Africa Insurance Trends - PwC South Africa

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Africa insurance trendsStrategic and Emerging Trends inInsurance Markets in South Africa,Kenya and NigeriaPart 1 – South AfricaOctober 2014www.pwc.co.za/insurance

Insurance Industry Survey 2014 – South Africa

Contents1.Foreword12.Executive summary33.Market environment and short term growthprospects – SA94.Bullish growth sentiment in bear environment – SA115.Strengths and weaknesses in the SA market136.SA market developments and change drivers157.A new world – preparedness to deal with changes218.A new world – responding to intensifyingcompetition in SA25A new world – who is the future competition in SA?319.10. A new world – SA local perceptions about thedisruptive global trends3311. A new world – SA subsector responses tochanging environment3512. Gearing up for growth: where will this come from?3913. Gearing up for growth: mergers and acquisitions4514. Social changes: Demographic shifts5315. Social changes: Responding to demographic shifts5516. Economic changes: Impact of urbanisation onbusiness models5917. Economic changes: Impact of urbanisation ondistribution channels6118. Political and regulatory changes63PwC

19. Environmental changes: climate andcatastrophic events6920. Technology and the new digital economy7321. Managing risks in the new environment8122. Talent shortages8523. Peer reviews in detail8724. Appendices9525. Background data9926. About PwCInsurance Industry Survey 2014 – South Africa117

1.Foreword

This edition comes at a timewhen global and African insurersare grappling with disruptivesocial, technological, economic,environmental and politicalchanges. These megatrends arealready reshaping the competitiveenvironment for insurers andreinsurers, and the markets theyoperate in across Africa.Victor MugutoWelcome to our firstbiennial PwC Strategicand Emerging Issues inAfrica Insurance Survey.Our previous five surveyswere confined to the SouthAfrican insurance market.We have now expanded thesurvey to include two morekey markets, Nigeria andKenya, whose results will bepublished separately. It isour intention to extend thesurvey to other countries inAfrica in future.It is against this background thatwe have conducted this survey.Hopefully, it will achieve itsprimary goal: to help industryexecutives recognise thesignificance of these changes anduse them to shape strategies forthe future. The survey includes theviews of long-term and short-terminsurance CEOs. We believe thatit brings out important themeswhich should be useful to insurersacross the continent. The keyobjectives of the survey are to: Raise the awareness of insurersto the megatrends that arechanging insurance marketsglobally and across the Africancontinent; Provide insight into how theinsurance market across Africamight evolve over the next fewyears; Shift the focus of CEOs frommerely responding to anddealing with the short-termmarket instability; and Help insurers to come upwith strategies and businessmodels that are relevant to thechanging environment.We would like to thank all theexecutives who participatedin this survey. We appreciatetheir openness and insight andthe vision they provided on thevarious topics. We would also liketo thank Dr Brian Metcalfe and thePwC Africa Insurance team for thetime and effort they put into theinterviews, analysing the surveyresults and producing this report.2Insurance Industry Survey 2014 – South AfricaWe trust that you will find thesurvey useful. Should you like todiscuss any of the issues addressedin more detail, please speak to thecontacts listed at the end of thisreport.The South African interviewsincluded in this publicationwere researched and writtenin association with Dr BrianMetcalfe, Associate Professorat the Business School, BrockUniversity, Ontario, Canada.He has a doctorate in financialservices marketing and has alsotaught an executive managementcourse on financial servicesmarketing at the Graduate Schoolof Business at the University ofCape Town.Interviews with Kenyan insurerswere conducted by Victor Muguto,our Long-Term Insurance Leaderfor Africa, in association withpartners/directors from ourNairobi office.Interviews with the Nigerianinsurers were conducted byObioma N Ubah, an insurancepartner from our Lagos office.The document was edited byVictor Muguto in association withour PwC Africa actuarial andinsurance teams, with significantinput from Tinashe Mashoko, AmitKooverjee and Sunel Jacobs.Additional copies of the report canbe obtained from:Susan de KlerkInsurance Knowledge ManagerPwC South Africa2 Eglin Road, Sunninghill, 2157Telephone: 27 11 797 5148Fax: 27 11 209 5148Email: susanna.de-klerk@za.pwc.com

