South Africa: Exercising caution in insurance

Insurance sector leaders in South Africa are hopeful the country will not be too deeply impacted by the deepening debt crisis in Europe, with many policy writers expressing cautious optimism as the new year gets underway. The implementation of EU financial norms and a national health insurance scheme could prompt some changes in the sector in 2012.

Though there are concerns over the global financial situation, and what effect it may have on South Africa, a recent survey indicated that many in the insurance sector are relatively confident going into 2012.

According to the latest CIB Insurance Broker Confidence Index (BCI), released in mid-November, 73% of respondents are confident about developing new business over the coming 12 months, a 4% increase over the second quarter. The survey also showed that brokers largely expected to maintain their current customer book over the next year, with confidence levels up to 78%, a 2% increase over the second quarter.

Jon-Jon Smit, the divisional director at CIB Insurance, a short-term insurance administrator, told local media in late November that the slight increase in confidence levels might indicate brokers were expecting a pick-up in consumer spending, a good indication of a positive outlook in 2012.

While the full impact of a downturn in Europe on the outlook of the South African insurance market remains to be seen, on the regulatory side, the country’s insurance industry is preparing itself for a much stronger alignment towards EU financial norms and supervision with the implementation of a Solvency Assessment and Management (SAM) regime expected for 2014.

Similar in many ways to the banking system’s Basel II, SAM imposes strict reporting, risk management and capital requirements on all licensed insurance companies. The move does have its critics, however. Compliance costs, for example, are expected to erode margins and could lead to consolidation as some of the smaller players – which may lack the balance sheets and human and system resources to meet the imposed obligations – are absorbed into larger entities or forced to exit the market.

“There is certainly merit in moving towards SAM, but it could harm entrepreneurship, force consolidation and decrease competition,” Michael Blain, the CEO of insurance company Centriq, told OBG. “One has to ask why, but why the urgency, as it is questionable whether or not the Europeans are truly at the forefront of sound regulation these days.”

“SAM is a noble idea, and while no one likes overregulation we have to remember that it was the strict regulatory controls that saved South Africa’s financial system from being significantly impacted by the global financial crisis in the first place,” Junior Ngulube, the CEO of Munich Reinsurance Company of Africa, told OBG. “The only issue is going to be the question of the market and the regulator having the ability and sufficient human resources to implement and monitor the full implications of SAM.”

Another matter of concern for insurers is the government’s plan to introduce a comprehensive National Health Insurance (NHI) scheme, with the first steps in the programme’s phased roll-out scheduled for this year. Many details of the programme have yet to be announced — including how it will be funded — and it is unlikely that a majority of South Africans will drop their private-health coverage in favour of the state’s plan.

“Unless the NHI is incredibly comprehensive, which realistically it will not be from the outset, most people at the middle to top end of the market will still pay for separate coverage over and above what the NHI offers,” Adrian Gore, the group CEO for Discovery Group, which operates the country’s largest medical scheme, told OBG.

Indeed, with the timetable for establishing the NHI spread over 14 years, it is probable that any impact on the private sector will be gradual and, in all likelihood, minimal. Currently, some 16% of South Africans are covered by a medical care scheme, either privately funded or as part of their employment package, and while outlays for health average around 9% of GDP, the public health system is generally seen as in need of improvement. Until the system is upgraded to a level matching that of non-state services, many of those with private or professional coverage will likely opt to maintain their policies.

“Because of South Africa’s high Gini coefficient, the very people paying for private health care are also the ones covering most of the tax base,” Gore told OBG. “So a lot will also depend on how an increase in funding for the NHI is created. If it comes in the form of an increase in the general tax rate, rather than a separate health tax, people will perceive the incremental spend differently.”

In the meantime, local policy writers are stepping up efforts to penetrate the burgeoning black middle class. As Ian Kirk, the CEO of Santam, a local short-term insurer, told OBG, “The ‘newly employed’ present significant opportunities. And there is clearly an aggressive push to reach this emerging segment through direct marketing as they are comfortable using the internet. As many young blacks come from families that in the past were never insured, it is a concept that is fairly new to many and requires strong education and awareness.”

Santam is not alone in targeting the black market, with other firms also seeking to improve their portfolio in a similar manner. However, this segment would be vulnerable to a sharp retreat of the economy, so insurers will be hoping any onset of global recession will be short and have little flow-on effect on South Africa.