An overhaul of South Africa’s financial regulations, already considered some of the most robust worldwide, is likely to result in a shake up for the insurance sector. While the new system will strengthen oversight and boost transparency, it is also expected to push up the cost of compliance, which in turn could lead to industry consolidation.
A key plank in the proposed reforms is the government’s “Twin Peaks” approach to regulating the financial sector, including the insurance industry. According to the Treasury, the Twin Peaks policy foresees the creation of a prudential regulator located within the South African Reserve Bank (SARB) and the recasting of the Financial Services Board (FSB) as a dedicated market conduct regulator.
In a statement issued in February calling for comment on the plans, the Treasury said the task of the SARB will be to maintain and enhance the safety and soundness of regulated financial institutions. The role of the FSB will be to protect consumers of financial services and promote confidence in the South African financial system.
Nicolaas Kruger, the group CEO of financial services company MMI Holdings, said the Twin Peaks policy will improve regulatory focus, but he told OBG that an element of flexibility may also be needed.
“The regulatory changes have been well thought-out and follow a discussion-based approach that the industry is supportive of, though unintended consequences sometimes arise when a one-size-fits-all approach is used,” he said.
It is important that the final version of the legislation for the policy, due to go before parliament by the end of the year, takes account of the fact that a large portion of the population is developing, he added. Regulations that are sensible in the UK, for example, might prevent access to financial services for the less-affluent in South Africa.
While Twin Peaks will affect the entire financial services sector, another more narrow set of regulations for the insurance industry – the Solvency Assessment and Management (SAM) framework – is also on the horizon, with an implementation deadline set for January 2016. Similar to the Solvency II system that has been proposed for the EU, the SAM introduces some risk-based capital adequacy requirements.
Complying with the new rules could be a challenge for smaller companies, Johan van Zyl, Group CEO at financial services firm Sanlam, told OBG. “The larger insurance groups which have more diversification around capital and business units will be able to stomach compliance burdens and capital requirements, while smaller independent players will be squeezed out.”
It could also be expensive, as additional staff will need to be hired and new IT systems put in place.
“The various regulatory changes will not be implemented in one big bang of reform, but we do see the costs of compliance rising,” Viviene Pearson, a general manager at the South African Insurance Association (SAIA), told OBG.
Higher costs mean that boosting South Africa’s insurance penetration rate – which at 13% is the highest on the continent – could be difficult. The segment with the most room for growth – the low end – is almost the most price sensitive.
It may be easier for larger operators to keep price increases down, utilising their economies of scale and more diverse activities to ensure that their products continue to be attractive to clients. This, along with other pressures imposed by the forthcoming wave of reforms, could change the face of South Africa’s insurance sector as some small insurers find increased compliance burdens and costs difficult to absorb.