Interview: Thabo Dloti
How would you evaluate South Africa’s transition to a “Twin Peaks” approach thus far?
THABO DLOTI: The South African insurance industry is coping well with the introduction of the new regulatory regime. The transition to a Twin Peaks model of oversight was introduced early enough that much has been done to prepare the industry. The new approach will see the South African Reserve Bank be responsible for prudential regulation and the Financial Services Board be responsible for market conduct regulation. Because South Africa is a G20 member, with an economy dominated by financial services, Twin Peaks is a welcome development. It will continue to highlight the integrity of the local financial system, while the market conduct aspects will enhance how the financial services sector engages with society.
However, South Africa is still a developing economy and introducing such an advanced regulatory framework may have unintended negative implications for the industry beyond simply increasing compliance costs. While the change means we will become more relevant, and investors from developed economies can now find comfort in our advanced regulatory environment, the potential impact on downstream financial services coverage isn’t so clear. Furthermore, the implication for capital movement going forward is somewhat uncertain, so unintended consequences will still need to be well understood and managed.
To what extent have slow headline growth and rising interest rates impacted premiums?
DLOTI: Macroeconomic effects will ultimately be transmitted into premium flows, both directly and indirectly, depending on which insurance products you are underwriting and the associated customer segments. For the mass affluent markets, we saw continued growth in premiums and investment flows up until the end of 2014. This segment in particular was being carried by the strong capital market and thus didn’t reflect the economy on the ground. As a result, we are seeing higher cancellation rates and higher lapse rates in the mass market, which clearly reflects the fact that the economy has been slowing down. We have seen the effects of the sluggish economy on new premium sales, which are slowing down across the industry.
Developments such as the economic slowdown in China and impending interest rate rises in the US have also led to more investor caution locally, which has a direct impact on new premiums growth. The bigger issue is consumer sentiment informed by local conditions. The electricity crisis, in tandem with falling commodity prices, has negatively impacted productivity and resulted in deferment of long-term investment decisions.
What are your thoughts on pension fund reform? How can a lack of “preservation” be addressed in 2015 and beyond?
DLOTI: If one looks at the country in aggregate,- South Africa has historically had a low savings culture. However, when examining the country’s saving patterns it is useful to split the country into two separate economies. The upper middle-class to upper-class economy consists of relatively strong savers because they have historically benefited from the established culture of contractual savings. However, all of us who work in this sector should be concerned with the second and larger emerging consumer, who does not participate in pension funds or preserve savings when they switch jobs. Even those who have contractual savings aren’t retaining assets until full maturity or retirement, which is a problem as the savings pool remains stagnant, despite many new entrants in this segment of the economy in South Africa.
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