Flying the flag high when the world looks to Africa
We all know that the South African insurance industry is an industry steeped in tradition and is the most established insurance industry on the continent. But is the industry growing? And what is our growth position in terms of the global market?
According to the recent Analysis of South African Insurers report, which was released by auditing firm Pricewaterhouse Coopers (PwC), South Africa’s major insurers posted a solid financial performance for the year ended 31 December 2014.
The results are indicative of continued growth initiatives and operational improvement in the industry, despite tough market conditions and economic uncertainty.
Long-term resilience
In order to determine the profitability of the long-term sector, PwC analysed the financial results of Discovery, Liberty, MMI Holdings, Old Mutual and Sanlam.
Dewald van den Berg, PwC Director, Financial Services Division, points out that these long-term insurers recorded combined group International Financial Reporting Standards (IFRS) earnings of R28.4 billion, up 17% on 2013.
Victor Muguto, PwC Long-Term Insurance Leader for Africa, adds: “The JSE All Share Index closed 7.6% higher than in 2013. The combined invested assets of the long-term insurers grew by 10.4% from R1.77 trillion in 2013 to R1.95 trillion. Total investment income earned amounted to R186.7 billion representing a return on average investments of 10%. This is reflective of subdued equity market performance in 2014 compared to 2013.”
Short-term happiness
The results of the following four short-term insurers were considered in the survey: Mutual & Federal, OUTsurance Holdings, Santam and Zurich Insurance Company South Africa.
Van den Berg says: “After experiencing a difficult year in 2013, insurers improved their performance considerably in 2014. One of the key factors contributing to the much improved results has been the absence of major catastrophe events. The only catastrophe event of note during the 2014 year related to the earthquake felt in the Gauteng region.”
Catastrophe events of the past few years have led insurers to restructure and optimise their reinsurance arrangements.
Van den Berg adds that in general, the claims ratios of short-term companies have improved significantly, decreasing from 68% in 2013 to 63% in 2014. This resulted in the combined IFRS earning for the year of R3.1 billion, which increased by 23% on 2013. This was largely due to the improved underwriting margins. The underwriting margins increased from 4.6% to 7.6% in 2014 as a result of the reduced claims experience.
Fighting from the ropes
Some would say that it is impossible to describe the South African industry as an industry that is fighting from the ropes in terms of retaining its position in the global market and on the African continent. But the reality of the situation is that we are in this position.
According to the PwC research, South Africa had a population of 53 million in 2013 with a Gross Domestic Product (GDP) of $351 billion. Premium volumes of both short-term and long-term insurers in 2013 amounted to just over $5.4 billion; this means that the industry grew by 11% over that period to R50.2 billion. South Africa also has the distinction of being one of the most mature markets in the world where the insurance industry makes up 15.4% of the country’s GDP, which means that insurance penetration in the country is high. However, we only have a GDP growth of 1.4% which means that our insurance penetration is more likely to stabilise than increase.
In contrast, the research points out that Nigeria had a population of 171 million in 2013 and had a GDP of $509 billion. This is far superior to South Africa, but with a bigger population. Gross underwritten premiums for the Nigerian market in 2013 came to $1 863 million, still much lower than South Africa as the market has a penetration 0.6%. But Nigeria is a growth market; research shows that GDP growth in 2013 was 5.4% and was 7% in 2014.
Kenya is in a relatively similar position than Nigeria. Their population in 2013 was 44 million with a GDP of $53 billion. Gross underwritten premiums for that market came in as $1 520 million. Their market penetration is also significantly lower than South Africa’s at 3.4%. But again, this is a growth market. The PWC research shows that Kenyan GDP growth in 2013 was 4.6% while their growth in 2014 was 6.2%
What does this mean for South Africa? To put this into context, South Africa currently holds a 1.17% share of the global insurance market. Nigeria holds a 0.04% share while Kenya holds a 0.03% share. But, with the growth of Kenya and Nigeria advancing at a rapid pace, how much longer will we hold the distinction of holding the highest percentage of the global market on the African continent?
Where can we find growth?
Van den Berg adds that the outlook for the insurance industry remains positive despite difficult operating conditions experienced in the past year, heightened by labour disputes and inflationary pressures on consumers. “In addition, insurers have to contend with a host of regulatory changes, as well as proposed amendments to tax legislation.”
But where are the growth markets for insurers? Muguto points out that 78% of Sanlam’s value of new business (VNB) is made up of business generated within South Africa while 22% of the company’s VNB came from the rest of Africa. Old Mutual is in a similar position where 86% of the company’s VNB came from South African business while 14% came from African business.
There is also increasing commitment from other insurers to grow the value of their African business. Although African VNB with MMI Holdings and Liberty was smaller than Old Mutual and Sanlam, there are indications that they have committed to African growth.
Editor’s Thoughts:
While the South African insurance industry is growing, infrastructure growth in South Africa needs to try and keep pace with other African countries. Infrastructure development means more insurable assets, so there is a gap in the market for our industry to thrive, provided government has growth on its mind. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
