South African insurance sector undergoes a period of transformation

Like the country itself, the South African insurance sector is a study in contrasts. The market is by some measures one of the most advanced in the world. It has a premium-to-GDP ratio that is among the highest anywhere, and its insurers are well-regulated, well-managed and innovative. The market is becoming even more sophisticated with the introduction of new legislation. Yet, it is in some ways not a mature market; much of the country is poor, unbanked and uninsured or underinsured. Financial inclusion is limited, and even such basic policies like auto property liability insurance are optional, which is a rarity even in the developing world, both in Africa and globally.

This situation presents both significant opportunities as well as some challenges. South African insurers are well run, and they have untapped markets within their borders and in the wider region. “Expansion into the rest of Africa by South Africa’s big insurance players is driven by the nascent opportunity of insurance penetration and seeing a growing middle market that will need insurance products over time,” Ralph Mupita, CEO of Old Mutual, told OBG. “There are still a lot of growth opportunities in South Africa but growth rates are more attractive in the rest of the continent given the growth of the middle income base, rates of urbanisation and nascent financial services.” However, South Africa can be a questionable venture for insurers. The cost of compliance is high in a jurisdiction where regulations are becoming more onerous and complicated, while much of the population remains economically vulnerable; demand is always at risk, especially during times of uncertainty. Returns are affected by stock market volatility and low returns on bonds globally, while erratically fluctuating exchange rates and the falling rand add to the difficulties of local insurers.

Deep History 

Insurance began in South Africa with the establishment of two branch offices in 1826, those of the United Empire and Continental Life Assurance Association, and the Alliance British and Foreign Fire and Life Insurance Company. A local entity, the South Africa Life Assurance Company, was established in 1831, and the Mutual Life Assurance Society of the Cape of Good Hope – which is still in existence today – in 1845. Mutual Life emulated the business structure of the Scottish Equitable Mutual Life Assurance Society. Zuid-Afrikaansche Brand en Levensversekering Maatschappij was formed in 1835, while Lloyds had its first agent in the Cape in 1850. A thriving and highly international market soon developed, and by the end of the 19th century the Cape Colony had more than 50 foreign insurers providing coverage throughout its territory.

The most significant recent regulatory overhaul came with the establishment of the Financial Services Board (FSB) in 1990. Tasked with supervising financial institutions and promoting the sector, its remit includes the Long-Term Insurance Act, 52 of 1998, and the Short-Term Insurance Act, 53 of 1998 (which together replace the 1943 Insurance Act).

Pressure has been put on the country to improve regulation. As a member of the G20, South Africa must undergo an assessment every five years and more frequent peer reviews. The market is well regulated and supervised with no major crises in recent years, but it is required to follow the lead of countries that have faced recent significant failures. It is thus forced to do more than perhaps is necessary given local conditions. “We face a lot of regulation because we are in the G20,” says Peter Dempsey, deputy CEO, Association for Savings and Investment South Africa. “In that sense, we are a regulatory taker.”

Healthy Growth

As of 2013, the country had 97 short-term insurers in the market, down from 100 a year earlier. The South Africa Insurance Association (SAIA), which represents the interests of short-term insurers, reported 61 members as of June 2015. As of 2013, the country had 74 long-term insurers, down from 79 in 2012 and 80 in 2011. The largest long-term insurer in the country is Old Mutual, with 16.26% of the net premiums in 2013 (the latest figures from the FSB). It is followed by MMI Group (14.37%), Investec Assurance (11.68%), Liberty (11.09%) and Sanlam Life Insurance (10.34%). The largest short-term insurer is Sanlam, with 18.9% of gross premiums. It is follow by Guardrisk (6.4%), Absa (3.1%), Budget Insurance Company (2.5%) and AIG (2.1%).

Developed & Developing

In the year ending 31 December 2014, the primary short-term insurers reported gross premiums of R102.8bn ($8.88bn), up from R96.2bn ($8.31bn) a year earlier. In the first quarter of 2015, the results were also strong, with the short-term insurers generating R28bn ($2.42bn) of gross premiums, up from R26.5bn ($2.29bn) in the same quarter in 2014. The situation was much the same on the long-term insurance side of the business. In the year through the end of 2014, the sector reported R438.9bn ($37.92bn) of gross premiums, up from R429.7bn ($37.13bn) a year earlier. Penetration in terms of the premiums to GDP ratio is one of the highest in the world, at over 20%.

Claims ratios in some subsectors have been on the rise. In terms of property insurance, the ratio climbed from 61% to 63% between 2012 and 2014, according to the SAIA. In transportation, it jumped from 42% to 52% in that time, and liability from 50% to 60%. But in other lines of business, the ratio has dropped. Engineering fell from 55% to 50%. Motor, the largest line of business, fell from 66% to 65%. Underwriting profits as a percentage of premiums have remained steady for a number of years, floating between 8% and 10% (9% in 2014). This is up considerably from the negative numbers in 1999 and 2000, though down slightly from the 11% peaks in 2004 and 2010.

