regulatory committee

The early insurance market was therefore largely dominated by foreign companies and UK institutions were largely replicated in South Africa. One of these institutions was the tariff . The hallmark of the UK financial market was self-regulation and consequently, the insurance industry regulated itself via tariff committees. These committee regulate the affairs of its members, companies which joined the tariff. These committees drew up very detailed rules including model policy wordings and regulated premiums, commissions and so on.

Not every insurer joined the tariff and thus two markets co-existed; the tariff and the non-tariff markets. Naturally the tariff companies were the benchmark with respect to policy wordings and premium rates for the entire market. The tariff continued until the 1970s.

The rise of insurance institutes

By the late 1890’s, it was realized that tariff committees could not be all things to all men and so another institution was formed, allowing the tariff committee to concentrate essentially on market regulatory matters.

The other institution was the Cape Insurance Institute modeled on the UK practice which had formed the first insurance institute in 1873. This was followed by others. Insurance institutes initially concentrated on arranging social events for the industry but quickly included insurance education.

In the UK, in the early 1900s, a central body was formed known as the Chartered Insurance Institute (CII) which turned its attention to insurance education. In South Africa other insurance institutes were formed and they started to offer educational programmes in conjunction with the CII in London. In 1966, it was decided to form a central body - the IISA, to take over insurance education activities which had been conducted by the local institutes. Regulatory issues continued to be catered for by the tariff committees.

Domestication of insurers

The National Party won the 1948 general election and the economy gradually became more centralized. As the international community reacted to apartheid it also became more isolated. In the 1960’s, the government formed the opinion that foreign companies should form local publicly quoted companies, thereby allowing South Africans to invest in these companies.

The government did not like the idea of foreign companies operating through branch networks. The government approach had an impact on the South African insurance market since many of the leading insurers were merely branch operations of their parent foreign company.

This arrangement nevertheless had considerable advantages to South Africa. At this point, the expertise was still from the overseas companies. But as a result of pressure from the government, the process of domestication of South African insurers took place. All foreign insurers formed local companies and many listed on the Johannesburg Stock Exchange (JSE).

Thus, for example, in the UK the company was the Royal Insurance Company (plc) but in South Africa the local company became the Royal Insurance Company of South Africa (Ltd). The insurance market thus became “South Africanised”, although in many cases the major shareholder was still the foreign parent company. The government of the day then indicated it would like to see closer cooperation between foreign and local companies. In the spirit of this initiative, for example, The Royal joined forces with Old Mutual to form Mutual & Federal. The beneficial involvement of foreign insurers continued until quite recently.

It is only in recent times, for example, that the UK Royal Insurance Company, then the Royal and SunAlliance, now the RSA Group, disinvested its holdings in Mutual & Federal.Within the last few weeks Zurich has also indicated an intention to disinvest.

Remarkably stable market

By the 1970’s, the tariff system had run its course. It was decided in the UK to disband the various tariff committees and South Africa soon followed suit. The South African Insurance Association (SAIA) emerged in the place of what was the central tariff committee.

The South African short-term market has been remarkably stable and successful. In the last fifty years only three significant short-term companies were of concern, namely Parity, AA Mutual and IGI.

Parity was largely a third party motor insurer. The case of the AA Mutual is very interesting as its demise has had a lasting impact on the SA insurance market. When the matter of the AA Mutual was finalized, it turned out it had millions as surplus assets, that is, after settling all claims and paying liquidators for more than two decades.

The formation of the Financial Services Board (FSB) is largely due to the findings of the Melamet Commission of Inquiry into the collapse of the AA Mutual, supplemented by the subsequent views of the Van der Horst Committee. Similarly, when the IGI was liquidated it ended with a surplus after paying all outstanding liabilities, including claims and liquidation costs.