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Insurers need to find new customers in tough environment, says PwC

Published May 12, 2022


FOR insurers to sustain profitable growth, they needed to find new customers and address unmet, new and evolving needs, while retaining ample margin, says PwC Actuarial, Risk and Quants partner Renasha Govender.

She said while in the past they had been able to generate value from their investment strategies, regulatory costs and constraints had meant that innovation with regard to products, integrated services and partnerships had proven to be key necessary drivers for continued financial success within the industry globally.

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Key indicators for the past decade demonstrated that growth in profitability was muted even before the pandemic. Combined IFRS earnings grew in line with inflation and Value of New Business (VNB) margins trended slightly downwards.

The industry had achieved VNB margins of between 2.7 percent and 3.1 percent over the period 2011 to 2015 as highlighted in previous PwC publications on the life insurers results. However, these had already decreased to 2.4 percent in 2018 and 2019. The VNB margin achieved last year was lower still at 1.9 percent, but an improvement from the result in 2020 of 1.49 percent.

Last year the five insurers achieved a VNB worth R6.9 billion, significantly more than the R4.7bn gained in 2020, but still below the VNB results for 2018 and 2019. The present value of new business premiums (PVNBP) increased by 13 percent from 2019, but was not sufficient to offset the fall in margins compared with pre-pandemic levels.

PwC said local life insurers were tested last year by the economic consequences and accompanying financial market volatility caused by the Covid-19 pandemic.

Under the theme ‘Sustaining Impact: Reflecting on past resilience and future challenges of life insurers in South Africa’, PwC South Africa’s analysis of major life insurers found that the local insurance industry was able to meet its escalating obligations to policyholders, and maintain required capital and liquidity positions, while dealing with business interruption.

Results for the year ending December 31, 2021 were analysed for five major insurers which included Discovery, Liberty Holdings, Momentum Metropolitan Holdings, Old Mutual and Sanlam.

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PwC Africa insurance leader Alsue du Preez said macro-economic factors constrained profitable growth, which was also compounded by Russia’s invasion of Ukraine that had led to further supply chain disruptions and a sharp rise in various resource prices globally.

“Given the consequent higher inflation, weaker external demand and an unreliable power supply (the country’s largest growth inhibitor), we now forecast a real GDP growth rate of 2.0 percent this year, from 2.3 percent previously, with continued downside risk,” Du Preez said.

“Alongside this, weaker economic outlook provides even greater concern about the speed of the country’s jobs recovery. There is little scope for South Africa’s unemployment rate to improve this year if local business sentiment is weighed down by these factors.”

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Du Preez said the upward pressure on food, fuel and electricity prices would adversely impact all households differently this year.

“Middle to higher income groups are re-evaluating their discretionary spending patterns and are either ‘buying down’ or reducing insurance and savings products,” Du Preez said.

“On the other hand, households in the lower to lower-middle income categories will struggle to sustain their monthly basket of goods purchases. Given increased costs of necessities, these households will need to carefully consider the affordability of other discretionary monthly expenses, including insurance products.”

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PwC said that low-income households spent more than half of their money on food and non-alcoholic beverages. This included grain products, like bread and maize, which in coming months would cost significantly more due to higher international commodity prices.

It said as the world exited the roller-coaster that was last year, a fair amount of uncertainty lingered in the industry. Talk was now moving more towards whether cost savings that insurance entities achieved during the lockdown would be sustainable, as well as what allowance should be made for the effects of Covid-19 on long-term mortality and long-Covid.

PwC said stronger performances in full-year 2021 for the major life insurers continued to demonstrate strong operational and capital management, and the relative benefits of diversification among their business portfolios.

“The post-Covid financial ‘recovery’ is pleasing to see, but the pre-Covid comparison, coupled with the difficult macro-economic backdrop into the medium term, demonstrates the need for insurers to continue to innovate and invest on multiple fronts,” Du Preez said.

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