One area of possible growth is the introduction of compulsory motor property insurance. According to the SAIA, only 35% of registered vehicles in the country are insured. Because of the imbalance in the market, those who are insured are indirectly picking up the cost of the uninsured, raising their premiums and making the product less attractive. Motor insurance is already a difficult business, with costs of repair high and recent storms causing considerable damage to cars. The association is pushing for the introduction of compulsory third-party motor property insurance, and its introduction is said to be imminent; this development is helping drive growth.

According to the FSB, the sector currently faces a number of challenges and risks. The board also notes that high unemployment and slow economic growth weigh on the businesses of insurers. More generally, the FSB cites as problems the lack of historical data, an insufficient capacity and systems to work with data, and the need for better risk management, governance, supervision of intermediaries and cost management. Perhaps the greatest concern in the market involves compliance, and the increased expense and administrative burdens that will come with the introduction of new, sweeping regulations.

Twin Peaks 

The sector is undertaking one of the most extensive reforms in its history. A draft of the Financial Sector Regulation (FSR) bill was first published in 2013. Its origins go back to a 2011 policy paper that was published in response to the 2008-09 global financial crisis. While the authorities felt that the South African financial system was resilient, they also noted that customers are not always treated fairly, that products are sometimes overly complex, that services do not always offer value and that some products are not always appropriate for the market.

The legislation, known as Twin Peaks, establishes two regulators for all financial companies, one in charge of prudential supervision and the other covering market conduct. It is hoped this structure will provide good oversight and bring clarity to the sector. “A Twin Peaks system also represents a decisive shift away from a fragmented regulatory approach, minimising regulatory arbitrage or forum shopping,” according to the Treasury in a 2014 statement.

When the programme is completed, the FSB will become the market conduct supervisor, while a new, statutory body under the central bank will act as the prudential supervisor. Under the proposed plan, the regulators will be more independent, the roles of the regulators will be better defined and communications between the relevant authorities will be improved. At the present, it is not always clear who is responsible for creating policy and enforcing it, and considerable overlap still exists. The insurers are broadly supportive of the Twin Peaks proposal, and the stability it will bring to the sector, as well as the improved oversight on fraud and customer protection. The industry recognises the legislation will help to protect customers, keep insurance competitive and fight financial crime. Some, however, worry about certain aspects of the legislation. It will be expensive to be in compliance with the new rules, and the whole system is seen as potentially complex. Some question whether the programme is not too far-ranging for a developing market, even one as sophisticated as South Africa. All companies will be required to make significant investments in IT systems, and it is worried that the smaller insurers will struggle with this cost. Customers will likely see an improvement in the quality and clarity of policies, but they might also see higher premiums.

“We are on the cusp of important legislation, Twin Peaks,” said Viviene Pearson, acting chief executive of SAIA. “It is a big change from the regulatory point of view. The end goals are good, but in practice it will involve some cost. There will be a whole lot of compliance issues and an increase in compliance costs.”

The regulators argue that the transformation of the regulatory infrastructure will not be as jarring as some expect. They note that significant preparation work has already been done. They also say that prior to the new regulatory push, the companies themselves were mostly well managed. The changes are being undertaken by insurers that are already in relatively good shape. Ultimately, the reforms make business sense as they are positive on balance.

“We are moving to adopt the Twin Peaks regulation, and it will be introduced in early or mid-2015,” said Jo-Ann Ferreira, head of regulatory framework insurance the FSB. “There has been a lot done already to get us and the industry ready. We did an economic impact study, and the benefits of it outweigh the costs.”


The sector is already highly concentrated, with almost 90% of the long-term market in the hands of the major players such as Old Mutual, Santam, Liberty Group, Outsurance and Sanlam. In the short-term market, the figure is about 44%. The sector also has a lot of smaller companies, some of which, with increased costs related to compliance and the constant push for soundness and stability, are having difficulties. Already, administrative costs, largely driven by the new compliance requirements, have been outpacing profit and premium growth, and this is driving mergers. A moderate amount of consolidation has taken place since 2009, with at least three small insurers leaving the business, but in an orderly manner with only one leaving claims unpaid. Some see difficult times for underwriters and anticipate the emergence of new models and the rise of specialty insurers, such as aviation and marine. Others see smaller insurers downgrading into the micro segment. In light of the higher compliance costs, and the macro-economic headwinds, alongside the challenges of competing against larger companies, there is scope for further consolidation.

“We expect the market to consolidate and the number of companies to reduce in the future,” says SAIA’s Pearson. “There are indications that some companies are already looking at different models. There may be some small companies under pressure.”


