Global and African insurers are grappling with new disruptive social, technological, economic, environmental and political changes. These megatrends are already reshaping the competitive environment for insurers, reinsurers and the markets they operate in across Africa. The results of PwC’s sixth biennial Strategic and Emerging Issues in South African Insurance show that, despite the magnitude of these changes, the insurance industry remains well capitalised and financially sound.
Given the low GDP growth outlook for 2014 and 2015 in South Africa, expansion to high growth countries in Africa is considered a key strategic driver over the next five years.
Victor Muguto, Long-term Insurance Leader for PwC Africa, says: “Expansion into the rest of Africa continues to be a key trend, with most of the major insurers focusing on selected high growth markets.”
The top three markets for expansion by South African insurers were identified as Kenya, Nigeria and Ghana. Insurers are attracted by projections of strong GDP growth, low insurance penetration rates and the expected increase in demand for insurance. But the increasingly onerous regulatory burden was cited as a significant barrier to entry into all three countries. The low level of insurance awareness was also an issue in Nigeria with the shortage of skills a concern in all three markets.
Only a few large insurers have ventured into fast growing markets in Asia such as India and China.
Strengths and weaknesses
“The survey comes at a time when South African insurers are grappling to adapt to a declining local economy and heavy regulatory requirements. It is encouraging to see South African insurers remaining well capitalised, financially sound and confident about future growth under the circumstances,” says Muguto.
Most insurers predict growth in the 7% to 10% range for 2014, and annually through to 2017 in the local market. Large insurers are targeting more growth from elsewhere in Africa.
While insurers were unanimous about the strengths and financial soundness of the local industry, there were more diverse views regarding the weaknesses. Some of the weaknesses identified include the risk of over-regulation, the presence of a number of old, inefficient legacy systems, the lack of sophistication in risk underwriting, under-investment in emerging technologies as well as shortages of actuarial skills and experienced non-executive directors.
The unrelenting pace and cost of regulatory changes, with far reaching implications for insurers were mentioned by respondents as the top trend impacting insurers.
“The overhaul of the South African regulatory framework brings with it the burden of compliance with SAM (Solvency Assessment and Management). In addition, South African insurers also have to prepare for other requirements and plan for changes that come with TCF (Treating Customers Fairly),”says Muguto. These two major regulatory developments are being introduced under the new “Twin Peaks regulatory framework, which separates prudential and market conduct functions under two separate regulators.”
“While the proposed Twin Peaks approach to regulation may promote certain benefits of market conduct and prudential supervision, respondents questioned the wisdom of adopting costly first world regulatory frameworks in developing economies.” he adds.
Furthermore, 90% of insurers surveyed indicated that the amount of regulation tends to dampen risk appetite and stifle growth.
Technology, digital and data analytics
The two most important technological advances in the insurance sector over the next three years were identified as the increasing digital economy and data analysis, fuelled by the internet and mobile devices explosion. In third place were social media and social networks. A large proportion (79%) of insurers acknowledged the need to develop strategies to deal with these technological advances. However, it is interesting to note that only a third have made concrete plans to address the impact of mobile technology, social media, sensor technologies, big data analytics, cloud computing and the wider digital economy.
Environment and catastrophic events
Short-term insurers raised concerns over the increasing frequency and severity of catastrophic events, such as flooding and hailstorms. However, it was surprising to note that, despite the increase in claims, rates have not significantly hardened. They also acknowledged their challenges to adequately underwrite and price for some of these emerging risks and the need to embrace new predictive and early warning sensor technologies to assist in managing the losses down.
Implications for insurers
“Insurers who are able to see the significance of these megatrends and reposition their strategies and business models will create competitive advantage for the future,” concludes Muguto.
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