South Africa, a world-class giant among others

Having presented the insurance markets of Brazil, Russia, India and China, Atlas Magazine is now completing its special report on the BRICS through this study dedicated to South Africa.

The beginnings of South African insurance date back to 1831 when the first company, South African Fire & Life Assurance, was set up. Nearly 60 years later, branches of British insurers established their own companies in the country. In 1894, South African Fire & Life Assurance was then taken over by the London & Lancaster Insurance Company. In 1918, Santam, the current leader of the non life market was founded in Cape Town.

With the increasing number of players, the legislation had developed. In 1943, a new law set a 30% minimum shareholding for South African investors in the capital of insurance companies, which prompted foreign companies to set up local entities. In 1970 another major player entered the market, Mutual and Federal, resulting from the merger of Royal Insurance Group and South African Mutual Fire and General Insurance. This group became the second non life insurer in the country in terms of premiums.

In 1990, the regulators set up a new insurance regulatory body, the Financial Services Board (FSB).

An important market with a penetration rate among the highest worldwide

© Dylan Harbour, CC BY-SA 3.0South Africa has only 50.8 million inhabitants. But despite this relatively low figure, the finance sector is highly developed. In 2012, the country ranked 17th worldwide in the insurance sector with a total premium volume of 51.9 billion USD, far ahead of all other countries on the continent.

South Africa alone accounts for 72.27% of the premiums collected in 2012 in Africa. The level of financial sector development gives people easy access to insurance.

Position of South Africa worldwide in 2012

in millions USD

	South Africa	Rest of Africa	Total Africa	%South Africa/Africa	Total World premiums	% South Africa/World
Life	41 691	8 197	49 888	83.57%	2 620 864	1.59%
Non life	10 269	11 733	22 002	46.67%	1 991 650	0.51%
Total	51 959	19 931	71 890	72.27%	4 612 514	1.13%

Source: Sigma and FSB

Penetration rate

Penetration rate was 14.16% in 2012, not only the most important in Africa but also among the highest in the world. Life insurance dominates the market since its penetration rate reached 11.56% compared to 2.6% in non life.

While the country has sophisticated insurance products, it still has to exert important efforts before it
can appeal to low-income people. Microinsurance is not actually present in South Africa due to the absence of legislation in this area. Only death insurance policies are provided in this niche. A draft law governing microinsurance is likely to be promulgated during 2014. Unconventional distribution channels ought to be created to attract the have-nots.

Evolution of penetration rate: 2010-2012

Source: Sigma

The first 10 penetration rates in 2012

	Life	Non life	Total
Taïwan	15	3.2	18.2
South Africa	11.6	2.6	14.2
Netherlands	3.8	9.2	13
Hong Kong	11	1.4	12.4
South Korea	6.9	5.3	12.2
Japan	9.2	2.3	11.5
United Kingdom	8.4	2.8	11.2
Finland	8.4	2	10.4
Switzerland	5.2	4.3	9.5
Denmark	6.6	2.8	9.4
World average	3.7	2.8	6.5

Source: Sigma

Insurance density in 2012

In 2012, insurance density amounted to 1080.9 USD per capita among which 882.3 USD in life and 198.6 USD in non life insurance.

Evolution of density: 2010-2012

Source: Sigma

Insurance density: position of South Africa in 2012

in USD

	Life	Non life	Total
Switzerland	4121	3401	7522
Netherlands	1750	4235	5985
Denmark	3718	1586	5304
Japan	4143	1025	5168
Luxembourg	3067	2012	5079
Finland	3860	910	4770
Hong Kong	4025	519	4544
Norway	2831	1656	4487
United Kingdom	3256	1094	4350
United States	1808	2239	4047
Ireland	3068	944	4012
Sweden	2866	1030	3896
Taiwan	3107	653	3760
Belgium	2367	1208	3575
France	2239	1304	3543
Canada	1493	2040	3533
Singapore	2472	890	3362
Germany	1299	1505	2804
South Korea	1578	1207	2785
Austria	991	1488	2479
Italy	1473	748	2221
Spain	730	827	1557
Israel	808	698	1506
United Arab Emirates	294	1170	1464
Portugal	794	485	1279
Slovenia	339	908	1247
Macau	825	364	1189
Cyprus	509	669	1178
South Africa	882	199	1081
Malta	655	335	990
World average	373	283	656

