January 29, 2018

South Africa’s insurers are innovating amid challenging market conditions

The political and other challenges faced by South Africa are driving innovative measures within the domestic insurance industry

First published in Insurance Day.

As I write this, the economic outlook for South Africa is weak and all indications are the country’s economy will show little growth in the near term.

During his mid-term budget policy statement, South Africa’s minister of finance, Malusi Gigaba, confirmed GDP growth in South Africa is likely to have fallen to 0.7% for 2017. The outlook is set for a slight pick-up to 1.1% in 2018 and 1.5% in 2019. 

This puts South African insurers under economic pressure and that pressure is increased by factors ranging from adverse weather conditions to a continuing reduction in disposable household incomes due to inflation and the high unemployment rate.

Furthermore, a plethora of regulatory amendments will be enacted during the course of 2018 with resultant increased compliance costs. These include new Policyholder Protection Rules, new Regulations to the Long-term and Short-term Insurance Acts and the Insurance Act.

Creative Period
While this foreshadows a difficult economic environment for insurers and intermediaries, we foresee that this will spur a creative period for product development and cost containment. 

The unsustainably high level of fraudulent claims in particular is beginning to lead to intelligent product innovations in South Africa. Peer-to-peer insurance, in which policyholders select their own insurance activities and risk pool – often from among people they know – and blockchain technology solutions are being developed specifically to reduce the number of fraudulent claims.

The Insurance Act will introduce microinsurance as a separate class of insurance business. Microinsurers will be able to underwrite both life and non-life policies and will benefit from less onerous solvency and regulatory compliance requirements (within the constraints of specific monetary caps on the premiums charged and policy benefits provided by these insurers).

This will in our view be a genuine market disruptor and is sure to increase market penetration in the lower secondary market. There are already new players waiting in the wings, ready to create low-cost products. Major insurers that operate in this space will need to cut costs or create new entities to operate under a microinsurance licence to continue to compete in this market. The stage is set for a wholesale shake up of the market, and no one knows how far this will extend. Meanwhile, mobile technology is also helping firms make rapid progress in broadening this segment of the market.

Technology, such as telematics and smart home security systems, is also increasingly applied to assist insurers in more accurately underwriting specific risks, which will drive down risk and cost.

There are other innovations, too – paperless insurance products, purchases by mobile phone, will be attractive in this continent, as well as on-demand insurance. 

Parametric or indexed-type insurance products have also gradually been introduced into our market, particularly in the agricultural insurance market.

Conventional insurance indemnifies the policyholder for the loss it incurs from an insured event. Parametric insurance, by contrast, pays a fixed amount upon the occurrence of a triggering event. The benefits payable are usually based on a modelled forecast of the loss the policyholder will incur. The nature of the product means no loss adjusting need take place. As soon as a pre-determined threshold has been met, the policy is triggered and payment is made.

Parametric products can cover risks that are not otherwise easily insurable and allow for more scientific pricing of products that respond to specific isolated parameters, rather than the physical losses that might result from any number of a wide range of occurrences. Together with lower claims management costs, this makes lines of business commercially viable that were not previously.

By its nature, parametric insurance brings with it the ability to provide rapid funding for relief, recovery and reconstruction efforts, and so may have the greatest potential impact in countries such as South Africa, which are dramatically affected by natural perils and where the protection gap (the amount of economic loss that is not insured) is wide. We expect retail sales could take off; and, given its unique suitability for Africa, we predict parametric insurance is another innovation that is here to stay.

Caution
However, in an environment of innovation, I would like to add a final note of caution. Navigating this race to innovate, South African insurers will need to balance the desire to design new and innovative products and distribute them though new distribution channels with their regulatory obligations, in particular, the fair treatment of customers  (given that regulations introducing treating customers fairly principles were formally adopted in South Africa on January 1 this year).

It would be easy to paint a negative picture of the prospects for the insurance market in South Africa. But the truth is that economic challenge has brought innovation bubbling to the surface in a whole variety of ways.

While the market remains largely traditional in shape, a combination of pressures on both insurers and intermediaries, alongside the growing number of new products designed to fit this market, could see some exciting new players and products emerge.