South Africa’s major insurers remain resilient despite global economic uncertainty

Despite the recent economic uncertainty, South Africa’s major long and short-term insurers have remained well weathered from the recent global economic uncertainty, according to a report issued by the Professional Services Firm, PwC today. “The greatest

He adds that in preparation for the implementation of the new Solvency, Assessment and Management (SAM) regulatory regime, insurers have skilled up on actuarial resources, invested in information technology and introduced more stringent risk management procedures in line with these requirements. In the wake of the costs incurred by European insurers and how far they have made their way down the legislative pipeline, it is anticipated that significant costs will also be incurred to implement SAM in South Africa.

The last number of years has been tough for investors in the South African insurance sector. While this is principally a reflection of economic uncertainty and market volatility, financial reporting has also played a part. Here, confusing and disjointed reporting can make it difficult to judge an insurance company’s strategy and to discern the true value being created in the business.

Achieving strategic clarity will make it easier to differentiate the business, cut through to the real drivers of value and to focus on sustainable value creation.

These are some of the findings of the First Edition of PwC’s Insurance Industry Analysis publication. The report analyses the results of South Africa’s major insurers for the year ended 31 December 2011. The publication also includes some market developments that PwC’s Insurance Practice expects during the course of 2012.

Overview of long-term insurance sector

The financial results of five of the larger players (Discovery Holdings, Liberty Holdings, MMI Holdings, Old Mutual and Sanlam) were included in the publication.

The present value of new business premiums, which includes insurance and investment contracts, for the insurers grew by 10% to R141,630 million. Victor Muguto, Long-term Insurance Leader in PwC’s Insurance Practice says: “The year-on-year increase of 10% reflects an increase in demand for life insurance products. Consumers are in a slightly better financial position compared to the previous two years as a result of the reduction in household debt levels. Consumers therefore had more disposable income to purchase insurance products.”

He points out that insurers were able to increase the present value of new business premiums with a margin on new business that was 13% higher than in 2010 at 2,6%. Therefore insurers were not only chasing new business volumes, but were also focused on the quality of the business written.

Between 2007 and June 2010, expenses incurred by large insurance offices tracked the Consumer Price Index (CPI). However, over the past 18 months, expenses incurred by long-term insurers grew more than CPI. Muguto says this is not surprising given all the regulatory changes that are unfolding.

Overview of the short-term insurance sector

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

Gross written premiums (GWP) increased by 5% during 2011 to R36,6 billion for the year says Ilse French, Short-term Insurance and Investment Management Leader at PwC. This increase compares with a CPI index of 5% for 2011.

The growth in GWP can largely be attributed to Santam, which posted a 12% increase in GWP and dominated the market with a 22% market share. Outsurance posted double-digit GWP growth in the six months to December 2011. This strong growth was achieved while maintaining an underwriting margin in excess of 20%. Mutual & Federal posted annual GWP growth of 3% over the past two years and the company indicated that it has increased its focus on achieving premium growth through alternative distribution channels. Although Zurich’s business volumes declined by 16% to below R4 billion, the company has been able to reduce its underwriting loss over the past two years and almost achieved a positive underwriting margin for 2011. Most companies achieved similar claims ratios in 2011, compared to 2010.

Looking forward

Winterboer says: “Premium growth this year will be under pressure due to the inflationary pressure in the economy, the regulatory examinations affecting intermediaries, the current soft short-term insurance cycle in the country as well as the continued economic uncertainty.”

A number of insurers are pursuing affinity partners as an alternative distribution channel in order to tap into new markets and defend their existing share. Insurance groups are also pursuing new opportunities in Africa, India and China. However, given the global skills shortage in the insurance industry, and competition from other significant global insurance players, it remains to be seen whether these ventures will become significant contributors to profits in the short-term.