Source: Sigma

Role of supervisory and regulatory authorities

Insurance control and regulation has been entrusted to the Financial Services Board (FSB) which oversees the entire sector, with the exception of health insurance.

Nelson Mandela bridge © austinevan, CC BY 2.0

Most prudential rules applied in developed countries are also in force in South Africa, and so are accounting and auditing standards. The country has ordered the monitoring of IFRS (International Financial Reporting) standards as of 2005.

Today the FSB is examining the establishment, in 2016, of new accounting rules called Solvency Assessment and Management (SAM), outlining the quantitative and qualitative requirements while demanding more transparency in the presentation of financial results. The SAM project is drawing direct inspiration from the Solvency II rules.

The authorities have also considered a bipolar supervision system with the Central Bank monitoring compliance with macro prudential rules, and FSB regulating market practice.

Structure of the current insurance market

By March 31st 2013, 175 direct insurance companies have their license among whom 77 in life business and 98 in non life. The market counts also 15 reinsurers, 8 in non life and 7 in life.

Number and type of life insurance company

Type of insurer	2012	2013
Insurers
Traditional insurer	31	32
Niche insurer	10	10
Linked insurer1	15	15
Cell captive insurer2	7	7
Assistance	10	7
Insurer in run-off	7	6
Reinsurers
Life reinsurer	3	3
Life and non life reinsurer	4	4
Total	87	84

¹Insurer who provides insurance polices indexed on a unit-linked fund
² Alternative system of «rent-a-captive», specific to South African market Source: FSB

Number and type of non life insurance company

Type of insurer	2012	2013
Insurers
Traditional insurer	31	33
Niche insurer	31	31
Cell captive insurer 1	10	8
Captive insurer	11	10
Insurer in run-off	15	16
Reinsurers
Non life reinsurer	4	4
Life and non life reinsurer	4	4
Total	106	106

¹ Alternative system of «rent-a-captive», specific to South African market Source: FSB

The market of life and non life insurance

The South African market has quickly recovered from the global economic crisis. By December 31, 2012, the total market turnover amounted to 440.222 billion ZAR (51.959 billion USD).

The sector is dominated by life insurance which accounts for almost 80% of all market contributions, that is 353.223 billion ZAR (41.690 billion USD) in 2012.
Non life insurance reported a premium volume of 86.999 billion ZAR (10.268 billion USD), compared to 79.407 billion ZAR (9.782 billion USD) in 2011, that is an increase of 9%.

Breakdown of gross life and non life premiums in 2012

in thousands USD

	2012 premiums in ZAR	2012 premiums in USD	Market share
Non life	86 999 506	10 268 552	19.76%
Life	353 223 090	41 690 921	80.24%
Total life and non life market	440 222 596	51 959 473	100%

Source: FSB

Life insurance

Market share and gross written premiums of the first 10 life insurers in 2012

By December 31, 2012, the top ten life insurers control more than 75% of the market premiums.

in thousands USD

	2012 premiums in ZAR	2012 premiums in USD	Market share
Old Mutual	55 535 587	6 554 865	15.72%
Momentum Group	36 090 178	4 259 724	10.22%
Sanlam	35 134 669	4 146 945	9.95%
Investec	33 148 080	3 912 468	9.38%
Liberty Group	29 860 060	3 524 383	8.45%
Coronation Life	23 679 513	2 794 893	6.71%
Investment Solutions	23 555 874	2 780 300	6.67%
Alexander Forbes	10 280 818	1 213 445	2.91%
Allan Gray Life	10 245 789	1 209 310	2.90%
Discovery Life	10 228 629	1 207 285	2.89%
Total top 10 insurers	267 759 197	31 603 618	75.80%
Rest of the market	85 463 893	10 087 303	24.20%
Total life market	353 223 090	41 690 921	100%

