Santam, Old Mutual at the top of the log in SA insurance industry
While South Africa's financial services industry is not untroubled by various issues like over-high fees, a lack of competition and suchlike, it is, overall, world class. Johannesburg is ranked as the world's 50th most-important financial centre, which is pretty good – certainly there are no other sub-Saharan African cities that come close – and the country is home to a number of stable, well-run, well-capitalised and profitable financial services companies.
The South African long- and short-term insurance industries are especially interesting as they play host to some of most innovative financial services companies in the country. Discovery, for example, has really revolutionised health and life insurance on the long-term side, while Outsurance has really shaken up things on the short-term side. Yet, despite the presence of these disruptors (and in testimony to the quality of the country's financial companies) traditional insurers in South Africa have managed to hold their own and deliver customer and shareholder value. It's far from perfect, but it's an industry South Africa can be justifiably proud of. – FD
ALEC HOGG: The 2013 financial performance of South Africa's insurance companies reflects the industry's positive bill of health, certainly, on the long-term side. Dewald van den Berg, who is Director of Insurance at PwC, joins us. We just had Deloitte and now we have PwC. I was wondering where the EY guy is, but maybe he's still in his office in Sandton, around the corner. Dewald, this is a terrific report that you guys put together. Every year, I presume, you take the insurance…the big life companies' financial statements, the short-term financial statements, and then come to conclusions.
DEWALD VAN DEN BERG: That's right. We look at the Big Five life companies and the Big Five short-term companies. Clearly, we can only look at those where they are publicly available, so a company such as Hollard, which is a big short-term player…they would not be included, because they don't report to the market. What we do is we basically look at the 2013 calendar year, so if your year ends in June we try to make it a comparable period so that we can actually compare apples with apples.
ALEC HOGG: It's a pity that Hollard aren't there, but Outsurance is, and it is just an overall trend of the direct insurers such as Outsurance. Are they taking an ever-bigger slice or have they gotten to their proper level now?
DEWALD VAN DEN BERG: I think they are taking a bit of a slice. If you look at the Outsurance results, Outsurance as a whole has grown a lot, but a lot of that is attributed to their Australian business – Youi. That has grown 74 percent. Locally, Outsurance only grew four percent, but if you look at MiWay business, which grew nicely at 22 percent, so there's definitely that growth in the direct market. You see the consumer wanting that direct access to the insurer. They want to compare. 'Am I getting the best premium?' It's easier these days to quickly phone up a couple of direct underwriters, and you actually get a quote, which helps.
ALEC HOGG: It's interesting. If you were advising a friend who's a short-term broker, would you tell them to maybe look for a different job?
DEWALD VAN DEN BERG: Not necessarily. I think there's still space for a broker – it depends. A broker can still add value. I think one needs to be careful, because if you compare 1/2/3/4 policies, you need to make sure that you're actually getting the same cover. It's therefore quite possible, that you will have a different excess level or some exclusion, so it's very important for the consumer to know what they're buying themselves.
ALEC HOGG: Yes, it's interesting. It's a completely different subject, but there's a big focus from government now on intermediary fees. If they were to wake up and say 'well, short-term brokers get 15 percent of your premium or 20 percent of your premium, if it's car or house', maybe there'll be some government intervention there, too. That's a subject for a different day. We've been talking about short-term insurers. Generally speaking, they seem to be under a bit of pressure.
DEWALD VAN DEN BERG: They've had a tough two years – 2012 was tough. We had large fire claims, we had floods, we also had hailstorms, and in 2013 we were almost out of the woods, when in November, two really big hailstorms hit the industry so they incurred losses of close to two billion Rand on those two hailstorms.
ALEC HOGG: Was it for themselves? Had they not reinsured?
DEWALD VAN DEN BERG: They had reinsured. I think the insurers were becoming smarter. If you look at the retention of some of the insurers, they had bigger losses but their exposure was slightly less, so I think they're becoming smarter with underwriting. Their own retention was also a bit less, so they've actually layered off slightly more to the reinsurers and you can see that in the numbers, as well.
