Africa’s growing insurance industry

Despite slow economic growth in South Africa and reduced contributions from investment markets due to lower performance, emerging markets in Africa offer growth potential for the insurance industry. This is seen as more European insurers gravitate towards the continent, says Victor Muguto, Long term insurance leader PwC South Africa.

CONTEXT: Victor Muguto, long term insurance leader PwC South Africa. Photo: Provided

CONTEXT: Victor Muguto, long term insurance leader PwC South Africa. Photo: Provided

Rapid urbanisation across Africa at 4% per annum means there will be larger cities and infrastructure that call for more insurable assets and more insurable lives, says Muguto. The African insurance market accounts for 2% of the world’s market; Africa’s share of the life market is 1.9% and the non-life market is 1.1%. Africa’s premium contribution is US$72bn out of the world’s US$2tr.

Growth in Africa’s industry over the past few years was heavily reliant on the life insurance market. The life market is significantly bigger than the non-life market. “There is a lot more potential for non-life growth to be a lot more significant than the life market,” says Muguto. Premiums in Africa recorded for 2013 come to US$50bn for the life market and US$22bn for the non-life market.

South Africa’s life market is a major contributor to the continent’s levels. About US$54bn of premiums come from South Africa out of Africa’s US$72bn, says Muguto. Nigeria lags behind South Africa with a contribution of US$1.86bn despite it having the largest population in Africa. Kenya follows closely with a contribution of US$1.5bn.

Considering the level of premiums as a percentage of GDP, South Africa spends about 15.4% of GDP on insurance, indicating a “mature market”, says Muguto. South Africa is ranked second in the world in terms of insurance penetration, where developed markets have 12% of premiums account for GDP, he explains. Nigeria only contributes 0.6%, an immature market despite its economic strength and population size.

Regulators in African countries need to do more to educate citizens and change insurance culture. Most of insurance cover is offshore. Local retention should be encouraged, says Muguto. Economies need to be growing at 6% per annum in conjunction with development and economic stability, to ensure insurance growth for the future.

Long-term insurance sector

South Africa’s growth opportunities are dwindling with instability in the market attributed to labour disputes (in the mining sector) and high energy costs and power shortages, currency fluctuation and urban tolls amongst other reasons.

Investment markets remain volatile, says Dewald van den Berg, Insurance Technical Director at PwC South Africa. “Insurers had to deal with currency fluctuations and the rand depreciating,” he says. The bond market was volatile but discount rates didn’t really change year on year. “They [insurers] had to manage through all of that volatility.”

OUTLOOK:  Dewald van den Berg, Insurance Technical Director at PwC South Africa

OUTLOOK: Dewald van den Berg, Insurance Technical Director at PwC South Africa. Photo: Provided

Considering investment markets, the JSE All Share Index closed 7.6% higher than in 2013. Long term insurers benefitted “quite handsomely” in that the average JSE level was 17% higher than in 2013, says van den Berg. The JSE All Bond Index produced a yield of 10%. “It’s not been too bad a year”. Results of long term insurers are “quite heavily geared” towards investment markets says van den Berg. Combined invested assets for long-term insurers grew by 10.4% from R1.77tr in 2013 to R1.95tr, according to the PwC report.

Insurers are also adjusting to changing regulations, such as Solvency Assessment Management (SAM), Retail Distribution Review (RDR), Protection of Personal Information act (POPI), Treating Customers Fairly (TCF) and binders and outsourcing arrangements.

Looking at the top five players in the long-term insurance market: Discovery, Liberty, MMI, Old Mutual and Sanlam, the combined group IFRS earnings came to R28.4bn. This is 17% higher than in 2013. These long-term insurers have consistently produced an average return on equity of 20%.

Return on average equity was at 21%. This follows a stable return over the last three years, with 20% in 2012 and 21% in 2013, says van den Berg. Value of new businesses grew by 12% as expected margins dropped from 3.1% to 2.9% in 2014. “There has been pretty strong growth in new business values,” says van den Berg.

The reasons for the reduced margins are attributed to the tough recurring premium business market, explains van den Berg. “The pressure on consumer disposable income value plays a role. There was also more single premium business in the past year, which has fairly low margins.”

Consistently insurers saw a positive mortality experience. “People are living longer than expected. A lot has to do with the effect of anti-retroviral treatment the government has rolled out. It has had a positive impact,” says van den Berg. In the past, insurers had higher margins to cover the risk of mortality to AIDS, he explains.

