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Insurance Markets
Sunday, August 1, 2010
Poised for growth

The rate of premium growth in the South African insurance market considerably outstrips its counterparts in the rest of Africa. The local insurance industry accounts for 91% of Africa’s life premiums and half of the regional non-life premiums.

The 2010 PricewaterhouseCoopers (PwC) survey, Strategic and Emerging Issues in South African Insurance, provides a comprehensive overview of the strategic issues and challenges facing the industry today. The industry has demonstrated resilience and is starting to show signs of strong recovery and growth, after experiencing some difficulties following the global financial crisis. Recent statistics reveal a welcome increase in new business sales for the second half of 2009 and for the first three months of 20102.
Victor Muguto, PwC Southern Africa Insurance Leader says, “The report was compiled from personal interviews with 30 managing directors and senior executives representing long- and short-term insurers, re-insurers and cell captives. It seeks to identify emerging trends and strategic issues over the next three years.”

Post global financial crisis insurance market

Respondents believe that the South African insurance industry largely escaped the more severe effects of the financial crisis as experienced in the US and Europe. “While investment performance and the overall profitability of most insurers were affected, we have started to see evidence of a return to profitability, as markets recover,” he comments. Some of the larger insurers have benefited from a flight to quality and used the market uncertainty to position themselves strategically for growth.
The industry remains robust and confident about the future. Client attrition and cost control, however, remain ongoing concerns. Participants are now devoting more time to acquiring new clients and managing risk as well as holding on to existing clients.
Most participants cited retaining customers and recruiting/training in the distribution channels followed regulation as the most pressing issues. Almost three quarters of the participants believe that regulation will increase substantially over the next three years. “In our 2008 survey, the National Credit Act was a primary concern,” says Muguto. “In this 2010 survey, most participants cited the proposed transition to the Solvency and Assessment and Management (SAM) regime as likely to have a significant impact. However, although it is very early days to predict the full impact of SAM, most participants believe that the regime will be of great benefit. They indicated that SAM will bring more confidence and stability; allow for a more professional approach to risk management and enable insurers to better understand and manage their risks.
In addition to SAM, the unfolding proposals on the Social Security Reform and the National Health Insurance programme, means that the operating environment has become more complex and unpredictable.

Direct marketing channels and consumerism

“As more insurance products become commoditised and subject to intense competition and aggressive pricing, low cost distribution and efficient servicing will be critical,” says Muguto. “Some of the larger ‘traditional’ insurers have already launched direct distribution channels as part of their growth strategy. Consumerism was also noted as rising, fuelled by legislative changes affecting protection of consumer rights, as well by consumers themselves becoming better informed and growing in confidence regarding their choices. The rising consumerism is also further facilitated by online access to competitive insurance offerings.”
Some participants implied that they would seek strategic investors if it allowed them ready access to other markets, particularly in Africa. Expansion into the rest of sub-Saharan Africa is already gaining traction among the bigger insurers. Some of these companies already have significant relationships in key African markets, which they will continue to develop.
As most insurers pursue growth strategies, risk management has started to play an increasingly more prominent role. Participants noted that risk management has added substantially more value to their businesses over the past three years. Companies are now monitoring and, in most cases, measuring a wide variety of risks including political, environmental and latent claims risks.

Strengths and weaknesses

Several companies highlighted financial stability, competitiveness and innovation as the major strengths of the South African insurance industry. The industry is widely seen as well capitalised.
The most common weakness cited, which could impact on growth strategies, was the skills shortage in the country. It is difficult to attract fresh and competent talent. One long term insurer mentioned that out of their 500 agents, only 150 were performing satisfactorily. Another noted that its brokers were aging and that they were unable to attract new committed and competent replacements.
Most short term insurers expect growth in annual premiums to be within the 15%-20% range for 2010, and anticipate little change over the next three years. Five long-term insurers see growth in the 20% range for 2010. However, most insurers expect growth to slow down by 2013, with only three long-term insurers expecting growth above 20%.
Muguto concludes, “Looking ahead, while the industry can expect many more challenges, we are optimistic that South African insurers can adapt quickly.”

Copyright © Insurance Times and Investments® Vol:23.8 1st August, 2010
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