SA insurance industry almost ‘out of the woods’

KPMG South African Insurance Industry Survey 2021

KPMG South Africa this week launched its annual South African Insurance Industry Survey for 2021. Forty non-life insurers, twenty-one life insurers and seven reinsurers were surveyed. The results indicate that the South African insurance industry has been invaluable to the economy, serving as a shock absorber and allowing many businesses to recover.

This year’s survey indicated a strong focus on risk management across key areas. One example is environmental risk. The insurance industry is highly affected by environmental changes and these risks and exposures should be identified, measured and responded to through governance, strategy, risk management, product offerings and related reporting. Corporate governance, market conduct, data privacy and cyber security breaches are all relevant ESG issues insurers are increasingly concerned about. However, although some insurers may have considered and potentially modelled pandemic type scenarios within their Own Risk and Solvency Assessment (ORSA) scenarios, few, if any, had adequately considered the linkages and connectedness between risks sufficiently to fully foresee the impacts on equity markets, interest rates, operational risks and persistency risks.

The life insurance segment

Looking to the life insurance sector, an analysis of 21 of the major life insurance licenses in South Africa, covering 88% of the market by total assets, indicated that the top five life insurers grew their asset base by 3.5% with the smaller remaining entities outgrowing their larger counterparts with a 9.3% growth in assets.

Similarly, net premiums reflecting risk and FIDP business for these entities grew by a meagre 2.2% while performance of the smaller life insurers saw an overall average growth of around 8%, leading to a slight shift in the share of premium. Despite this, the top five still generate over 87% of the total premium written by the market.

The life sector witnessed poor premium growth, mediocre investment performance and significant claims and as a result, the industry has moved from a total industry profit of close to R22.1 billion in the 2019 period to a loss of R2.6 billion in 2020 and the impact was felt not only on provisions, but also on expenses, as businesses moved to remote working, supply chains were disrupted, and premium collections slowed.

“Despite these losses, dividends for the surveyed entities increased from R16.1 billion to R18.5 billion, with the life insurance industry remaining well capitalised,” continues Danckwerts.

“Moving forward though, there are concerns that once the vaccination rollout has achieved scale, policyholders may decide that life cover is now less of a priority than other basic needs. This, coupled with the fact that the next few months hold some challenging moral decisions for life insurers as they debate vaccine mandates for employees, vaccine premium adjustments for policyholders and questions of repricing policies to recoup some of the losses incurred over the recent period, means that there are some tough business decisions that lie ahead.”

Non-life insurance

The industry has certainly been tested in almost all respects. While it experienced lower gross written premiums (GWP) growth when compared to the average of prior years, increases in reinsurance costs, low interest rates, volatile financial markets and significant business interruption claims, some lines of business loss ratios actually improved under the COVID-19 lockdown.

The non-life insurance industry reported GWP of R128 billion in 2020, an increase of 5%. This indicates that the impact of the pandemic had not been as severe on the industry as expected and is commendable considering the premium relief measures many non-life insurers had provided to their customers including premium holidays, delayed pay-back, debit order leniency, reduced premiums, and the like.

The sector delivered a profit after tax (PAT) figure of R6 billion in 2020, representing a 28% decrease from the prior year. This is largely attributed to numerous challenges the sector experienced including defaults on credit, an increase in net claims of R1.9 billion and a claims ratio of 59.5%.

Furthermore, total investment income was down 31.9% due to the interest rate environment and fair value losses, with gross insurance liabilities increasing by 27.2%. In 2020, the market share of the ten largest insurers by GWP amounted to 73.8%.

As we move forward, a few key themes have emerged with insurers focusing on key learnings in terms of planning and dealing with channel overloads, optimising digital advancements to keep pace with emerging risks, stronger scenario planning and stress testing and social responsibility – making sure they are listening to their policyholders to mitigate any brand fallout.

“For the greater good of our communities, insurers need to remain vigilant and keep on improving their modelling of extreme events. Management and boards need to keep challenging themselves in this respect and ensure that risk and reward are well balanced. So, are we out of the woods? Nearly – there is still some ground to cover, and it is good to see that insurers are adapting faster and becoming more agile” concludes Danckwerts.