2.Executive summary

BackgroundThis survey focuses onstrategic and emergingissues in the South African,Nigerian and Kenyaninsurance markets. Ourprevious insurance surveyswere confined to the SouthAfrican market. Surveyfindings on Nigeria andKenya are presented inseparate country reports.Other countries in Africawill be surveyed in future.The survey attempts to provide anindustry-wide sub-Saharan Africaperspective. However, wheremeaningful, it also highlightsdifferences between the shortterm and long-term insurance subsectors, as well as identifying someof the differences in the marketssurveyed.The survey is based on personalinterviews with CEOs and seniorexecutives; 31 in South Africa,eight in Kenya and six in Nigeria.The South African list shows 34companies. This is because onlyone interview was conductedwith AIG, Hollard and Regent,where each of these is listed underboth short-term and long-termsubsectors.Reinsurers and cell insurersare also included in the overallindustry charts and, whererelevant, in their long-term orshort-term categories.The interviews were conducted inJohannesburg and Cape Town inJune, Nairobi in July and Lagos inAugust 2014.The full list of insurers whoparticipated in the survey is shownin the appendices of each contryreport.Main findingsSouth Africa is the number oneinsurance market on the continent.It was also ranked 15 and 28 inthe long-term and short-terminsurance markets respectively in2013.Source: Swiss Re Sigma Report4Insurance Industry Survey 2014 – South AfricaMajor change driversdisrupting themarketAs with the global insuranceindustry, the African market isin a state of flux, with a series offar-reaching disruptive changesoccurring at the same time. Theseinclude:1. Social networks, which areshifting the balance of powertowards customers;2. Technological advances,which are disrupting the entireinsurance value chain, fromdistribution to underwriting,pricing and loss control.Advances in embeddeddevices, sensors, software andhardware are also enabling thetransformation of big data intoactionable insights;3. Environmental changes,including the increasingseverity and frequency ofnatural and man-madecatastrophes that are creatingchallenges but also newopportunities for sophisticatedunderwriting models and risktransfer;4. The rising economicsignificance of emerging highgrowth economies like Nigeriaand Kenya. South Africa’s,economy on the other hand,is stagnating at a time whenit should be taking advantageof being in the limelight ofemerging markets; and5. Political changes, includinggeo-political risks, terrorismand major regulatory overhaulwhich may become unfortunatestumbling blocks at a time whenAfrica is ready to take its placein the global economy.

Despite these disruptions, thereare opportunities for thoseinsurers who can turn the changesinto competitive advantage andreposition their businesses for thefuture.Ability to handle changeParticipants were asked to assessthe level of preparedness of theirorganisations to deal with thesedisruptive changes. Most werewell organised at the board andexecutive levels and in certainfunctional areas, such as actuarial,risk and compliance, and finance.However, the majority weregenuinely less well prepared inIT, sales and customer service,marketing and distribution, andhuman resources.Overall, it is clear that mostinsurers were focused on dealingwith the short-term effects of thechanging environment. Whatis needed, though, is a radicalrethink of how to build a futurein an increasingly competitiveand rapidly changing Africaninsurance market.Highly competitivemarketsThe insurance markets in allthree countries remain highlycompetitive in all segments.The greatest competitive threat formost insurers remains the largebroad-based financial institutionsthat have the ability to own largecustomer bases and to cross-sellinsurance, investments and otherfinancial services products.These large financial institutionsare formidable competitors andhave responded to new innovativeentrants in the direct market spaceby establishing new subsidiaries orthrough acquisitions.Although they may be burdenedby legacy systems in their homemarkets, they have also adoptedan aggressive approach tointernational expansion.Some of the large players nowhave a substantial footprint inother sub-Saharan markets.A small number of South Africaninsurers have ventured into Asia,to countries such as India, China,Malaysia, Indonesia and Australia.Larger players in Kenya alreadyhave significant operations inUganda, Tanzania, Rwanda as wellas other surrounding countries inthe wider East Africa community.There was an increase in thenumber of participants who feltthreatened by non-traditionalinsurers and new entrants intothe market. These new entrantsinclude mobile phone operatorsand retailers, with large customerbases and data mining power.Social changesOn the positive side, the growingmiddle class and improvingliteracy levels were mentioned asthe top social changes impactinginsurance growth. The up-take ofsocial media and the emergenceof powerful social networks werenoted as positive for innovation indistribution channels. However,the stubborn high unemploymentlevel at 24%, which has not fallenbelow 20% in the past 17 years is asignificant negative factor in SouthAfrica.Nigerian and Kenyan respondentsalso mentioned the importance ofa growing middle class and socialnetworks. Increasing urbanisationwas also noted as positive for thegrowth of insurance in all threecountries.Given the growth in the middleclass and increasing urbanisation,the use of data analysis to betterunderstand the needs of these newcustomers was noted. Businessmodels were also expectedto change, to become moreknowledge driven and customercentric. A few larger Life insurershave already adopted “customercentric” business models.Geo-political uncertainty andterrorism were mentioned asnegative developments for Kenyaand Nigeria. Other emergingnegative developments includethe impact of the spread ofhaemorrhagic diseases such asEbola in West Africa.Technological advancesand digitalisation of theinsurance marketThe most important technologicaldevelopments for short-terminsurers were in the big dataand data analytics areas, andthe potential to use these to gaincompetitive advantage. Long-terminsurers were more concernedabout the growing influenceof mobile devices, tablets andsmart phones and their impacton distribution and sustainabilityof existing insurance businessmodels.Most participants agreedthat there are already majorapplications of technologyin real-time, cost-effectivedata analysis, claims or lossprediction and improvedcustomer communicationsthrough advances in technology.However, the Participants are onlybeginning to realise the magnitudeof disruption arising from thedigitalisation of the insurancemarket.Looking across the six differentareas of mobile technology, socialmedia, sensor technologies, bigdata and data analytics, cloudcomputing and the wider digitaleconomy, it was surprising to seethat only a third of participantshave developed plans to addressthe impact of these far-reachingchanges.PwC5