There was a R2.4bn gain in mortality. This means insurers paid out R2.4bn less than they expected in mortality claims. “It’s quite a significant change,” says van den Berg. Expenses saw a loss of R168m. By capitalising on the gain, there is a lot of profitability in reduced mortality in the future he says.

Insurers are looking at keeping customers for longer periods of time. In the case of Discovery, which charges age-rated premiums, it is important to keep policy holders because premiums increase over time and there are profits in years to come, says van den Berg. Insurers are focussing on giving value to customers. Insurers are focussing on providing fit-for-purpose products for clients while still striking a balance between doing what’s right for clients and what’s right for the business.

Short-term insurance sector:

Results of short-term insurers Mutual and Federal, OUTsurance, Santam and Zurich were collected. Short-term insurers experienced a difficult year in 2013, but there was strong performance by companies in 2014, says van den Berg.

The return on average equity was at 25%, this is an improvement from 16% in 2012 and 18% in 2013 due to reduced losses from catastrophe events, explains van den Berg. The only major catastrophe event recorded for 2014 was the earthquake in the Gauteng area, according to the PwC report.

As a result, the companies claims ratio has reduced by 5.2% from 68% to 63%. IFRS earnings increased by 23% to R3.1bn in 2014. Gross written premiums were up by 11% as insurers implemented selective rate increases. Margins rose by 3% over the past two years, from 4.6% in 2012 to 7.6% in 2014.

The sum of acquisition costs, expenses and claims as a percentage of earned premiums improved from 95% in 2013 to 92% in 2014. Insurers are looking for growth opportunities outside of South Africa. OUTsurance’s business in Australia Youi saw growth of 66% and the company was expanded to New Zealand.

Africa’s outlook

Long-term life insurance is not a significant part of Africa’s business yet, says van den Berg. However the Value of New Business has increased by 7% since 2013.

According to the report, opportunities for insurers are greater in the rest of Africa than in developed markets and South Africa, given the higher investment returns and insurance margins. Relatively stable democracies, improved governance and economic growth make countries like Nigeria and Kenya attractive investment destinations.  Sub-Saharan Africa has predicted GDP growth rates between 5-7%.

Trends enhancing growth include:

Rapid Urbanisation

By 2050, Africa is expected to have an urban population of 56%. Africa will account for 24% of the world’s population. About 400m Africans will have migrated from rural areas to cities, with two in three people being urbanised. Initially those urbanising will move to informal settlements with the threat of communicable diseases due to poor water and sanitary infrastructure. As a result there will be increased infrastructure development programmes in East and West Africa, responding to growing demands for services in urban areas. This will lead to insurance growth in the continent due to increased insurable assets.

Demographic and social change

The emerging African middle class population will grow from 15m to 40m by 2030. Their increased spending power will impact the demand for insurance and savings products. Healthcare providers will need to increase services in terms of range and location, creating opportunities for health and insurance products. Africa however has high unemployment rates. Estimated youth unemployment is twice that of adults. However the fast economic growth may close the gap. With that, demand for life insurance and investment products like retirement savings may increase. The tech-savvy generation will create opportunities for quicker distribution channels for the industry.

Shifts in global economic power

Infrastructure development will make doing business in Africa easier. Only 30% of the African population has access to electricity. Economies are limited by the poor electricity supply.  Infrastructure investment will be US$180bn by 2025. Economic growth is linked to industrialisation.

Climate change and resource scarcity

Natural resources have been the main source of economic growth. Africa holds one-third of global mine reserves, one-tenth of global oil reserves and produces two-thirds of the world’s diamonds. The falling oil price has impacted GDP growth negatively by 1%, GDP growth for 2015 will be 4%, this is the lowest since 1990.  Non-oil sectors like construction and retail may step in to drive economic growth according to the IMF. Africa’s dependence on natural resources presents opportunities and challenges for insurers and investors. The impact of climate change, urbanisation and infrastructure development will increase greenhouse gas emissions. This will increase the chances of natural disasters and insurers may have to adapt products and services to respond to these risks.

Technological breakthroughs

Technology will impact future insurance distribution. About 70% of Africa’s population have mobile subscriptions. Insurers’ ability to customize previously generic insurance products for clients’ needs and to engage with them on a more personal level will help insurers grow.

Government policies, the legal and regulatory environment

Political and legal factors impact the insurance industry. Political risk constrains investment. Insurers need to overcome the difficulty of doing business in Africa. The World Bank’s rankings for ease of doing business show that 60 of the lowest ranked countries are in Africa. Financial service regulations have to be improved. Insurers may have to partner with existing local partners to overcome difficult business environments

This article was featured in Finweek magazine.

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