Insurance sector displays resilience in face of downturn – KPMG survey

The South African short- and long-term insurance industries, while battling against constrained economic conditions which prevailed in 2009, face more stable prospects in 2010. In addition, proposed new regulatory capital requirements have broadly been welcomed by the sector although uncertainty exists around the costs implementing it will bring, where players are in relation to the process of implementation and the features of the post implementation landscape. The insurance industry as a whole has, however, approached regulatory reform with optimism that benefits over the longer term will far outweigh the costs. These are some of the findings of The South African Insurance Industry Survey 2010 launched by KPMG in South Africa.

The results of the survey are based on the analysis of the 2009 annual financial results of participating insurance companies complemented by other publically available data. The survey also details some market developments that KPMG expects in 2010.

The short-term insurance sector aspect of the survey includes nine of the ten largest players in the South African market. Participating insurers reported a drop in underwriting profits to R164m in 2009 from R1 141m in 2008. “Apart from the tough trading conditions, this drop can be explained by looking at the high frequency and severity of industrial property claims that affected this sector. Motor risks also continued to be a concern to the industry as insurers look for ways of better risk selection, pricing and reducing the cost of vehicle repairs. It is noted that the short-term insurance industry has welcomed a government initiative to explore the introduction of a compulsory motor vehicle insurance scheme which it is hoped will ensure the long-term sustainability of motor insurance.”

One of the key challenges for South African short-term insurers is to improve the efficiency of doing business. “In the absence of strong premium growth opportunities, emphasis needs to be placed on the containment of costs to ensure acceptable underwriting margins and returns to shareholders,” said Dixon. Not surprising then we are seeing a number of insurers engaged in business transformation programmes. Better use of information technology can not only assist in this regard, but also improve the total customer experience.

The emergence of the South African recession and continued investment market volatility did not provide a sound launch pad to the long-term insurance market going into 2009. This pressure manifested in increasing lapse rates. “Furthermore, the number of single-premium products sold was down by 18% in the first part of 2009 compared to the equivalent period in the previous year,” said Dixon. “This could be explained by the reluctance of policy holders to look at long-term investments in strained economic times in favour of liquidity.”

But 2009 was a year of two halves for the life insurance industry. In tandem with the recovery of the investment markets, there was a revival in the long-term insurance market in the second half of 2009, the survey found. The second half of the year recorded a 22% increase in single-premium income compared to the first half of the year. To complement this, lapse rates decreased by 3% in the latter half of 2009 compared to the first half. “This is a heartening finding as it shows that the efforts of the industry in being flexible as to how it treated policyholders had a positive impact on the sector,” observes Dixon. The resilience displayed by the sector in the latter half of 2009 bodes well for 2010 although new business will be tough going, especially high margin business, he said.

An ongoing feature probed by the survey is the implementation of the Solvency Assessment and Management (SAM) regime in the South African insurance industry. “SAM is in effect the equivalent of the European Solvency II regulatory regime and the Financial Services Board in South Africa has initiated a project that aims to ensure that we will have a framework for our environment by 2014.”

The survey found that most players in the industry are in favour of the proposed framework with 88% of respondents in various stages of implementation. While there is uncertainty about the impact of the new regulations on the industry, 48% of respondents expect benefits to outweigh costs and 32% expect benefits to equal costs.

“While the companies surveyed indicated that they were concerned with where they are in the process of implementation, it is pleasing to note that they are being pro-active about implementation. The uncertainty is understandable as it will be a long process and it covers unchartered waters,” said Dixon.

The implementation process in South Africa has been deliberately phased to be behind that of Europe so that lessons learnt there can be adapted for the South African context. “The regulator is also trying to ensure that it is as consultative a process as possible,” says Dixon. “While we understand the apprehension that the survey results have revealed, the sector should not feel that they are alone in the process of SAM implementation. We can draw on the experiences of sector colleagues from the banking industry as it relates the Basel II implementation and the Solvency II guidance material from Europe.”

“Overall, we are happy that the survey has confirmed our feelings about the resilience of the industry and its ability to be pro-active towards regulatory change.”

For a copy of the survey, please visit http://tiny.cc/a0j4h