The future of the South African insurance industry
A decade from now the global financial crisis of 2007/8 will show up as an insignificant blip on historic stock market price charts. Financial analysts will mention the ‘Sub-prime Crisis’ in the same breath as The Great Depression, Black Monday, the US Savings and Loan crisis, the Asian Financial crisis, Dotcom, etc. Each of these events forced investment industry stakeholders to reassess how they conduct their business. As world economies emerge from the crisis-induced recession, key financial services companies will have to come to terms with the new business environment. In today’s newsletter we take a look at how the South African insurance industry will adapt.
An international team from PriceWaterhouseCoopers (PwC) has identified nine key developments for the insurance industry to take note of. To find out how PwC expects local insurers to adapt to these developments we attended a presentation titled Emerging from the storm: The day after tomorrow for insurance. Victor Muguto, Southern Africa insurance leader at PwC, put a local spin on the report.
Will ‘wise’ consumers trigger an industry restructure?
The first three developments identified by PwC are introduced as organic restructuring, the end of innocence for retail investors and the reawakening of mergers & acquisitions. Each of these development relate to how insurers adapt to their business environment, with specific attention to client needs. “As insurers withdraw from some of their geographical markets and scale back particular lines of business, the market shares and opportunities for those that remain will increase sharply,” says PwC. A number of South African insurance companies have already expanded operations through Africa and to other emerging economies, particularly India.
Insurers face tough challenges to align their product offerings with consumer demand. Local consumers have more power than ever before and are increasingly calling the shots regards what their savings and investment products contain and how they purchase these products. The PwC report concludes that “South African insurers face significant marketing, product design and distribution channel battles” in coming years. The trend in the next three to five years will be to simpler and more transparent products.
PwC says global merger & acquisition activity is likely to accelerate in coming years too. They expect South African insurers will steer away from the consolidation and restructuring activities, and focus instead on “expanding and diversifying through strategic partnerships in Africa.”
On reporting, private public partnerships and rewards
The fourth key development is referred to as “another rethink on reporting.” PwC expects further moves toward an “industry consensus” reporting standard. “The lack of a relevant and comparable reporting standard for insurance companies has long been regarded a problem by investors,” says PwC. The latest attempt to address the crisis of complex and non-transparent reporting is know as International Financial Reporting Standard 4 Phase II (IFRS 4 II) and will be used as a standard measure of insurance contract liabilities by 2012. At this stage the only certainty is that insurers will incur additional costs to comply with the standard’s onerous disclosure requirements.
“Blurring the lines,” the fifth international development mentioned by PwC, observes that government exerts “stronger influence over the insurance market as a result of bailouts, regulatory reform and greater control over pensions and healthcare.” Apart from various legislative interventions, the South African government is poised to implement both National Social Security (retirement) and National Health Insurance (healthcare) reforms in the coming years. “Political awareness and staying in touch with government policy is of particular importance for businesses in the highly regulated financial services industry,” says PwC. Following the introduction of King III, PwC expects a greater focus on the remuneration of chief executives and executive directors. They identify this as the sixth global insurance industry trend – an “overhaul of rewards.” The company concludes that insurers will “base much more of their performance related pay on risk-adjusted measures, aligned to their business strategy.”
On uncertainty and regulation
Other factors that will influence insurance company strategy in the future include mounting uncertainty over tax, the role of Reinsurance and the tilting of the regulatory playing field (developments seven through nine). The South African Revenue Services is going to be under pressure to collect every last cent from local taxpayers as the government budget deficit grows. Treasury has already warned that South Africa’s budget deficit could skyrocket. In September, finance minister Pravin Gordhan offered this written response to a Parliamentary question: “The latest revenue data suggests that tax receipts will be at least R60bn below target this year, which will result in a considerably higher fiscal deficit than originally expected.”
PwC believes we could see a move away from reinsurance in the domestic environment. “Insurance companies believe that, with improved risk management, their appetite to retain insurance risk can be improved.” This explains the recent withdrawal of some of the larger global reinsurance players from domestic markets. “South Africa should expect an increase in supervision, with additional focus on solvency, governance, consumer protection and risk management,” says PwC. Local financial services companies have had to adjust their business practice for a range of recent legislative changes, including the Insurance Laws Amendment Act, the Consumer Protection Act, the Companies Act and the FAIS Act to name a few. It’s clear that the cost of compliance will escalate as regulation intensifies.
Editor’s thoughts: Financial crisis aside, it seems most challenges in the insurance space stem from regulatory intervention. Is government overactive in the financial services space? Add your comments below, or send them to [email protected]
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