With new direct marketing and niche upstarts in the life insurance industry starting to make some inroads, the question remains if insurance giants like Old Mutual and Sanlam will also give up a significant market share in 10 years time.
Partner and national head of insurance at KPMG Gerdus Dixon says: “The level of legislative and regulatory change facing both the short-term and life insurance industries would suggest that smaller players might struggle to keep pace with the ongoing and significant adjustments to the playing field. The implementation of Solvency Assessment and Management (SAM) is already fuelling speculation of merger and acquisition activity ahead of its expected implementation date in 2016. “The additional staffing and improvement to IT systems come at a cost that may not be viable for some of these smaller operations,” says Dixon. SAM is only one of a raft of other regulatory changes facing the industry. Also on the cards in the near future is Treating Customers Fairly (TCF) an example of how the regulator plans on continually evolving regulations to manage market conduct and influence the way that insurers conduct business with customers.
“Communication and implementation of regulation by South African authorities has generally been very good, and there is no feeling of massive regulatory uncertainty,” says Dixon. “As a result, the industry has been generally accepting and even supportive of the direction that regulation and legislation is taking. There appears to be a shared understanding that the steps being taken are necessary and are moving in the right direction.”
Ongoing regulation, however, might slow down the growing market share of the smaller players, and potentially make them more vulnerable to merger and acquisition activity.”
The survey clearly reveals that administrative costs are running well ahead of profitability growth and premium inflation. The increasing administrative costs are likely to be at least partially the result of regulatory changes and suggest that consolidation in an effort to achieve scale might be an industry response.
The likely result is an insurance industry still dominated by very large players, but with an extended product offering, flexibility and direct and alternative distribution channels typically associated with smaller, newer entrants to the market.
A new addition to KPMG’s Insurance Survey in 2012 is a sustainability article, covering the 10 generic sustainability ‘megaforces’, and how these will impact the insurance industry going forward. The basic premise of insurance is the ability to predict and set premiums that cover actual claims and other expenses. The sustainability of insurers would be called into question should that predictability no longer become possible. Weather events in particular have become increasingly difficult to predict. The survey shows that natural disaster frequency and severity has increased dramatically, a clear trend can be seen. However, the ability to match the trend to events and reflect it with annual premium adjustments is a far more challenging prospect.
Another sustainability issue is the ability of customers, be they business or consumer, to afford the premiums. The rising cost of goods and services, puts the disposable income of the consumer under pressure and impacts the affordability of insurance products. This calls for innovative product features that respond to consumers changing circumstances.
At the heart of any insurance company is the claims management process. The better the process the more likely the insurer will be successful in retaining and winning new customers and thereby growing revenue and profits. The South African insurance industry has become increasing sophisticated in managing its claims process, this includes settling legitimate claims quickly and efficiently, reducing leakage or over paying for claims, stamping out fraudulent claims, preventing duplication of effort by centralizing data, providing flexibility within the claims team to manage fluctuations in the number of and type of claims, working within a compliance aware environment, ability to transfer knowledge and excellence in people management.
Shared services and outsourcing
The 2012 insurance survey predicts that outsourcing and shared services are likely to be features of the insurance industry in the next few years. This is in part driven by the global shareholders embedded within South African insurance companies as well as the significant African expansion plans necessitating standardization and consolidation of functions across broad geographies.
The state of the South African insurance industry is healthy. Locally the industry is mature, but well established and sustainable. Margins are under pressure, but opportunity exists to build a more sustainable and stronger business, capable of managing ongoing regulatory change. Great opportunities exist to expand into fast developing African countries.
Survival was the number one priority for many insurance firms during the depths of the global financial crisis. Since then European and North American insurers in particular have focused on addressing regulatory change, improving their understanding and modeling of risk and enhancing operational efficiency. Find out more in The Intelligent Insurer, KPMG's global insurance survey report.