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SA banks and insurers set to ride out the 2022 inflation shock

20 May 2022 Gareth Stokes

There are a couple of stories dominating world news circa May 2022 and they are inextricably intertwined. The first, and probably most notable, is the Russia-Ukraine conflict which had entered its 87th day by the time of writing; and the second, inflation. Inflation, defined by as “a general increase in the prices of goods and services in an economy” was readying for an onslaught before the conflict started, due largely to the impact of the 2020/2021 COVID-19 pandemic on global supply chains, and the record stimulus that governments pumped into their economies to survive the crisis. The war added fuel to the fire in the form of surging commodity, gas and oil prices.

Big jump in oil and wheat prices

We will mention two commodities to illustrate the extent of the problem before unpacking how these prices surges impact consumer prices; the inflation outlook for the remainder of 2022; and the consequences of higher inflation for South African banks and insurers. In the six months since December 2021 a barrel of brent crude oil has jumped 78%, from USD65.57 to USD111.57 while wheat has surged 53%, from USD778.50 to USD1191.25 per bushel. Ordinary consumers experience these rising energy and food inputs costs in their municipal bills and at the pumps and tills. And for once it seems South African consumers are not the worst afflicted. 

In March this year, US inflation topped out at 8.5% year-on-year, the highest rate recorded since 1981. By comparison, the Consumer Prices Index (CPI) in the UK rose by 9.0% for the 12 months to April 2022, up from 7.0% in March, and taking inflation to its highest level in 40 years. The US expects price rises to moderate through the remainder of the year but warns that inflation is establishing a higher baseline. In the UK, the Bank of England, expects inflation to peak at 10% in the second half of 2022. Somewhat counterintuitively, South Africa’s inflation outlook seems benign. Our consumer prices rose only 5.9% in April, though we were rewarded with a half percent precautionary hike in the bank lending rate (Repo rate) in May. 

Will government extend fuel price relief?

High inflation hits consumers’ pockets hard. A higher US dollar oil price is felt first at the pumps and then slowly works its way into the price of every good and service offered in an economy. South African consumers are already on high alert for petrol price shocks, with Efficient Group chief economist, Dawie Roodt, warning EWN readers of a potential ZAR3.50 per litre spike in June. This whopping price hike includes a R2.00 price adjustment based on the oil price and rand-dollar exchange rate plus the reversal of a two-month-long government subsidy of R1.50 on the general fuel levy. PS: This would represent a 15% increase over one month, on top of an already inflated petrol price. 

Given forecast for food and fuel prices, the recent depreciation of the rand and May’s 0.5% interest rate hike we cannot see any way but higher for local inflation! Despite this writer’s emotional response, the South African Reserve Bank (SARB) remains confident that it can keep inflation within its 3% to 6% target range. Consumers can, however, expect further interest rate hikes through the year.  So, what does inflation mean for South Africa’s banks and insurers? Readers may be interested to learn that banks can do well during periods of higher and / or rising inflation. Late November 2021, ratings agency Moody’s issued a report on the US bank sector, including this conclusion: “Elevated inflation will not necessarily hurt bank profitability, but abrupt rate hikes or inexperienced bank management could”. In other words, as long as banks anticipate the interest rate cycle and rate hikes take place sensibly, they should be ok. 

Locally, one need only look at the outperformance of the South African financial services sector over the past six months, in what many asset managers have described as a shift from growth to cyclical shares. The index of 15 JSE-listed financial shares is up 17.5% over the half-year to 19 May 2022, with listed banks such as ABSA (+22.4%), Nedbank (+27.1%) and Standard Bank (+18.4%) are all doing well over the same period. 

A wealth of inflation news and views

The web is chockfull articles discussing the impact on life and non-life insurers. In an article published on, Chris Price, Insurance Solutions Strategist at AXA Investment Managers commented that rising inflation had “clear implications for long-term investors [which insurers are] as far as assets are concerned, as well as on the liability side [due to] casualty losses being correlated with inflation”. And US-based property and casualty insurer, Conning, observes that non-life insurers can be hurt in many ways by inflation. “Inflation impacts the real values of the portfolio, income and returns; the impact on liabilities can be more complex, and it can have greater effect on insurers with longer tail risk,” they write. This long-tail risk exhibits as claims where the total incurred loss is not clear until many years following a claim notification. 

Swiss Re, meanwhile, in a 2012 presentation titled Inflation risk and the impact on insurers, offered the simple explanation we were looking for. They explained that inflation might affect insurers through various channels. For example, non-life insurers face rising claims costs due to the impact of inflation on repair and replacement, especially in the motor class. For life insurers, inflation is a benefit, if accompanied by higher interest rates. “Insurers can partially mitigate inflation risk through contract design, reinsurance and investment strategy,” wrote Swiss Re. Both life and non-life insurers can benefit from higher inflation and the resulting higher interest rates (yields on government bonds) because they invest significant sums in cash, bonds and other ‘safe’ investments, which contribute to their profits alongside their underwriting activities. 

Non-life insurers will prevail

This does not mean that non-life insurers are not concerned by the potential operational consequences of higher inflation. In its 2021 Annual Report, Santam writes that “inflation influences consumer spending, which may result in increased cancellations and returned debit orders”. Later in the report they continue: “higher expected interest rates and inflationary pressures will decrease disposable income in South Africa”. Less disposable income means less money available for risk protection products. Overall, the insurer aims to achieve real growth from its conventional insurance business, with or without inflation. Their stated goal is to achieve premium growth of CPI (currently 5.9%) plus GDP (around 2%) plus 1%-2% extra for good measure. And that should deliver 8.9%-10% for the 2022 year. 

To conclude: it looks like business as usual for banks and insurers as ordinary consumers bear the brunt of higher inflation due to the combination of lower disposable income and higher prices. High inflation or not, you can rely on banks and insurers to take the actions required to keep their margins and return on equity in the sweet spot demanded by their shareholders.

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We have watched with interest as each of the country’s large life insurers report their 2021 life claims statistics, with soaring claims and claims values. That got us thinking: how do the big life insurers compare against one another, from an IFA perspective?


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