Source: FSB

Net life premiums split per class of business

In life insurance, life and pension policies account for almost all market underwritings with over 93% of premium income.

in thousands USD

	Net premiums in ZAR	Net premiums in USD	Market share
Assistance*	5 550 024	655 069	1.71%
Disability	5 425 832	640 411	1.67%
Pension	152 070 010	17 948 823	46.85%
Health	3 757 541	443 503	1.15%
Life	149 969 151	17 700 859	46.20%
Sinking fund	7 843 900	925 816	2.42%
Total	324 616 458	38 314 481	100%

* including premiums underwritten outside South Africa

Non life insurance

74% of the non life operations are carried out by traditional insurance companies. Niche insurers and the various captives along with similar entities are reporting 26% of the overall non life turnover in 2012.

Source: FSB

Market share and gross written premiums of the first 10 non life insurers in 2012

Despite the high number of players, the insurance industry remains largely concentrated in the hands of a few big companies which dominate the market. By December 31, 2012, the top ten non life insurers have accounted for more than 63% of the overall premiums.

	2012 premiums in ZAR	2012 premiums in USD	Market share
Santam	16 527 094	1 950 693	19.00%
Mutual & Federal	7 537 799	889 686	8.66%
Hollard	5 566 673	657 034	6.40%
Guardrisk	5 498 070	648 937	6.32%
OUTsurance	5 340 678	630 360	6.14%
Absa	3 426 990	404 488	3.94%
Zurich	3 403 040	401 661	3.91%
Auto&General	3 152 661	372 109	3.62%
Allianz Global	2 469 679	291 496	2.84%
Centriq	2 208 404	260 658	2.54%
Total top 10 insurers	55 131 088	6 507 122	63.37%
Rest of the market	31 868 418	3 761 429	36.63%
Total non life market	86 999 506	10 268 552	100%

Source: FSB

Breakdown of non life premiums per class of business in 2012

Motor and fire insurance account for 76.72% of premium income while other non life classes of business are lagging behind. This is the case for engineering and third party liability which respectively represent 3.83% and 4.62% of revenues. Marine insurance remains marginal with just 2.73%.

in thousands USD

	2012 premiums in ZAR	2012 premiums in USD	Market share
Fire	29 509 570	3 483 015	33.92%
Marine	2 373 175	280 106	2.73%
Motor	37 233 281	4 394 644	42.80%
Accident & Health	5 161 345	609 194	5.93%
Credit, bond	2 136 496	252 171	2.45%
Third party liability	4 022 323	474 755	4.62%
Engineering	3 330 665	393 118	3.83%
Miscellaneous accident	3 232 651	381 550	3.72%
Total non Life	86 999 506	10 268 552	100%

Source: FSB

Reinsurance market in 2012

In non life reinsurance, seven companies were locally registered at the end of 2012. They are: Africa Re, Flagstone Re, General Re, Hannover Re, Munich Re, Saxum Re and Scor Africa. Saxum Re is the only South African reinsurance company while the other companies are subsidiaries belonging to foreign groups established in South Africa.

