Hanna Ziady
Workers clean windows outside the Cape Town headquarters of Anglo-South African financial services company Old Mutual, March 7, 2016. Old Mutual said on Monday it was considering all options available to it under the strategic review announced in November. REUTERS/Mike Hutchings – RTS9M4D
JOHANNESBURG – As volatile markets drive investment returns lower, insurance companies are going to have to get smarter about managing risk and servicing customers in order to maintain profit levels, says PwC, noting that insurers are being forced to break away from ‘business as usual’.
“Insurers in South Africa have been very fortunate since 2008 in that the investment markets have always come to their rescue, but there are worrying trends in the volatility in markets,” said Victor Muguto, PwC Africa’s long-term insurance leader.
“Political uncertainty is another issue, along with uncontrollable factors such as the drought and the global climate change situation,” Muguto told journalists on Thursday, presenting the findings of his firm’s South Africa insurance report.
Discovery, Liberty, MMI, Old Mutual and Sanlam were included in the long-term insurance survey, while Santam, Mutual & Federal and OUTsurance were analysed on the short-term insurance side.
The combined earnings of the five life insurers assessed totalled R33.4 billion in 2015, up 18% on 2014.
Total investment income fell 17% on the previous year to R154.4 billion.
“South African insurers faced a difficult environment, which was compounded by rising interest rates, fears of possible sovereign rating downgrades and declining GDP growth rates,” said Dewald van den Berg, PwC’s insurance technical partner.
While long-term insurers continued to deliver a high return on equity (21% for the last three years), their embedded value earnings came under pressure, falling 16% to R33 billion.
This was primarily a function of the risk discount rate, or cost of funds, ticking upwards, resulting in a reduced present value of future profits in their embedded value, as investors demanded a higher return.
The value of new business among long-term insurers was flat year-on-year, reflecting pressure on premium pricing in a weak consumer economy.
On the upside, life insurers continued to make significant mortality and morbidity profits (R1.8 billion in 2015), demonstrating a conservative evaluation of risks, said Van den Berg.
Lapse profits amounted to R212 million for the year, indicating that fewer customers cancelled their policies than expected.
Insurers nonetheless continue to adopt a conservative stance to future lapse rates, having expected a lapse loss of R139 million in 2015.
Short-term insurers enjoy bumper year
Partly a function of a benign catastrophe environment, the three short-term insurance companies analysed enjoyed strong profits and underwriting margins (income after claims payments) over the year.
Santam, Mutual & Federal and OUTsurance’s combined gross written premiums (GWP) increased 12% to R52.2 billion, well ahead of consumer price inflation (CPI).
“This is mainly due to insurers continuing to effect rate increases on consumers in order to mitigate rising insurance costs as well as to ensure that the quality of the policyholder books are maintained,” PwC said.
Short-term insurers achieved a high underwriting margin of 10.8%, but this could quite easily fall by as much as 4% in the longer term, Van den Berg warned.
Extreme weather events, such as a major hailstorm, can have a significant impact on insurers’ underwriting margins in a given year.
Future opportunities for growth
With slow GDP growth at home, other African countries with high growth rates and youthful populations present significant opportunities for South African insurers, according to Muguto, particularly as they become increasingly urbanised.
Africa’s share of the world insurance premium market in USD was just 1.44% in 2014, reflecting exceptionally low penetration rates.
Innovating around the customer and investing in new financial technologies presents further opportunities, Muguto said.
According to PwC’s global fintech report, published last month, insurance companies said that they believe as much as 21% of their business is at risk of being lost to standalone fintech companies within five years.
Banking respondents said as much as 24% of their business was at risk.
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