Survey paints a sobering picture as challenges plague the industry
The insurance and financial services industry plays a vital role in South Africa as it provides necessary cover for a growing population which demands world class coverage and access to state of the art medical facilities. However, the industry needs to d
It is safe to say that while the industry is doing the best it can to overcome these challenges; the immediate outlook is hardly encouraging. This was the view of auditing giant KPMG which recently released the 2012 edition of is annual insurance survey (survey) which painted a sobering picture of the industry.
Short-term pressures
The Short-term industry sustained significant pressures during 2012 and will hope for a better performance in 2013. According to the survey, growth in the Short-term insurance industry has been under pressure with the industry recording a disappointing increase of net written premiums in 2012 of 6.9%.
According to the survey, deteriorations in both the claims ratio and expense margins have culminated in a worsening of the underwriting results for the 2012 year increasing the combined ratio by 2.7%. The participants (hereafter referred to as the industry) reported gross written premiums of R71.6-billion which is an increase of 7.9% when compared to 2011’s figures.
The survey adds that the loss events in Q4 of 2012 significantly tainted the profitability of the Short-term sector’s yearly performance. The industry was inundated with claims after the hail storms in Gauteng and the floods in the Eastern Cape. The year concluded with the St Francis fires where damages are estimated to reach at least R500-million. Floods and hailstorms in Ladysmith also played a role in this.
While Short-term insurers are hoping for a better year, the survey points out that the industry should not put the champagne on ice just yet. Continued competitive rates, a subdued outlook for economic growth and a spate of regulatory requirements will ensure that the insurance industry remains challenging. Looming on the horizon is the mandatory QIS 3 and the implementation of treating customers fairly.
Long term bulls running rampant
While the Short-term sector was under significant pressure, the long term industry bulls were running rampant as the survey showed that it reported a 70% aggregate increase in profit before tax that increased to R50.1-billion, which was up from R29.5billion.
This was driven by a few significant factors. The first significant factor was a strong performance during the second half of the year which followed on from a stable environment in the first six months. This saw the JSE All Share Index increased by 23% over the calendar year. The second contributing factor is the fact that despite the tough operating environment that the country is currently experiencing, the long term industry managed to increase its new business sales by 3%. The third factor was the ability of long term insurers to cash in on the strong performance of subsidiaries which was also boosted by the strong performance of the JSE.
The fourth contributing factor was the fact that direct insurers are looking for scale. The fifth contributing factor was that bancassurers and insurers with strong credit life footprints have continued the momentum created in previous years. The fifth contributing factor was that lower yields for longer term bonds with the 10 year bond yield decreased by as much as 1.3% during the year. This resulted in lower discount rates being applied in policyholder liability calculations which assured profits from insurance books with substantial negative reserves for future asset based fees but had a detrimental effect on the valuation of insurance books with guarantees.
Looking forward, the survey points out that the tendency of insurers diversifying their income base will continue in 2013 as insurers capitalise from a unique liquidity risk position. The payment profile of insurance contracts allows insurers an ability to project the outflow of funds when compared to other industries more freely. KPMG added that it has noted that as a consequence, insurers are increasing their exposure to structured transactions and advancing credit. 2013 may also see more insurers amend their group structure where their current structure leads to capital inefficiency or additional regulatory oversight.
Editor’s Thoughts:
Surveys must always be approached with a certain measure of scepticism because you are never sure about the size of the sample area included in the survey and whether it is significant enough to be seen as a true reflection of the industry. However, the KPMG survey included economic info of 90% of the industry’s economic activity, so it provides a fairly accurate view of the industry.
Barring an industry changing event, it is clear that while the Short-term industry will continue to be under significant pressure and the bulls in the long term industry will not be returning to Pamplona any time soon. What can the Short-term industry do to overcome the challenges which assail it? How will hardening rates affect the Short-term industry? Have we seen the extent of the long term industries growth? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughtsjonathan@fanews.co.za.
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