Insurers enjoy a premium and profit resurgence
After a year marked by subdued economic growth and shifting regulation, South Africa’s insurance industry still managed to increase premiums and improve profitability. The latest KPMG Insurance Industry Survey presents an analysis of the financial statements of 28 non-life insurers, 16 life insurers and four reinsurers, accompanied by a series of thought-leadership essays exploring key industry themes and responses.
Consistent reporting under IFRS 17
FAnews attended the virtual survey launch to learn more about the findings. “This year’s process has been significantly streamlined in that all participating insurers are now producing their results under IFRS 17, allowing for more consistent and insightful comparisons,” said panel moderator Kashmira Naran, as she described the operational realities facing survey participants going back decades.
Insurers and reinsurers had faced constant challenges, from the Y2K scare in 1999 to the global financial crisis (GFC) in 2008 and the ‘up in the air’ risk landscape of the 2020s. Naran singled out the rising frequency and severity of extreme weather events, social and political challenges, the Covid-19 pandemic, technology such as AI and blockchain and the IFRS 17 implementation to illustrate the “continuous state of transformation” under which industry stakeholders conduct business.
“The expectations for insurance companies are on the rise,” she said. “Regulators are asking for safer business practices; customers are demanding more socially responsible behaviours; and employees and other stakeholders are looking to companies to align with their values.” South Africa’s insurers and reinsurers were commended for their resilience and savant-like ability to adapt to both external and internal forces. The audience was reminded of the role that insurers play in protecting businesses and consumers, and in enabling economic activity.
An ex-growth insurance market
Marius Botha, a Partner in Financial Risk Management at KPMG SA, said the 2024 industry results were a lot healthier than in recent years. He singled out the end of the pandemic and stronger investment returns as factors working in the industry’s favour.
“The market is still ex-growth,” he said, describing how firms that were doing well were doing so at the expense of competitors who were struggling with persistency. There is also a growing list of compliance and reporting challenges. Addressing operational risks linked to cyber and fraud, and implementing Joint Standard 1 of 2023: IT Governance and Risk Management for Financial Institutions, though necessary, were costly.
Commenting on capital management, Botha said many firms were still in acquisition mode. “If you cannot sell enough business, you can go and buy books of business or another company, and try and create shareholder value in that way,” he said. Insurers are also looking at ways to reduce exposure to underperforming parts of their business. Skills development and transformation remain key focus areas in a highly complex industry, and insurers face significant pressure to attract, re-skill and upskill staff.
Artificial intelligence (AI), automation and digitalisation continue to disrupt and impact traditional distribution and underwriting models. The KPMG panel took a keen interest in innovations occurring in the payments and premium collection space following the South African Reserve Bank’s interest in PayShap, and the emergence of digital wallets. Climate change-related risks are top of mind among non-life insurers, but all stakeholders are affected by transition risks and the need for environmental, social and governance (ESG) reporting.
Climate risk and ESG reporting
Naran asked Poogendri Reddy, Associate Director: Sustainability Services at KPMG SA, about the future of climate risk management and ESG reporting. “South Africa has a long history and a good, solid foundation in sustainability reporting, and this has been driven outside of active legislation for decades now,” Reddy said. Estimating the financial impact of catastrophic weather events has long been part and parcel of non-life insurers’ underwriting methodologies. More recently, insurers have been challenged to process large climate data sets and come up with models to quantify financed emissions.
Reddy said local businesses and insurers were presenting a fragmented view of climate risk and ESG information, with some detail carried in integrated annual reports and some in standalone sustainability reports. She expects reporting to be consolidated under future standards that will hopefully consider the unique challenges facing the insurance industry. “Insurers must get their processes and systems in place for adequate reporting … so that when mandatory reporting comes, everybody is able to supply information consistently across the market,” Reddy said.
Brendon Thorpe, an actuary and IFRS 17 expert, offered more concrete insights into managing natural catastrophe risks. “One of the fundamental requirements for a risk to be insurable is for there to be uncertainty in that event,” he said. Hurricanes in Florida and the wildfires in California point to a breakdown of the fundamentals, with large natural catastrophe events shifting from rare and unexpected to commonplace. Thorpe noted that non-life insurers had to respond through premium escalation or reduced cover.
A threat to actuarial pricing
A worrying development out of the United States is that regulators are trying to compel insurers to cover certain perils or be prevented from underwriting in a particular state. This raises some very interesting questions for actuarial teams who end up having to price for an unpriceable risk.
“We are fortunate in that we are not as burdened with catastrophic events as the US is, but we can cast our minds back a couple of years [to find events like] flooding in KwaZulu-Natal or severe hailstorms in Gauteng,” Thorpe said. He warned that higher frequency and severity losses risked “crowding out the ability of insurers to provide coverage.”
Nishan Bikhani, an Audit Partner in the KPMG SA Insurance Practice, steered the conversation away from risk towards reward, offering some insights into insurers’ latest results. “We have seen really robust results which a lot of insurers are pretty proud of,” he said. 90% of the 28 non-life insurers participating in the survey reported improved results for 2024. Overall non-life insurance revenue increased by 9.8%, from R140.4 billion in 2023 to R154.2 billion in 2024, and profit after tax increased from R14.2 billion to R17.7 billion.
The main contributors to robust non-life insurer results include a benign claims experience through 2024 and an ability among leading insurers to price for inflation. “Insurers have done a lot of good work in claims management and pricing appropriately for risk,” Bikhani said. The market has also benefited from stabilising reinsurance rates. KPMG reported that the underwriting result was driven by a favourable claims experience and healthy top-line growth amidst fierce market competition.
Distribution through digitalisation
Life insurers had a good year too, boosted by claims normalisation, distribution efficiencies through digitalisation, resilient premium growth, stabilising reinsurance rates and strong investment returns. KPMG reported positive fair value gains on investment portfolios and improved embedded value (EV) growth across most life insurers.
Investment returns stood out as a major profit driver for both life and non-life insurers. “We saw a great equity performance in 2024, and even the yield performance was superb,” he explained. Naran asked what insurers were doing to grow their EV in a slow economic growth environment. First and foremost, they are focusing on enhanced distribution through digital sales channels. Second, they are using acquisitions and corporate activity to go beyond organic growth to gain market share.
It was left to Botha to interpret matters from the consumer perspective. He urged insurers to remember that while profitability and shareholder value were important, the industry ultimately exists to serve its customers. Over the coming years, insurers will have to balance consumer and stakeholder outcomes by, for example, ensuring their investments into AI yield cost and efficiency gains for consumers in addition to profit.
Benefitting the end consumer
“The insurance industry exists because of its customers,” Botha concluded. “Insurers need to decide to what extent they are going to take some of those profits and invest them for the benefit of the consumer.”
Writer’s thoughts:
A profitable insurance industry is good for businesses and households, and we can only hope the current trend persists into 2025 and beyond. Do you expect insurers to pass any of their good fortune on to your clients? And if yes, how? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
