The healthy state of the insurance industry
FAnews recently attended the launch of the annual KPMG Insurance Survey, and a few interesting insights into the industry were presented.
By all accounts, the insurance industry has fared well over the past year, and the outlook is not bleak.
Short-term contentment
South African Gross Domestic Product grew by 1.8% in 2014; according to Antoinette Malherbe, Director of Financial Services at KPMG. One could mistake the increase in the gross written premium of 6.9% for the primary short-term insurance industry as a stellar performance.
However, she adds that this is far below the aspirations of the industry and is a direct reflection of the struggle to increase market penetration in a country where poverty levels are on the rise.
“The fact that South Africa is battling to achieve good economic growth is at the heart of why the insurance industry is battling for growth and is seeking alternative markets to achieve its growth aspirations,” says Malherbe.
The hunt for alternative markets was mainly achieved through improved efficiencies in the claims handling process, rate increases in excess of consumer price index inflation, the offloading of unprofitable businesses and a renewed focus on commercial lines businesses. This was complimented by the lack of weather related catastrophe events in 2014.
Insurers reported gross written premiums of R81.8 billion in 2014, which was an increase of 8% over the similar 2013 figure.
Thriving long-term sector
While KPMG points to the fact that the short-term sector has to be content with the cards it has been handed; Gerdus Dixon, National Head of Insurance at KPMG, points to a thriving long-term sector which has recorded its third year of growth.
Dixon points out that the total assets of the insurers covered by the survey increased from R1.71 trillion in 2013 to R1.87 trillion in 2014. He adds that total profit before tax in the sector was R47.36 billion.
The Association for Savings and Investments South Africa (ASISA) covering 2014 show net positive client cash flows declining by 29% from the R45 billion reported in 2013 to R32.1 billion in 2014. “On closer scrutiny, the reduction in net cash flows stem from group/institutional business which for the first time in three years reported net client outflows of R19.1 billion,” says Dixon.
The buoyant retail single premium market continued with a 20% increase in the single individual premium investment product premiums reported. “The challenge remains that the newer single premium products often have margins that are substantially lower than the older generation products that are maturing,” says Dixon.
Talking about an evolution
Derek Vice, Senior Manager Financial Services at KPMG, points out that the South African reinsurance market is continuously evolving and is preparing itself for its own wave of regulatory reform. The Financial Services Board first presented its Reinsurance Regulatory Review proposals in 2014, and were released for public comment earlier this year. The proposals are set to become legislatively enacted concurrently with the implementation of the new Insurance Bill.
Vice points out that these proposals could have far reaching consequences on the local reinsurance market. In particular, the proposed adjustments to the credit ratings for counterparty default on reinsurance assets clearly favour locally incorporated entities and will affect the go-to-market strategy and pricing of reinsurance.
The introduction of branches as a reinsurance incorporation option should continue to increase competition. The scrapping of the existing approved vs non-approved framework will affect the way reinsurance policies are written. Proposals on splitting composites are still being debated.
Editor’s Thoughts:
While we are seeing an environment where growth can be scarce, by the looks of the KMPG report, the South African insurance industry is in a healthy state. Perhaps we are just not used to the same level of growth that we saw during 2000 where there was good economic growth, but we will have just adjust to a new normal as the challenges that are inherent in the industry do not seem to be going anywhere. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
