Riding the storm through rough waters

Business executives all over South Africa are facing more and more challenges in an ever increasingly demanding business landscape.

This is no different in the short-term insurance industry, where executives and management of all role players need to apply creative thinking and strategies on an ongoing basis to identify the opportunities and mitigate risks for their organisations; as well as their clients.

Our looking glass

We have strong views and opinions of the pitfalls and dangers of current market conditions. We have to be alert and focused as we have a responsibility to our clients to provide them with the best possible business solutions.

We predict that the current volatility in the local and global economy is set to continue for quite some time due to South Africa’s emerging market positioning. It would seem as if the rand will maintain its downward slide, or at least remain under pressure, which may lead to a rise in inflation and possibly in interest rates.

Obviously the weaknesses in the local economic indicators are putting significant pressures on consumers, which in turn have a negative impact on the affordability of insurance.

Supporting this view

The trends in the volumes of premium collected on individual broker portfolios on a monthly basis by Insure Group Managers, supports this view. Personal lines business is definitely under pressure.

Commercial businesses seem to be in a better position to maintain volumes. Where growth in volumes do occur, the volume percentage of new business is not in line with the value percentage.

Retaining business

It would appear as if the market will have to shift focus towards a much stronger emphasis on retaining existing business as opposed to generating new business in order to manage within the difficult economy.

This strong requirement for retention puts further pressure on brokers and, coupled with increased workloads as well as ever increasing regulatory costs, the risk of negative growth is a reality.

The effective use of optimised technology and technology platforms can definitely mitigate some of these challenges and risks. In dealing with the broker market, it is clear that those players who started the process of optimising technology some time ago are now reaping the benefits. Those who have not certainly have a lot of catching up to do.

Re-price the books

Apart from the negative impact that the current volatility on the stock market has on investment returns for insurers, they have to get smarter in re-pricing their books in order to address affordability in the consumer market.

The rapid devaluation of the Rand over recent months will further impact negatively on the cost of claims, and it is quite possible that the risk of fraudulent claims will also increase. This means that insurers will have to apply themselves a lot more stringently and diligently to claims assessments.

The difficult economic conditions and unsure outlook is forcing some insurers to start expanding markets across the borders into the rest of Africa. This in turn may create opportunities for pro-active market participants.

Short-term consolidation

The short-term insurance market is experiencing ongoing consolidation through mergers and acquisitions, which may result in fewer players in the market and emphasis on control and specialist, quality advice.

International players seem to be endeavoring to explore markets not only in South Africa, but also in other countries in Africa. Africa is definitely regarded as an expansion market for international players, and local players may be approached in this regard.

A significant threat

The current uncertainty around the final format and implementation of the Retail Distribution Review (RDR) proposals by the FSB is one of the biggest regulatory challenges for brokers at the moment, and is a significant threat.

This poses difficulties for clients’ and other players where transactions are being delayed or placed on hold, because of the uncertainty around RDR. It would seem as if some players in the market are embracing the anticipated RDR implementation, while others follow a strong wait-and-see approach. Especially where brokers may be considering selling their business, it is imperative that these brokers seek clear, knowledgeable advice from experienced institutions, acknowledged in the market.

Indications are that the Regulatory Tsunami currently flooding the industry will not abate soon and the market needs to place itself in a position to incorporate this. One of the ways to do this is to focus on building strong relationships, invest ample time and effort to understand the complexity of required regulations and build the necessary skill set as well as associate with reputable partners to manage the regulatory environment within the business.

Technology change

The speed at which information and communications technology and platforms are developing brings many advantages to the business world, but at the same time also bring many challenges to the industry.

The availability, sharing and ease of access to data may lead to a loss of control for the smaller players as technological advances place this in the hands of bigger players.

As the reliance on technology is fast becoming core to the operational ability of the business, the requirement to have effective, tested data protection, and disaster recovery ability in place becomes imperative.

Transformation remains a priority in the South African business context and is therefore also a challenge to players in the insurance industry. The speed of transformation is however limited by the skills shortage in the financial services sector.

A lot has already being done by various bodies, institutions and companies within the industry to address and support the delivery of skilled entrants into the industry that can support transformation. It is important that the industry embraces transformation, as it was evident in the past that self-regulation is a far better option than to get regulated through legislation.