Leaner times for South African insurers

A cooling economy and reduced spending is expected to limit growth in South Africa’s insurance industry through to the end of the year, with operators likely to struggle to increase market share and maintain revenue levels.

Downturn in premiums

South Africa is by far the largest regional insurance market, accounting for nearly 80% of all premiums in sub-Saharan Africa, and an insurance penetration rate of 13%, which is the highest in the region.

However, the weakening of the rand – which lost 12% over the past year – along with the slowing economy present difficulties for the expansion of South Africa’s insurance sector.

Demand for insurance products is set to narrow for the rest of this year as household discretionary spending levels remain static or fall, and businesses see margins tightening.

“Cash-strapped households and businesses have a weaker ability to fund insurance premiums and therefore display a reduced demand for this non-essential product,” according to KPMG’s 2016 South African Insurance Industry survey.

Reduced demand means that South African underwriters will have to work harder to retain market share and secure new clients, with the more competitive market likely to push down profit rates.

While the new operating environment could drive down insurance costs for clients, and therefore stimulate policy growth, it could be some time before the effect of this shift in the supply and demand balance is felt by the industry, according to the KPMG report.

With these factors taken into account, it is unlikely the insurance sector will be able to match last year’s gross written premiums of R89.1bn ($6.3bn), which represented an 11.4% increase on the previous year, although growth was attributed to rate increases rather than policy uptake.

Though the premium levels were up last year, industry profits were down to R31.3bn ($2.2bn), an almost 30% fall from 2014, with much of the decline due to lower investment revenues.

The KPMG report also warned that the industry could see a decline in non-operational revenue, with earnings on investments such as shares coming in below long-term trends.

The possibility that South Africa’s credit rating may be lowered to junk status could also add to borrowing costs for insurers.

Pricing pressures

Revisions in pricing, combined with weaker demand, could also spark higher levels of competition this year with increasing pressure on smaller underwriters with less capital than their larger rivals.

With South Africa’s insurance market dominated by only a few companies – the leading four firms account for 52.7% of gross written premiums – smaller operators may struggle in the more rarefied atmosphere of flatter economic growth.

Insurers will need to strike an effective balance between pricing of premiums and retaining policyholders, according to a PwC report on the South African insurance sector released in April.

“The challenge remains for them to continue stimulating local growth in a difficult economy,” PwC concluded, “with insurance companies’ day-to-day costs and claims costs expected to rise due to inflation and the weakened rand.”

Muted outlook

The South African Reserve Bank (SARB) forecasts that GDP will flat line this year, downgrading previous predictions from 0.6% growth. This comes on the back of a 1.2% contraction in the first quarter, raising concerns about a possible recession.

The negative outlook for the broader economy could extend beyond 2016, according to Sizwe Nxedlana, chief economist at First National Bank.

Growth levels are set to remain marginal at best through to 2019, Nxedlana said at an insurance seminar in July, with investor confidence down and South Africans more risk adverse.

On a slightly more positive note, the SARB announced at the end of July that GDP is expected to expand by 1.1% next year and 1.5% in 2018.

Though an improvement on the 2016 forecast, South Africa’s predicted weak performance could result in a scaling back of revenue from existing policies, as holders may re-evaluate their position and reduce or cancel coverage.

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