There are a handful of bancassurance initiatives in South Africa, including Standard Bank, Absa and First Rand. Standard Bank acquired Liberty Life in 1999, while in 2012, Absa developed an integrated portal for online finance, which includes access to both life and non-life products. Until 2007, First Rand had stakes in three insurers, Discovery, Outsurance and Momentum, but it decided that it would be better to spin the assets off and simply continue with them in a more limited or simplified bancassurance relationship.

More generally, as a highly sophisticated market with good distribution and strong governance, South Africa looks at bancassurance as any other G20 economy would: a useful but not vital tool with an only moderately attractive risk profile and high compliance costs. Selling insurance through banks in South Africa has not been as popular a proposition as in some jurisdictions. Insurance companies have historically been unwilling to write simple policies that suit the transactional nature of banks. Though policies have simplified recently, bancassurance remains in question. Many market participants have negative views on the arrangement since the 2008-09 crisis, when some bank-insurance relationships in Europe were abandoned. Others noted competition from direct insurers and new regulations, particularly those related to Treating Customers Fairly guidelines.

Growing Innovation

Despite lukewarm activity in the bancassurance segment, South African insurers have been developing other innovative sales approaches. Taking a cue from shopper loyalty programmes at retailers, insurance providers have begun rolling out similar initiatives in recent years, with the aim of retaining customers. There are now over 70 such programmes in the country, according to local media, with at least 10m people being a member of one or more of them.

Meanwhile, in the telecoms industry, companies are taking advantage of the country’s high mobile penetration rate to offer new micro-insurance products. The products on offer enable customers to make insurance payments through their mobile phones, while some firms are offering free insurance with phone credit, with customers receiving more coverage with higher credit purchases. The ease of use of such schemes is expected to encourage many more customers to purchase insurance.

Micro Plans 

South Africa is highly insured. In terms of premiums as a percentage of GDP, it has one of the highest ratios in the world – life insurance was at 21.6% in 2013. To a great extent, this reflects the history, sound regulation and the fact that a significant portion of savings is held by life insurance companies. However, the country is also in some ways still underinsured in terms of customer populations. It is underbanked, with more than a third of the people in the country without a bank account, while an estimated 40% of the population lacks any long-term insurance policy. It also has a very high lapse ratio of almost 50%, according to the IMF. This reflects the large number of policies sold to people who live at the social margins, where economic weakness an unemployment can quickly squeeze cashflow and make even the cheapest of policies unaffordable.

Over time, it appears that the uptake of insurance by poorer individuals has declined. In 2008, 44.5% of those in the lower income categories had insurance; in 2013, that number had fallen to 40.7%. The decline in short-term insurance uptake has been particularly pronounced. In 2008, 5.3% of the lower income population had short-term insurance compared with 3.8% in 2013. “South Africa does have a high penetration of life insurance,” says Dempsey. “Despite the high levels, people do not have enough insurance. In the formal sector, the problem is quantum; in the informal sector, the problem is one of inclusion.”

To close the gap, South Africa has been working on developing microinsurance for some time. It is a priority but progress has been slow. Efforts have been on going since at least 2008, when the Treasury issued the discussion paper on the future of micro-insurance regulation to develop appropriate legislation. A framework was issued in 2011, and the plan was to establish a standalone microinsurance act. In the end, however, it was decided that the legislation would be rolled into the Twin Peaks reforms and that interim measures would be passed in order to promote the development of relevant products.

Reports indicate that momentum is flagging amongst commercial players. They are finding the submarkets within the microinsurance universe to be surprisingly mature, with little additional demand to be found regardless of the strategies employed. They are faced with tough calculations, whereby additional sales require considerable expenditure and will return little in the way of premiums. Those who need and can afford the micro products have generally already bought them. Research also suggests that the continued uncertainty surrounding regulation is holding back the subsector. The delays and the lack of guidance have made it difficult for insurers to develop strategies. Many are delaying new initiatives until more clarity is achieved. What is known is that more emphasis will be put on reserving, and making efficient use of, capital. As a result, firms are most focused on cleaning up their existing microinsurance portfolios and making sure they are profiting as much as is possible from them, according to The Centre for Financial Regulation and Inclusion.


South Africa’s insurance market is undertaking the most significant transformation in its history, and it will be challenging. The introduction of Twin Peaks will cost the insurers in terms of investments in technology and compliance resources. The payoff will come over time, as the sector becomes more transparent and as the benefits of more stringent regulations feed through to policies and policy holders. The question now is whether the sector can devise products to meet the needs of the poorer residents of the country, not only because these individuals require coverage but because the insurers need further growth and much of it is likely to come from the development of more inclusive products.

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The Report: South Africa 2016

Insurance chapter from The Report: South Africa 2016

The Report: South Africa 2016

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