20 February 2017: The South African short-term insurance industry has weathered tough economic, regulatory and risk conditions to deliver stronger financial performance.
This is according to Marc Chadwick, Head of Insurance Ratings at Global Credit Ratings (GCR), who says the industry’s overall profitability has been driven by improvements in underwriting profitability. The sample used in GCR’s 2016 Short-Term Insurance Bulletin also demonstrated a 9% increase in Gross Written Premiums (GWP) in 2015, to R99.1 billion.
“Continuing the trend from 2014, GWP growth appears to have been supported by inflation related adjustments and re-rating of underperforming portfolios, while being moderated down by selective portfolio management and lower overall demand,” Chadwick says.
GCR’s annual Short-Term Insurance Bulletin is designed to provide an analysis of the industry’s performance through a sample of key players. This year, GCR included 42 active insurers in its sample, which included direct, multiline, monoline, captive, Underwriting Management Agency (UMA) sponsored insurers and other niche insurers. This represents the majority of the insurance market in terms of premium income, in excess of 86%.
“Our Bulletin showed that net after-tax profits in the industry rose by 25% to R8.1 billion in 2015, on the back of a significant increase in the underwriting profit and higher realised investment income,” says Chadwick.
Strengthening in underwriting profitability was observed across five of the seven insurance segments in 2015.
Chadwick says, “The improvements in underwriting performance have been a direct result of the reduction in claims ratios. The industry gross loss ratio reduced for the second consecutive year to 58% in 2015, down from 62% and 65% in 2014 and 2013 respectively. Despite the potential for higher weather-related claims in 2016/2017, the apparent stabilisation in rates is viewed to have strengthened the industry’s resilience to claims shocks.
He says strong net profitability and more conservative dividend distributions also underpinned a 7% increase in the capital base for 2015. Return on equity rose to 22% in 2015, from 18% in 2014, while return on gross revenue stood at 9% for the year, up from 7% in both 2013 and 2014.
Chadwick says, however, that the industry has and will continue to face challenges. These include the fluctuating exchange rate, slow economic growth, a potential sovereign ratings downgrade, cyber security risks, greater weather uncertainty and regulatory complexity.
“The depreciation of the Rand is expected to have had a direct impact on the cost of motor vehicle replacement parts and associated claims in 2016,” Chadwick says. He says the prominence of motor insurance within the overall industry and potential for further currency volatility could feed through to claims experience in 2017.
Slow economic growth
A further slowdown in South Africa’s economic growth, rising inflation expectations, job losses, higher debt servicing costs and constrained fixed capital investment are just some economic factors facing short-term insurers.
“These factors all impact on demand for insurance across segments, and are likely to contribute towards increasing pricing pressure, reducing aggregate sums insured and higher individual policyholder lapses, limiting growth and profitability potential for the insurance market,” says Chadwick.
He says insurance companies, however, are exploring innovative ways in the long term to access a broader portion of the market, in conjunction with pursuit of their financial inclusion objectives.
The potential downgrade of South Africa’s sovereign rating to a non-investment grade status is a key concern for insurers.
“Aside from the economic implications, this could also impact on insurers’ ability to attract and retain business in the multinational and large infrastructure spaces, as well as from outside of South Africa,” says Chadwick.
As insurers move towards the use of new technologies and big data, they are increasingly exposed to cyber risk. This is viewed as one of the priorities on most companies’ risk schedules, and is likely to contribute towards ongoing management attention.
However, Chadwick says it also represents an opportunity to expand product offerings within the liability spectrum as clients seek innovative solutions to manage the risk to themselves.
There are several regulatory reforms relevant to the short-term insurance industry. These include Twin Peaks, Solvency Assessment and Management, Retail Distribution Review, Treating Customers Fairly and proposals under the Reinsurance Regulatory Review, all of which continue to occupy management time and increase uncertainty.
“Nevertheless, most companies that GCR engaged with have conveyed that they are comfortably placed to adapt to new regulations as they come into place. In general, insurance participants have been involved in ongoing consultations with various industry and regulatory bodies to provide feedback and position for the anticipated changes,” says Chadwick.
He concludes, “While the poor economic outlook could put pressure on pricing flexibility and top line growth, the South African short-term insurance industry is positioned to withstand anticipated challenges, given the healthy aggregate financial profile and demonstrated resilience in tough conditions.”