Economic environmentThe biggest concern highlightedby South African respondentswas the lack of growth in theeconomy, against a backgroundof unemployment levels at 24%.According to the IMF WorldEconomic Outlook, released on7 October 2014, South Africa’sGDP will grow by a mere 1.4% in2014, rising to 2.3% in 2015. Thisis a far cry from the 6% target raterequired to create jobs and for anymeaningful reduction to the highunemployment levels.Negative factors mentioned byparticipants include unsettledlabour markets, particularly in themining and metal industries, highenergy costs and inflation, lowproductivity, rising interest rates,high consumer debt and fallingdisposable incomes.High urbanisation rates and agrowing black middle class wereseen as positive for insurance.By contrast, Nigeria’s GDP isseen as rising from 5.4% in 2013to 7.0% in 2014, and to 7.3% in2015, predominantly driven by oilwealth. Increasing urbanisationand a growing middle class werealso seen as positive for insurancegrowth.Nigeria’s GDP was recentlyrebased, from 270 billion to 509 billion for 2013, overtakingSouth Africa’s 351 billion andeasily becoming Africa’s largesteconomy. This wealth, a largepopulation of 171 million, risingaffluence and low insurancepenetration rates are seenas positive factors for futureinsurance growth.However, other factors need tobe taken into account, includinglow levels of insurance awareness,and per capita incomes, which at 2900 are still much lower thanSouth Africa’s 6621.6Insurance Industry Survey 2014 – South AfricaThe concentration of oil wealthin a few hands is also a factorlimiting insurance industry growthto the wider population.Kenya’s GDP was also rebased,from 4.3 billion to 53 billionfor 2013, making it Africa’s ninthlargest economy. A population of44 million people, high literacylevels and GDP outlook risingfrom 4.6% to 5.3% make this anattractive growth market. Therising middle class and increasingurbanisation were also mentionedas positive contributors to futureinsurance growth.GDP per capita now stands at 1246, making Kenya a middleincome country.Kenya’s significance will continueto rise, given its influence in theemerging East Africa economiccommunity with a combinedpopulation of 200 million people.Environmental changesand catastrophic eventsShort-term insurers raisedconcerns over the increasingfrequency and severity ofcatastrophic events. However, theywere surprised that, paradoxically,despite the increase in claims,insurers’ rates had not hardened.They also acknowledged theirinability to adequately underwriteand price for some of the emergingcatastrophes, given limited pastexperience and statistics.Innovative new technologiesin the form of early warningsensors, sophisticated catastrophemodelling and underwriting,pricing, and risk transfermechanisms are now seen as theway forward, and are rapidlypicking up pace in the SouthAfrican market.

