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Insurers’ profit bonanza little more than a post-crisis clawback

20 October 2022 Gareth Stokes

The first reaction when comparing South Africa’s life and non-life insurers’ 2021 performance to 2020 is to uncork the champers and celebrate the apparent profit bonanza, but on a more reasoned assessment one would have to leave the bubbly on ice and accept the surge in headline numbers as little more than a gradual return to pre-pandemic levels. This is especially true for the non-life insurers included in The South African Insurance Industry Survey 2022, published recently by KPMG. The survey analysed the results of 34 non-life insurers, 19 life insurers and 4 reinsurers.

An annus horribilis for all insurers

“Some of the insurers have merely returned to pre-pandemic results, even though they are showing double-digit growth in profitability or revenue or whatever other measure,” said Mark Danckwerts, Partner and Africa Insurance Leader at the firm. He told the audience assembled for the official report launch that 2020 had been an annus horribilis for local and global insurers regardless of their focus, with life insurers paying and providing for billions of rand in COVID-19 related death claims, and non-life insurers doing the same for business interruption (BI) claims consequent the combined peril of lockdown and pandemic. 

Starting with the non-life insurance industry, KPMG reported robust growth in gross written premiums (GWP) in 2021, to ZAR131.6 billion, an increase of 7% on the prior year. The industry remained narrowly held, with the 10 largest non-life insurers boasting a market share of 76.5% of total GWP. “Following the significant volumes and values of BI claims in 2020, the non-life insurance industry presented robust 2021 results, with the sector increasing profits by more than double the 2020 figures to ZAR12.1 billion,” confirmed Danckwerts. The sector showed incredible resilience by getting back to pre-pandemic results, with profit after tax increasing by 110% on the back of a smaller industry loss ratio of just 57%”. Anecdotally, this triple-digit performance elicited grumblings from some in government who were concerned over the ‘super profits’ being earned by insurers, a misconception already addressed in the newsletter’s opening paragraph. 

Triple C of claims escalation: Catastrophe, cohesion and crime

KPMG commended five licensed non-life insurers for growing their GWP by more than the sector average of 7%, including Bryte, Discovery Insure, Escap SOC, Guardrisk and Lombard. FAnews readers will be familiar with these brands, with the possible exception of Escap, which is a cell captive insurer aligned with the state-owned power utility Eskom. “While the non-life industry has had a strong year, the pressure is on to remain resilient,” Danckwerts said. “Increasing crime, weather-related catastrophe events, the continued erosion of social cohesion in South Africa, and supply chain and power supply disruptions all paint a picture that will demand tenacity, skill and an increased focus on loss-preventing technology from insurers”. 

The life insurance industry results could languish in the doldrums for a year or two longer, despite some positive signs. According to KPMG, SA life insurers’ net written premiums were 10.4% higher for 2021 than the prior year, with 10.4 million new in force policies, up from 8.9 million in 2020. And the Association for Savings and Investment South Africa (ASISA) confirmed a 17% increase in new individual recurring premium risk policies and a reduction of 28.8% in lapsed policies for 2021. “The industry swung from a ZAR5 billion loss in 2020 to a profit of ZAR17.1 billion in 2021, a good result though it is important to note that for many life insurers, results have not yet returned to pre-pandemic levels,” said Danckwerts. In hindsight, 2020 was a shocking year, with several life insurers having paid or accrued for more claims than ever before. He said that life insurers will have to refocus their efforts on other drivers of profitability such as digital innovation, cost optimisation and pricing reviews to return to full strength. 

Generating profit through competitive pricing could, however, prove difficult for life insurers, given that reinsurers will want to start clawing back the losses they suffered in 2020 and 2021. The reinsurers took a bath in both years as they had to support both life and non-life insurers, with some digging into their investments to pay claims. To make matters worse, the reinsurers surveyed only grew GWP by 1% in 2021, the third consecutive year of declining real GWP growth. Against this backdrop, the insurance experts at KPMG expect a significant hardening of reinsurance rates in 2023. 

Key trends to keep insurers on their toes

There are a handful of macro trends that will keep insurers on their toes in the coming years. First and foremost, Danckwerts pointed out that the evolution (and interconnected nature) of global risks will have an increasing impact on South Africa’s insurance and reinsurance sectors, even though the country is relatively insulated at the southern tip of the costliest insured loss year on record due to the impact of weather catastrophes. One need only look at Hurricane Ian, which recently tore into the Florida coastline in the US, to appreciate the impact that this type of peril poses to insurers and reinsurers alike.

 The macro trends shared in the 2022 KPMG survey were listed under broad categories such as the economy, climate change and the erosion of social cohesion. Under the economy category, insurers will have to contend with higher energy prices, rampant inflation, unemployment and South Africa’s crumbling infrastructure, among others. The country’s possible grey listing by the Financial Action Task Force (FATF) also falls in this category and could have significant implications for insurers. The erosion of social cohesion is evident worldwide in the January 2021 Capitol Riots in the US; our own July 2021 riots; and more recently, Russia’s incursion into Ukraine and unrest in Iran. “We are witnessing an erosion of trust between human beings [which is of concern to] the insurance industry, which is built on that trust,” commented Danckwerts. 

The insurance industry is built around trust

It seems no 21st Century insurance sector discussion is complete without comment on climate change as a major contributor to extreme weather events. Even so, from a South African perspective, the ‘S’ is probably the most relevant factor in the broader environmental, social and governance (ESG) debate. “Social aspects are probably most relevant to local insurers right now, as opposed to the climate change or environmental aspects which it seems are more relevant to northern hemisphere players,” concluded Danckwerts. 

Writer’s thoughts:
It is easy to get caught up in a debate about a sector’s profitability, and in so doing lose sight of the value that the sector adds to the economy and society as a whole. Does the amount of profit reported by local life and non-life insurers trouble you, or do you take the more pragmatic approach that consistent profit is necessary for a sustainable insurance sector? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts

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