Breakdown of non life reinsurance premiums per company

in thousands USD

	Premiums 2012	Fire in %	Marine in %	Motor in %	Accident & Health in %	Credit in %	TPL in %	Engineering in %	Misc. accident in %
Africa Re	199 790	20.18%	24.45%	32.06%	32.44%	11.94%	26.33%	18.13%	1.74%
Flagstone Re	4 633	0.39%	-0.94%	0.61%	-0.68%	0.10%	0.03%	2.59%	-
General Re	5 389	1.03%	0.22%	0.29%	0.02%	-	0.37%	0.02%	-
Hannover Re	264 578	32. 95%	22.48%	35.56%	12.55%	26.90%	31.38%	9.16%	8.35%
Munich Re	328 793	34.52%	49.31%	28.62%	42.32%	36.84%	39.88%	57.34%	74.40
Saxum Re	-2.59	-	-	-	-	-	-	-	-0.01%
Scor Africa	81 508	10.93%	4.48%	2.86%	13.35%	24.22%	2.01%	12.76%	15.52%
Total	884 689	100%	100%	100%	100%	100%	100%	100%	100%

Source: FSB

Insurance distribution channels

Central Business District, Johannesburg © PZFUN, CC BY-SA 3.0

The insurance market is endowed with a wide range of distribution channels, with intermediaries in control of most corporate risks. Brokers control a substantial share of the market even though banks are playing an important role in life insurance and direct sales are prospering. Brokers are everywhere setting their foot on the marine, third party liability, fire and motor markets.

South African brokerage has visibly changed during recent years: AON South Africa has acquired Glenrand MIB in April 2011 while Marsh took control of Alexander Forbes in August of the same year. Jardine Lloyd Thompson Group has obtained license in April 2011.

Mobile phones, call centers and internet are holding a more and more active position in direct sale. Bancassurance is also gathering momentum, getting more engaged in niche markets.

It is worth noting that insurance agents’ position is marginal with a penetration rate peaking at 7% in motor.

Distribution channels’ shares in insurance classes of business

	Insurance agents %	Brokers %	Direct business %
Fire	5	82	13
Third party liability	5	90	5
Motor	7	78	15
Life insurance	5	45	50
Marine	-	95	5

Source: Axco

The remuneration of intermediaries, based on premium percentage, is determined by the insurance commission which sets a maximum rate. Reductions are often granted by brokers, especially in times of stiff competition.

Classes of business	Commissions in % of premiums
Fire	Maximum 20%
Third party liability	Maximum 20%
Motor	Maximum 20%
Accident	12%

Source: Axco

Highly capitalized insurers are making profits

Operating results of insurance companies have been on the rise since the 1990s and positive as of 2001. Following the 2004 peak, these profits remain stable since 2005.

All South African insurers are posting a consolidated (operational + financial) profit in the last 24 years. Such profits have grown even bigger over the last ten years, as shown by the following chart which features results’ evolution since 1990:

Source: FSB

While operating results are good, they remain, nonetheless, exposed to the volatility of the local currency. The devaluation of the rand in relation with main international currencies has triggered an increase in claim costs, especially for the motor insurance because of the obligation to import spare parts from abroad. Moreover, climate factors, which we cannot exclude in this region of the world, may annihilate profits accumulated for several years.

In life insurance, overexposure of investments on stock markets (over 60% of assets detained in equity shares invested in listed companies) is likely to make insurers entirely dependent on financial markets.

The main external challenges insurers have to meet are summed up as follows:

In life insurance
Lengthy periods of low interest rates A weak economy High cost of reinsurance

In non life insurance
A lengthy period of low interest rates Competition and economic conditions which push prices down Severe climate events High cost of reinsurance, especially that of natural catastrophes coverage

Capitalization ratio

Insurers’ soundness, as reflected by the excellent financial results so far, has allowed for the consolidation of the general outcome. By December 31, 2012, capitalization ratio (solvency margin) of most insurers had been two to five times above the minimum level required by the authorities.

	Number of life insurance companies
Asset exceeding solvability margin	2010	2011	2012
from 0-1 time	3	2	0
from 1-2 times	22	28	28
from 2-5 times	37	35	31
from 5-10 times	11	12	16
More than 10 times	3	2	2
Total	76	79	77

Source: FSB Exchange rate as at 31/12/2011: 1 ZAR = 0.12319 USD ; as at 31/12/2012: 1 ZAR = 0.11803 USD.