OBG talks to Barry Scott, CEO, South African Insurance Association

Interview: Barry Scott

Where is industry growth expected to come from?

BARRY SCOTT: Market growth has been driven mainly by increasing premiums, not by a rising number of policyholders. While direct-line channels have expanded, this has not been a driver of growth, but rather has taken shares away from the personal line market. Despite rising costs, profitability is as good as ever, meaning that cost increases are being absorbed by the customers.

The industry must find ways to dramatically reduce the cost of premiums to introduce new customers to the market, as those in lower- and middle-income brackets cannot afford insurance under the current price structure. According to data from the Financial Services Board, in the past five years, cost-plus-commission figures have grown from 25% to 32% of premium, with the average cost of selling products rising by almost one-third. This is driven partially by an increase in distribution costs, but mainly by growing regulatory expenses. Both the Treat Customer Fairly and Solvency Asset Management (SAM) regulations will soon be coming into force, so this trend is likely to continue.

What policies are in place to help the industry better serve lower-income segments?

SCOTT: The most significant growth opportunity for the market is in selling new policies to the less affluent. To do this, providers will need to lower costs and find alternative distribution paths to the traditional broker model. Brokers, who typically expect premiums of R100 ($12.24) and 20% commission, are ill-suited for a micro-insurance market where the products themselves must sell for as low as R50-100 ($6.12-12.24) per month.

The national treasury is issuing new microinsurance legislation that will potentially come on-line in 2014, which should help alleviate pressures on costs by reducing capital requirements and regulatory overheads for purposefully licensed micro-insurers. Another good innovation is that those qualifying will be allowed to sell composite products. Currently, long- and short-term insurers cannot sell risk-based life products and short-term products together, as each requires separate licences and compliance standards. Under the proposed legislation, so long as you are selling only micro-insurance products, only one licence is required irrespective of whether they are long or short term.

Which distribution channels are having the strongest impact on increasing penetration?

SCOTT: The big players will be active product providers within the micro-insurance space since they already have a foothold with funeral policies that can be extended through new licences to include a range of short-term products. We will also see the established microlending banks, which understand the low-income segment and have active customer bases, extend their product offerings to include insurance. As it will be costly and difficult to cold call or cold sell a microinsurance product, businesses that already have people coming into their premises to undertake financial transactions, like discount retailers, are also likely to enter this space.

Affinity groups with sizeable member bases, like trade unions or churches, may already be offering funeral products to affiliates. It makes sense for insurance companies to partner with these organisations as product providers. Finally, with South Africa’s high penetration of cellular phones and mobile banking services, gaining traction insurance will likely follow suit.

Is there a healthy number of competing providers operating in the market?

SCOTT: The market is fairly stabilised and has not lost a major industry player in a long time. New, innovative players are entering the market and work to capture niche segments. SAM, if not handled properly, could lead to consolidation. Mono-line insurers without a large asset base and a wide spread of risk, such as export credit insurers or guarantee insurers, might find it challenging to comply. The industry is engaging regulators to make sure that niche insurers do not get wiped out since they play an important role in the economy.