Political environment andunrelenting regulatorychangesSouth African participantsreported solid progress as theyprepared for the implementationof SAM, the Solvency IIequivalent. Data clean-ups andsystems implementation are wellunderway, but not yet completed.The feedback seemed positivefrom most participants, with onlya few companies lagging behind intheir implementation.Indeed, the emergence ofinnovations in South Africa andKenya, provides evidence ofthe dynamism present on ourcontinent.The M-PESA Mobiledistribution and paymentinnovations in Kenya are a goodexamples.Participants were also willingto identify shortcomings. Theyacknowledged that they havebeen poor communicators whentrying to articulate their valueproposition to stakeholders,including government.Participants also mentioned thedisruption and costs associatedwith implementing otherregulatory changes, such asTreating Customers Fairly (TCF),Retirement Fund proposalsand IFRS4. The majority were,however, embracing the need forchange and preparing to comply.Many South African participantswere critical of their inability todeliver on transformation andskills development and to dealwith the inequalities inheritedfrom the past.While Nigeria has opted tointroduce Solvency II, it is stillearly days for most insurerson this journey. The regulatorhas introduced measurers toconsolidate the fragmentedindustry, increase insurancepenetration and improvegovernance.Previous reports have documentedtalent shortages and this issuesurfaced again in this report.As noted above, the industryrecognises that it needs to bebetter at skills development.Kenya has not yet adoptedSolvency II or an equivalent. Theregulator there has proposed someinterim requirements for riskbased supervision. Most insurersin Kenya are well prepared toimplement the proposals, althoughthe market is desperately short ofactuarial skills.Sound footingDespite the magnitude of thedisruptive trends, the SouthAfrican market remains wellregulated and financiallysound. Although the industryis dominated by a few largeconglomerates, there are alsoa good number of midsizedcompanies, which fosterscompetition and innovation.Industry failing to attracttalentUnderwriting, actuarial and riskmanagement skills were areasof concern. Midsized companiesemphasised the challenge offinding appropriately qualifiedand experienced non-executivedirectors. They argued thatcandidates are often ruled out by‘conflicts of interest’ because oftheir involvement in other parts ofthe financial sector.IT skills, or perhaps moreappropriately digital skills, arealso in demand as the industryattempts to keep pace withemerging technologies.PwC7

In search of future growth–international expansionDespite the disappointing GDPgrowth in 2013 and the weakeconomy in South Africa, bothshort- and long-term companiespredict steady growth in 2014and beyond, in the region of 7%to 15% per annum. However,these are nominal growth targets,in a Rand currency, which isincreasingly weak and volatile.Real growth for South Africaninsurers will therefore have tocome from new products in newrisk areas, and from geographicdiversification outside SouthAfrica. We are now witnessing thenew “Great Trek” northwards toother territories. Most of the largerinsurers have made significantacquisitions and are targetingup to 15% contribution to theirresults from outside South Africa.In this regard, the top threetarget markets for South Africaninsurers were identified as Kenya,Nigeria and Ghana. Insurers areattracted by projections of strongGDP growth, low penetrationrates and the expected growth indemand for insurance as affluenceincreases.Kenya was singled out because ofthe success of its mobile phonedistribution and payment systemsand its bancassurance channels.Nigeria was similarly singledout because of its populationdemographics, low insurancepenetration rates and strong GDPgrowth. Nigeria is potentiallythe biggest insurance growthmarket in Africa. Ghana wasalso attractive because of lowinsurance penetration levels, andthe potential of earning of highmargins.Only a small number of largeinsurers have focused attentionon the fast-growing markets inemerging Asia which includesIndia, China, Malaysia andIndonesia.Larger Kenyan insurers are alreadyoperating in countries such asUganda, Rwanda, Tanzania andBurundi. Some would like toventure into virgin markets such asEthiopia and South Sudan.Peer-ranking overviewTable 1:FirstSecondThirdAlternative risk transferGuardriskCentriqHollardAssistance businessOld MutualSanlamHollard LifeCredit lifeHollard LifeAbsa LifeStandard InsuranceGroup business – InvestmentOld MutualMMISanlamGroup business – RiskOld MutualMMISanlamInvestment productsLiberty LifeDiscoverySanlamLife risk productsDiscoverySanlamOld MutualMotor insuranceOutsuranceSantamTelesureProperty (excluding motor)SantamOutsuranceHollardHealth insuranceDiscoveryAIGHollardCustomer ovationsDiscoveryOutsuranceHollardMarketing strategiesOutsuranceDiscoveryHollardTechnically competent nce Industry Survey 2014 – South Africa

3.Market environmentand short termgrowth prospects –SA

Africa’s insurancesector in a globalcontextTo put things intoperspective , the entireAfrican i

These megatrends are already reshaping the competitive environment for insurers and . executives recognise the significance of these changes and use them to shape strategies for the future. The survey includes the views of long-term and short-term insurance CEOs. We believe that . the use of data analys

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