SA’s insurance industry remains stable despite continued market uncertainty and economic turmoil in 2012

The financial results of South Africa’s major insurers for the year ended 31 December 2012 are a positive reflection of the financial state of the industry. They show that the industry remains stable despite, continued market uncertainty and economic turmoil during the course of the financial year, according to a publication issued by professional services firm PwC today.

Tom Winterboer, PwC Leader of Financial Services for Africa, says: “The greatest challenge currently facing the industry is a myriad of proposed regulatory and reporting changes. The industry will be affected by the cost of implementing proposed Social Security reforms, Treating Customers Fairly (TCF) and Solvency Assessment and Management (SAM) with the third and compulsory Quantitative Impact Study (SA QIS3) planned for later this year.

“The current economic climate will also be challenging for annuity writers. The increase in longevity as a result of medical advances, inflationary pressure in managing these policies and the reduction in yields when bonds have to be reinvested, all have a negative effect on annuity business.”

Winterboer says that South Africa long-term insurers will have to adapt to the prolonged  low-interest environment and can also learn from the UK experience.
These are some of the highlights of the Second Edition of PwC’s Insurance Industry Analysis publication. The publication analyses the results of South Africa’s major insurers for the year ended 31 December 2012. The publication also includes some market developments that PwC’s Insurance Practice anticipates during the course of 2013.

Overview of the long-term insurance sector

The financial results of the top five players (Discovery, Liberty, MMI, Old Mutual and Sanlam) were included in the publication.

These long-term insurers recorded combined group IFRS earnings of R20.4 billion, up 2% on 2011. Victor Muguto, PwC Long-term Insurance Leader for Africa, says: “This is a steady performance in a period where the JSE all share index closed 23% higher than at the start of the year.” Despite the positive equity and bond market performance, there were large variations in IFRS earnings achieved by the respective insurers. For example, an insurer’s IFRS earnings more than doubled in 2012, while another saw earnings reduce by almost a third.

As a result of the 8% higher average shareholders’ equity that the insurers held, the combined group return on average equity reduced to 19%, compared to the 20% achieved in 2010 and 2011. “This reflects a cautious approach followed in investing shareholders’ capital, hedging against exposure to the volatile equity markets and holding slightly higher levels of capital.”

The present value of new business premiums (PVNBP), which includes insurance and investment contracts, reflects a steady increase for the financial year. The year-on-year increase of 7.4% (2011: 6.6%) reflects an increase in demand for life insurance products when compared to CPI of 5.6%. “Consumers continue to struggle in the tough economic climate and the increase in the volume of business is a good result under the circumstances,” says Muguto.

He says that insurers were able to increase the PVNBP with a margin on new business of 3.2% that was 18% higher than in 2011. “This was the second consecutive year where insurers were able to increase the margin achieved on new business written.” As a result of both the PVNBP as well as the margins locked into this new business, the long-term insurers were able to grow the value of new business by 27% (2011: 24%).

Acquisition costs incurred by the businesses of the long-term insurers increased by 8.9% to R12.8 billion in 2012. This is lower than the increase in Annual Premium Equivalent growth of 7.7% over the same period. Acquisition costs have not increased to the same extent as new business premiums. This could be indicative of a changing product mix, with more investment products being sold, which attract relatively lower commissions than risk products, states the publication.

Overview of the short-term insurance sector

The results of the following five short-term insurance companies were considered in the publication: Absa Insurance Company, Mutual & Federal, Outsurance Holdings, Santam and Zurich Insurance Company South Africa.

Gross written premiums (GWP) increased by 10% during 2012 to R44.8 billion for the year. The growth is ahead of the CPI index of 5.6% for 2012.  “This represents an improvement over 2011 when the insurers included in this publication were unable to achieve any real growth,” says Ilse French, Short-term Insurance and Investment Management Leader at PwC. The 2012 industry results also benefitted from strong growth achieved in Outsurance’s Australian’s business. This business doubled in size during 2012 and if this result is eliminated the industry still grew GWP by a credible 7.6%

South Africa’s short-term insurance industry tended to follow the global underwriting trend for 2012 where the first three quarter’s performance of the year was benign. However, the fourth quarter was adversely affected by the claims for the multi-million Rand hailstorms in Gauteng and the St Francis fires. Internationally, Hurricane Sandy also affected the reinsurance market in this quarter.

The underwriting margin achieved in 2011 of 9.3% was nearly halved to 4.6% in 2012. This was largely due to the catastrophic losses suffered during the course of the year. Following the adverse weather experience, panel beaters had to contend with the increased volume in motor vehicle repairs.

The industry’s overall claims ratio increased to 66% (2011: 62%). Insurers have also attributed this to the weaker Rand in the second half of 2012 and a pickup in crime-related claims. In the current economic climate, firms, including insurers, are tending to shift their focus to cost savings. However, insurers should be aware of customers who have implemented cost cutting measures. Where risk management activities are reduced by the insured, they are clearly increasing their exposure to risk, states the publication. “Insurers should therefore step up their underwriting practices. Robust underwriting will be the differentiator between insurers who maintain good margins compared to those who do not,” advises French.

A number of the local players have indicated that they will be re-pricing some of their business on a selective basis in 2013.

Capital and solvency

The Financial Services Board’s process of developing a new risk-based solvency regime for the insurance industry is gathering pace. SAM is being adapted specifically for the South African market. The second South African Quantitative Impact Study (SA QIS2) marks an important milestone in the development of the SAM framework. This was the last voluntary quantitative impact study, with the third Quantitative Impact Study (SA QIS3) planned for 2013 being compulsory.

The publication explores the implications of Solvency Assessment and Management (SAM) on the future of insurance financial reporting. It assesses the issues that insurers are likely to grapple with as they think through the implications of SAM on external reporting and how this fits with other developments, in terms of investor focus and in relation to IFRS 4 Phase II, which will collectively lead to a wider re-evaluation of how to judge and assess value and risk in the next couple of years. “Considering the focus by most insurers on Pillar I (quantitative  measures) and II (governance, risk and controls), compared to reporting under Pillar III to date, it is possible to misjudge or underestimate some of the key strategic and implementation challenges, points out French.

Looking forward

South Africa has a competitive insurance market, with a number of direct writers having entered the market in recent years. “A potential growth area to keep an eye on is technology and the use of big data and cloud,” says Winterboer.

“With a number of countries with some of the highest economic growth rates on our doorstep, insures will continue to expand on the African continent. Together with other emerging markets, Africa will remain the area where global insurers look to grow their business in the foreseeable future. As these markets are not yet as competitive as the traditional local market, they offer an opportunity to earn profits at attractive levels.”