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Innovation to define leadership in Insurance industry - South Africa’s insurance leaders speak

28 August 2012 Marsh Africa

Challenges, including the rising costs of compliance, competition from non-traditional market entrants, and changing consumer behaviour are leading many of South Africa’s insurance leaders to predict market consolidation in the near future.

Bleak global economic conditions driven by the Eurozone sovereign debt crisis, increasing regulatory pressures, and higher reinsurance costs coupled with increased natural catastrophes in 2011 have amounted to a challenging year for South Africa’s insurance industry.

Despite the need to successfully manage these challenges, South African insurance leaders also identified the evolution of new business technologies to deal with industry challenges like climate change as critical. Allied to this was the importance of improving operational efficiency by using new technologies to reach customers. Developing technology to provide better and more accessible service that promoted customer and broker centricity while managing controllable risk factors, such as fire and floods was equally critical.

These opinions represent a summary of the views of the chief executives of nine of South Africa’s leading insurers all of whom contributed their opinions to Marsh Africa’s June 2012 South African Market watch.

Other concerns that emerged included an increase in natural catastrophes with 2011 being the most expensive year on record for reinsurers following major natural disasters locally and abroad. Despite higher reinsurance costs, these catastrophes “served to raise corporate risk awareness, driving an increase in the identification of risk and the purchase of cover globally” said Hollard CEO, Nic Kohler.

Santam too expects reinsurance rates to increase in business lines where reinsurance costs are a factor. CEO, Ian Kirk, however, believes that “there is still opportunity if insurers adapt existing products to address emerging risks such as climate change, fires and floods.”

This view was supported by Guardrisk, Mutual & Federal, and Zurich. Edwyn O’Neill, CEO of Zurich, for example, recently launched a new product to assist local farmers insure key assets following flooding in Limpopo and Mpumalanga in 2011.

“Insurers need to understand the changing risk landscape and to manage and finance sustainability risks arising from environmental, social and governance issues,” added Guardrisk CEO, Herman Schoeman.

Growing industry regulations and costs of compliance were also putting large local and international intermediaries under pressure. This was evidenced by consolidations in 2011 which Guardrisk and Hollard expect to continue in 2012.

Nic Kohler at Hollard, for example, sees regulatory issues as a major challenge for insurers. Even though new regulations reflect industry collaboration to improve standards and confidence in the insurance and financial services sector, “increased compliance costs could stifle competition and innovation, impacting affordability for customers” he added.

A growing number of non-traditional insurers entering the market were also increasing rates pressure, promoting price-based competition. As such, “traditional insurers, who rely heavily on the broker distribution channel are going to need to work closely with brokers to become more innovative if they want to retain their market share,” said Herman Schoeman at Guardrisk.

Despite the challenges, South Africa’s insurance leaders also recognised a number of opportunities.

Nic Kohler at Hollard, for example, believed worldwide infrastructure development programmes offered attractive insurance opportunities, especially in Africa, where the ratio of working people to dependents is rising, boosting growth and stimulating consumer demand.

Zurich, Santam and Guardrisk had also shifted their focus northwards with Schoeman at Guardrisk, warning that “unless local insurers become more proactive in seizing investment opportunities in Africa they will lose out to international competitors.”

Looking to the future, CGIC CEO Mike Truter predicts that South African growth prospects will remain below 3% in 2012 and only slightly above 3.5% in 2013. Add weak export demand and pressure on disposable income and South Africa’s leading insurers remain cautious about the country’s growth for 2012.

Mike Durek, CEO of Chartis, for example, believes that the market continues to be dominated by excess capacity and rates reduction with some companies remaining intent on gaining market share at the expense of professional underwriting. Given the excess capacity in the market, Chartis doesn’t expect rates to harden in the near future.

Similarly, Lion of Africa CEO, Adam Samie feels that the current pricing trends, which benefit direct insurers at the expense of intermediaries, are unsustainable over the medium and long-term.

Santam CEO, Ian Kirk, sees higher overall industry claims ratios for 2012 driven by cost pressures and increased competition from non-traditional rivals and, given the difficult economic environment, modest growth and margins for intermediated insurers going forward.

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