The recent political upheaval following upon the ruling party’s recent convention is set to have an impact on the insurance industry in South Africa, but the sector has already weathered many storms and economic cycles , so will the resignation of Jacob Zuma and his replacement by Cyril Ramaphosa, really make a difference?
On the 15th February 2018, Jacob Zuma officially resigned, with immediate effect, from his post as the President of South Africa. Though the final push came in the form of a potential vote of no confidence from his ANC party, persistent allegations of corruption have peppered Zuma’s presidential career, which began in 2009 and has offered the world a tarnished view of South Africa, as a whole.
Widely regarded by some as a rather dangerous, challenging but exciting location to do business in, South Africa has always been perceived to be on the sharp end of lower insurance premiums , compared to the global norms , despite the stagnant economy and perceived higher than normal crime rates , increasing levels of joblessness and of course the underperforming rand . The question is, just how much will this turn of events impact on the insurance industry? Peter Olyott, CEO of Indwe Risk Services, gave his opinion on the matter.
Talking specifically about the political situation in South Africa, Peter commented that,
“Zimbabwe, three decades ago, was one of the largest economies in Southern Africa and has the potential to make a reasonably rapid turnaround, once stability is achieved and the new leader’s economic policies are put into effect. So far the signs are promising . This, of course, has a positive effect on South African businesses as well. Once the general elections are over, the turnaround can be expected to gain momentum.”
He went on to say,
“On the political front in South Africa, we expect the stage to remain highly charged with a change in the ruling party’s leadership and an all-important general election looming. Again, the rhetoric has been positive, although it remains to be seen whether this will convert into positive actions in what is an extremely complex and volatile political and economic environment.”
The State of Insurance Affairs
When you look into the insurance industry in South Africa, you can begin to understand why certain people within the sector must have thought that the recent presidential upheaval was the best thing that could have happened in order to put the brakes on the increasing decline in the health of the economy.
Peter also revealed that a number of catastrophic events and what he referred to as “general fire and perils claims” resulted in some enormous commercial and corporate losses which had contributed to a decline in the performance of the Property segment of the insurance market . Add this to the fact that South Africa is no longer considered to be a lower natural risk territory and you have a recipe for rising premiums in order to ensure that insurers can sustain their books of business.
“The resultant losses have forced re-insurers to tighten up both on rates and risk acceptance levels, together with minimum criteria for the acceptance of property risks. This has resulted in less capacity being available in general and much more restricted capacity, if at all, on sub-standard risks. In turn, this results in higher pricing for specific risk categories. Intermediaries will need to work harder at finding reasonably-priced and termed capacity for their clients. In addition, deteriorating emergency services in some municipalities and water supply problems require specific additional attention being paid to fire protection and fire-fighting equipment of clients.”
There’s the rub. Insurance premiums are rising, but so is the risk of property damage as well as other risks such as crime related exposures associated with a stagnant and in some sectors a declining economy . A sluggish economy, like the one that South Africa is currently struggling with, could be a reason for businesses and individuals to cut costs where possible and insurance policies are often the first things on the chopping block, but that would be a far too risky move, at least right now, for any insured South African,
“The stagnant economic conditions do not auger well for the short to medium term in the South African economy, even with a changed political dispensation . However it will be possible to at least place South Africa onto a positive growth trajectory provided the political rhetoric is backed up with decisive action in terms of the issues which have plagued our economy long past the economic downturn of 2009.”
What can South Africa expect in the future?
Naturally, the one way to keep everybody who buys insurance happy is to ensure that insurance premiums come down or at worst are maintained , that risks are downgraded and effectively managed and that insurers can streamline their processes and remain profitable and Peter already sees a wealth of potential,
“On the technology or Fintech front, there are some very interesting business models being touted both locally and abroad. Whether these have the intended impact in the short-term remains to be seen, as in particular markets, they will be up against some serious firepower in the form of both the direct and intermediated insurance markets who have market presence and relatively deep pockets. Even the larger traditional insurers however are embracing technology in an effort to drive costs out of the system and ensure their pricing models are more accurate and capable of being tailored to the specific risk being presented . Nonetheless, disruption in whatever form, together with the economic impasse, will surely drive innovation harder in the sector, particularly where technology is employed to reduce distribution and servicing costs in the sector and even precipitate changes to existing business models and products offered.
Of course, the general population has a part to play as well. With the newly appointed head of the country and of the ruling party , there is reason to be optimistic that the government will look to restore economic stability and then proactively work to ensure the economy fires up again and creates growth which in turn will sustain the programs which will seek to distribute wealth more fairly and protect the interests of absolutely everybody living within South Africa. For the foreseeable future though consumers and businesses will need to tighten their belts before the situation improves .
As Peter says,
“Exciting but stressful times lie ahead for the South African insurance sector, which will require a proactive and innovative approach to the positioning of one’s value propositions to the consumer and business.”
Everybody has a part to play, so it’s going to be fascinating to watch whether the general optimism across the broad society which is clearly visible following President Ramaphosa’s appointment will be sustained in the coming months and years .