South Africa’s insurance industry remains healthy despite the challenging environment, says PwC report

19 March 2014 PwC

The financial results of South Africa’s major insurers for the year ended 31 December 2013 are a positive reflection of the financial health of the industry. They show that the industry remains robust despite a challenging operating environment, according to a report issued by PwC today.

Tom Winterboer, PwC Leader of Financial Services for Africa, says: "The outlook for the insurance industry remains stable despite the continued market uncertainty experienced during the course of the year, and a host of regulatory and reporting changes.
"Most insurers are currently working on the compulsory Solvency, Assessment and Management (SAM) Quantitative Impact Study (QIS) 3 submissions, which are due by the end of April 2014 and are planning for the light SAM parallel run that will commence in the second half of the year. They also need to get their business practices into gear to comply with Treating Customers Fairly regulations.”
These are some of the findings of the Third Edition of PwC’s ‘Insurance Industry Analysis’. The survey analyses the results of South Africa’s major insurers for the year ended 31 December 2013. The survey also identifies common trends, issues and challenges that are shaping the industry, as well as trends in the rest of Africa.
Overview of the long-term insurance sector

The financial results of the top five players (Discovery, Liberty, MMI, Old Mutual and Sanlam) were included in the survey.
These long-term insurers recorded combined group IFRS earnings of R24.4 billion, up 29% on 2012. Victor Muguto, PwC Long-Term Insurance Leader for Africa, says: "Local investment markets saw mixed fortunes. The JSE all share index closed 18% higher than in 2012.This followed on the 23% growth experienced in 2012. As a result of the strong market performance, insurers benefited from the higher average assets under management during 2013.”
Insurers had to deal with volatility in interest rates and emerging market currencies. Over the past few years they have significantly strengthened their capability to manage exposures to market risk within predetermined ranges. The combined group return on average equity increased to 21%, compared to the 17% achieved in 2012, and 20% in 2011, respectively.

Combined group embedded value earnings were strong in 2013 at R39.2 billion, despite the impact of higher long-term interest rates on valuations. "This result reflects the strong operating performances by their South African operations in 2013, as well as the benefit of strong equity markets,” adds Muguto.

The new business volumes which includes insurance and savings products, reflects a good result in challenging times. The 13% year-on-year increase is well in excess of CPI of 5.8%. "Given the impact of higher market discount rates, which reduce this value, new business performance was quite strong,” says Muguto.
The expected profit margin on new business written remains about the same as in 2012 at 3.1%. "Insurers are not only chasing new business but also focusing on quality. It appears that the intermediary exams of 2012 and 2013 are now paying dividends.”

The industry as a whole managed actual expenses according to what had been projected in their actuarial assumptions at the end of 2012. They also profited from better-than-expected mortality and morbidity experience across the board, which contributed about 5% to 2013 embedded value earnings.
Acquisition costs incurred by the businesses of the long-term insurers also increased by 12% to R14.3 billion in 2013. The Financial Services Board (FSB) is expected to introduce new regulations to address ‘conflicted’ remuneration, to ensure that intermediary incentives do not introduce bias in product advice and do not interfere with intermediaries’ primary duty to act in the best interests of the customer.
Overview of the short-term insurance sector

The results of the following five short-term insurance companies were considered in the survey: Absa Insurance Company, Mutual & Federal, OUTsurance Holdings, Santam and Zurich Insurance Company South Africa.

Dewald van den Berg, PwC Director, Financial Services Practice, says: "South African short-term insurers experienced another tough underwriting year in 2013. All insurers experienced further worsening in claims experience.” Their loss ratios increased by between one and four percent and by a combined 1.8% largely due to adverse weather conditions. The bulk of the 2013 catastrophic events took place in November 2013. These include: the Western Cape floods in November (R400 million); Gauteng hail storms in November (in excess of R2 billion); and the Limpopo floods in January 2013.
It is interesting to note that the increased use of smart device technology (together with weather service alerts) and responsible customer behaviour have assisted in avoiding motor claims. Insures noted that they have started to see a marked difference in the claims outcome for portfolios where predictive technologies are actively used.
Insurers have also started to become smarter in the way they underwrite risks. Improvements in catastrophe modelling are required to more appropriately assess and price for hail, flood and fire risks. In addition, some insurers are collaborating with local authorities to reduce systemic risk.
Despite the 12% growth in gross written premiums (GWP), acquisition costs and management expenses as a percentage of GWP remained constant at 29.3%. This is indicative of the higher cost of doing business, given the number of regulatory changes being implemented in the industry.
Growth across the African continent

South African insurers are steadily growing their foot print in the rest of Africa. Historically they have targeted the neighbouring SADC countries (like Namibia, Botswana, Swaziland, Lesotho and Mozambique) due to their close proximity. More recently, insurers have also invested in African countries where there is strong economic growth, such as Nigeria, Ghana, Kenya and Zambia. In countries such as Tanzania, Uganda, and Mauritius, insurers have capitalised on bancassurance models and favourable tax regimes.
The contribution to the value of new business ("VNB”) for life insurers from other African countries has increased over the past three years. Overall the VNB of African business as a percentage of the value of new business for South Africa ranged between 4% and 34% for the long-term insurers and 18% on a combined basis.
While insurers in South Africa are preparing for the implementation of SAM in 2016, similar regulatory changes are also taking place in other parts of Africa. "These developments will assist in aligning the regulatory environment and practices across Africa and should result in a stable regional financial services sector,” adds van den Berg.

Looking forward

Muguto concludes: "Given the low South African economic growth rate experienced in 2013 and weak prospects for improvement in the short-term, insurers need to become more innovative to grow market share.

"Insurers expanding into the African continent need to continue to optimise their structures, contain costs and deploy resources in the various businesses. The current low penetration rates and potential for high growth rates present attractive opportunities for focused insurers.”

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