FINANCE: Insurance Industry Faces Upheaval and Soaring Costs
Recent Western Cape Business News
South Africa’s insurance industry is undergoing significant regulatory changes which are dampening risk appetite, stifling growth and slowing the pace of international expansion, according to PwC’s fifth biennial Strategic and Emerging Issues in South African Insurance survey released yesterday.
Tom Winterboer, Financial Services Leader for PwC Southern Africa and Africa says: “In 2012, regulatory and reporting changes are considered the major drivers of change in the insurance industry.
“In addition to the Solvency Assessment and Management (SAM) requirements, South African insurers also have to prepare for pension fund, national health insurance and Treating Customers Fairly (TCF) reforms among other changes. An overwhelming majority of insurers believe that they are operating under a heavy burden of regulation, which is expected to increase substantially over the next three years.”
The other major drivers of change facing the industry this year are capital requirements, which moved from fifth place in 2010 to second place (2012), and consumerism. Two new drivers, changing demographics and internet/mobile technologies were positioned close behind in fourth and fifth position. Disintermediation continues to be an important driver of change as the direct marketing sector continues to expand.
In line with Global trends, regulation tops the list of major drivers for change in the South African insurance market. Victor Muguto, Long-term Insurance Leader for PwC Southern Africa says: “The unprecedented overhaul of the South African insurance regulatory environment will not only bring with it the onerous burden associated with the Solvency and Assessment and Management (SAM). In addition, South African insurers also have to prepare for other requirements, and plan for opportunities that will come with the micro-insurance, binder agreements, National Health Insurance and Treating Customers Fairly reforms, among other changes. An overwhelming majority of insurers believe that they are already operating under a heavy burden of regulation, which is expected to increase substantially over the next three years.”
Muguto adds:“South Africa has embarked on a path to implement a ‘Twin Peaks’ model for financial regulation, which separates prudential supervision from business conduct regulation. The TCF proposals are being introduced to provide the framework for the market conduct supervision, while SAM will be the basis for the prudential requirements for insurers. Insurers believe that SAM specifically, will benefit the industry, particularly by improving risk management.
“While many insurers recognise the need for and are generally supportive of all these more comprehensive regulations, and acknowledge the benefits they bring, they worry about the associated significant costs. Others view the regulations as dampening risk appetite, stifling growth and slowing down the pace of international expansion.”
Some smaller long-term insurers estimated that it could cost them between R25 to R50 million to implement SAM and other regulatory changes over the next three years. Other larger insurers estimates were in the R200 to R300 million range, with one large insurer estimating as high as R800 million. Short-term insurers’ estimates were more modest, ranging from R50 to R100 million.
He says that major changes are also expected regarding the future role of intermediaries. Shake-ups are anticipated across the board. The rise of direct insurers, customer empowerment, price sensitivity, product changes and new regulations will fuel these changes.
“While the survey comes at a time when Global and South African insurers are grappling to adapt to the tough new business, investment and regulatory environments that have emerged from the financial crisis, it is encouraging to see South African insurers also taking advantage of the many opportunities for growth that are emerging,” says Muguto.
Insurers predict continued revenue growth for 2012 and over the next three years. Although percentage growth estimates in 2012 were less optimistic than in 2010, growth rates of 15 to 20% are expected for long-term insurers, while the majority of short-term insurers anticipate revenue growth in the 10 to 15% range over the next three years.
Insurers identified smartphones and tablets as the major technological innovation that will have a significant effect on the insurance industry over the next three years. The most important applications of technology by 2015 were identified as direct insurance and online distribution. “This confirms the growing importance of the internet in insurance marketing,” says Ilse French, Short-term Insurance Leader for PwC, Southern Africa. These applications were followed by data mining and actuarial systems.
However, slow broadband was seen as a limiting factor in the application of mobile technology to sales, claims and information processing.
French says that Own Risk and Solvency Assessment (ORSA) is the cornerstone of the European Union’s (EU) Solvency II Directive. It requires insurers to make a self-assessment of the capital available to support their business risks. “ORSA adds a new risk disclosure to the regulatory environment and supplements solvency assessments.”
The majority of participants (27 companies) believed that ORSA enhances risk management. Furthermore, respondents reported that they had commenced the deployment of ORSA within their respective companies.
The insurance industry continues to be plagued by talent shortages. This year, the two most sought-after executive professional positions were specialist underwriters and actuaries followed by capital management and risk management professionals.
Non-executive directors and audit committee members are also high in demand.
South African insurers believe that the African continent continues to be recognised as the top region for offshore expansion, followed by Asia. Interest in South America has declined significantly. The top three considerations for South African insurers moving into sub-Saharan Africa are low-penetration rates, higher margins and profitability, and the quality of local management.
The main barriers to South African companies investing in the rest of Africa were cited as regulatory restrictions, cultural issues and a lack of local insurance skills.
The survey, which is carried out every second year, is based on interviews with managing directors and senior executives of 29 insurance companies. The study provides a comprehensive overview of the strategic issues and challenges facing the industry today. Global and South African insurers are grappling with the difficult new business, investment and regulatory environments that have emerged from the financial crisis.
The main objectives of the survey are to raise awareness of insurers to emerging issues and trends in the South African insurance industry; understand the views of industry CEOs about these issues; provide insight into how the industry may evolve over the next few years; and assist South African CEOs to shape their own future.
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