ALEC HOGG: So they got a little bit smarter on that. I spoke to Johan Jonck, who runs a website called Arrive Alive – it's been going for 11 years – and he was saying to me (perhaps, from his perspective), that you have to have car insurance in South Africa because it's just a matter of time. Somebody is going to knock into you at some point in time. Is this being reflected yet in (1) premiums and (2) on the rest of the world's ability or desire to accept reinsurance of the car market in South Africa?
DEWALD VAN DEN BERG: I think our big losses were due to weather-related claims and not so much the motor book although the motors, clearly, would have been impacted by the hail but that's more of a catastrophe. That's not so much the driver skill on the accident side. Motor is very competitive in the country. If you look at all the results, you can see personal lines, of which the bulk is your motor/homeowner/content-type of insurance. There, the insurers haven't grown all that much, but it's a very competitive market, so their rates are very competitive.
ALEC HOGG: Thank goodness it is, because we have one of the worst accident rate in the world, haven't we.
DEWALD VAN DEN BERG: It is. Something that the industry is punting is to get to compulsory motor insurance and I think it's probably worthwhile, because you don't want to end up… At the end of the day, the insured consumer out there…if the person you have an accident with is not insured, it comes down to those who are insured having to pick up the cost.
ALEC HOGG: And if you don't have insurance like somebody I know, who is very close to sitting in this chair, and you are hit twice…well, you end up paying, generally speaking. Life insurance companies…you have the Big Five: Discovery, Liberty, MMI, Old Mutual, and Sanlam. Discovery is one of those Big Five. Are they continuing to eat the lunch of the more established incumbents?
DEWALD VAN DEN BERG: They're doing well. If you look at the old two big one – Sanlam and Old Mutual – they've done really well in the last year. Old Mutual have targeted the mass foundation cluster – that's their entry-level emerging market and they've done really well, so they've grown their chunk of new business at 14 percent for two years running, primarily through that market in the South African market, so they've done really well. However, Discovery is still doing well. They're really doing well in terms of maintaining their customers on their books through their interaction with Vitality. Many people won't know what Vitality is, but it's their Customer Loyalty Program – and they link it to many of the products, which Discovery, as a group, offers. It just helps that stickiness and they really drive that to keep people with them for longer and the longer they're with you…clearly, then they make their money.
ALEC HOGG: So their disruptive model still hasn't run out of road yet. What about Liberty? We don't hear much from them lately.
DEWALD VAN DEN BERG: Liberty, I think, have turned the corner. If you go back three years, they had a really tough year. If you look at the new business they've written, I think you can see in the consistency of the management team there…for the last three years, it has been the same management team talking to you, and you can see it in the results. It's far more consistent. They've gotten the margin back up to where they want it on their new business, and the volumes are there as well, so new products such as their Evolve product have sold quite well, so people are liking the new innovative products they've put out.
ALEC HOGG: And MMI…whenever you get two companies – Metropolitan and Momentum – merging, in this case, it does take time to settle. Have they?
DEWALD VAN DEN BERG: I think so. You can see it. They've clearly communicated that they're now focused on their growth, so the past two years, for them, was a focus to bring the two companies together. They are now focusing on growth, and looking to build that as a big group. I think it's difficult. It's a big ship to align, but if you look at it, the big focus for this initially, was to get some expense savings. If you look their assumption set going forward for next year, they have actually set their assumptions on their cost base – slightly lower – so it would seem that those merger synergies are actually starting to come through there.
ALEC HOGG: Very quickly, who would be the star performer of the life assurance industry and the short-term insurance industry for 2013?
DEWALD VAN DEN BERG: That's a tricky question. I think that in terms of real growth in new business, Old Mutual have done really well over the last two years consistently.
ALEC HOGG: And short-term?
DEWALD VAN DEN BERG: Short-term, I think Santam didn't do badly because they have such a big chunk of the business, so they haven't taken too much of a knock. I think they've done quite well.
ALEC HOGG: Santam on the one…Old Mutual on the other: I'm sure there are many people watching this and thinking 'yay, that's us' and many people thinking 'I must take Dewald out to lunch'. That was Dewald van den Berg, the Director of Insurance at PwC.