Posted on Jan 27, 2012 by Sergio Ulloa
Two new research documents released this week by Fitch Ratings analyzed the state of the South African insurance market in 2011 and what challenges and opportunity lie ahead. Overall the global credit ratings agency found that while the business environment in South Africa remains quite challenging at present, both the life and non-life insurance industries have proved to be widely resilient so far and will continue to develop going forward.
While South Africa has certainly been less affected by the 2008 global financial crisis than many other developed countries, the persistent financial market volatility and tough economic conditions that followed have of course had an adverse impact on the domestic insurance industry's performance, driving down profitability and sales growth across most lines. Despite the South African market showing signs of recovery in 2010 and 2011, with improved local equity markets and consistent economic growth, it remains challenging for insurers to turn a profit. Overall, Fitch expects earnings for insurers to remain under pressure in the near term in view of the difficult and volatile South African and global investment market conditions and continued pressure on disposable income in South Africa. "Although the local economy showed a gradual recovery, the investment markets were volatile and consumers' disposable incomes remained under pressure," Fitch noted.
In "South African Life Insurance: Good Performance in Difficult Environment,
" Fitch wrote that they had now affirmed the rating outlooks for all life insurers in South Africa as stable after witnessing a number of positive factors in 2011, including market-wide improvements in operating performances, more robust capital levels, higher policyholder resiliency, as well as maintenance of market share. "The local insurance industry performed well in H111, despite tough economic conditions," Fitch said in their report. "Profitability improved (although it remains under pressure), with major insurance companies reporting higher net profit compared with H110."
According to Fitch, South Africa's life insurance industry remains well regulated, highly competitive and moderately saturated. Following the merger of two large domestic insurers, Momentum and Metropolitan in 2010 to form MMI, the South African life market is now dominated by four major insurance companies - OMSA, Sanlam, Liberty and MMI. Together, these groups reported a 14 percent growth in net income for the first half of 2011, taking in ZAR7.1 billion (US$910 million) versus ZAR6.2 billion (US$790 million) in 2010. Fitch added that South Africa's life insurers have been able to maintain adequate capital reserves during this period as well. Although the minimum regulatory capital adequacy requirement in South Africa is currently only equal to 1 times business outlay , the majority of the country's life insurers are well capitalized with cover ratios of between 2 and 4, according to Fitch.
The Fitch report also discusses what upcoming regulatory changes could affect the South African life insurance sector going forward, including proposals for a compulsory retirement savings initiative, a National Health Insurance (NHI) system and the Solvency Assessment and Management project. The South African government is taking more proactive steps to combat both the country's poor savings rate and crumbling public health infrastructure
through compulsory pension and health insurance funds. While Fitch believes these moves could all significantly affect how life insurers operate, much about these schemes remains uncertain and the ratings agency expects major insurers will ultimately be able to adapt successfully to the proposed reforms.
In a separate report, "South African Non-Life Insurance: Strong Operating Fundamentals in Tough Environment
," Fitch found that South Africa's general insurers were facing similar issues to their life market counterparts, and received an identical stable credit outlook in tow. "Despite the ongoing challenging operating environment, all non-life insurers rating outlooks remained stable in 2011. This was attributable to resilient and improved underwriting performances, strong solvency positions and the maintenance of market share," Fitch wrote.
South Africa's general insurance market is also well regulated and very competitive. While the market is also currently dominated by four major non-life insurers, these players are not nearly as dominant as the top four in the life market, and only control around a 50 percent market share between them. Like the life market as well, general insurers in South Africa are continuing to face a tough operating environment, where flagging consumer spending power, competition, and low interest rates, limit the ability of insurance companies to set appropriate premium rates for the risks underwritten, which in turn has put downward pressure on company profit margins. Furthermore, Fitch noted that the larger non-life companies are now facing significant competition from non-traditional insurance providers, such as direct writers, banks and retailers.
Despite persistent financial market volatility and a soft pricing market, the South African non-life industry was able to grow last year with the major general insurance companies all reporting higher net profits when compared with the previous year. According to Fitch, these insurers reported a 37 percent growth in annual net income, from ZAR818 million (US$104 million) in 2010 to ZAR1.12 billion (US$140 million) in 2011. This success was reflective of the gradual recovery in the local economy post 2008, improved underwriting performances, strong solvency positions and improved sales. Going forward, the ratings agency has applied a cautious outlook for the South African insurance industry. Fitch expects the margins of both life and non-life insurers to remain under some pressure going into 2012, owing to market competitiveness, downward pricing trends, and relatively stagnant consumer confidence in South Africa.
Fitch Ratings is a global rating agency and provides ratings and analytical services for thousands of banks, financial institutions, insurance companies, corporations, and national governments. Fitch was founded in 1913 and now features dual headquarters in New York and London with over 50 offices worldwide.