Maximising value from today s opportunities

Transcription

1 Maximising value from today s opportunities Strategic and Emerging Issues in South African Insurance 2012 Fifth edition June

2 PricewaterhouseCoopers ( PwC ), the South African firm. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers in South Africa, which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity and does not act as an agent of PwCIL.

3 Contents Foreword 4 About the author 6 Executive summary 7 Market environment 13 Emerging issues 26 Restructuring 37 Regulation and governance 41 Information technology 54 Performance 60 Risk management and fraud 63 Peer review 69 Appendices Methodology and participants 76 Background data 80 About PwC 95 Strategic and Emerging Issues in South African Insurance

4 Foreword Victor Muguto Long-term Insurance Leader PwC Southern Africa Ilse French Short-term Insurance Leader PwC Southern Africa Welcome to our fifth biennial PwC Strategic and Emerging Issues in South African Insurance survey. This edition builds on our previous surveys and comes at a time when global and South African insurers are grappling with the difficult new business, investment and regulatory environments that have emerged from the financial crisis. Geopolitical instability arising from the Middle East, North Africa and the unsolved Eurozone crisis have all created considerable uncertainty, making it very difficult for most insurers to predict and plan for the future. While this is all happening in the short term, we at PwC believe there are also other far broader challenges that could shape the future of insurance in the longer term. Social changes, for example, changing customer behaviours, fuelled by social networking, new customer expectations for speed and simplicity in an increasingly mobile internet environment and increasing risk awareness, are shifting the balance of power from intermediaries to customers. Demographic shifts, including changing middle class dynamics, ageing populations and changes in dependency ratios are among the social trends that are changing the future of insurance. Technological advances, driven by the exponential growth in smartphones, tablets and mobile internet as well as sensors and other devices connected to the internet, present opportunities for better underwriting and proactive loss control for innovative insurers. They also help expand penetration and access to previously excluded communities, particularly in rural South Africa and across the African continent. At the same time, they also present challenges to intermediated models. On the environmental front, the increasing severity and frequency of catastrophic events requires insurers and reinsurers to become more sophisticated in their risk modelling and innovative in structuring risksharing and risk-transfer deals. The use of advanced early warning technologies, together with risk transfer mechanisms, could help cushion insurers and reinsurers against abnormal losses. Economic uncertainty and recession in the Eurozone combined with sluggish growth in the rest of the developed world have resulted in the rise of economic influence and power of emerging market countries, including South Africa and the rest of Africa. The attraction of lower insurance penetration rates in African countries, their relatively high GDP growth rates and prospects of higher margins all point to a new push for geographic expansion on the continent. The exponential growth in mobile phone and internet technologies, partnership arrangements between mobile phone operators and banks with existing branch networks in African countries makes access possible for South African insurers. 4 PwC

5 The most significant challenges are coming from regulatory changes. In addition to the Solvency Assessment and Management requirements, South African insurers also have to prepare for pension fund, national health insurance and Treating Customers Fairly reforms among other regulatory changes. These all require significant resources and are seen by some as stifling growth. In addition, Micro-insurance proposals are also being drawn up to increase access to previously excluded communities and to formalise the informal activities in that market. It is against this background that we have conducted this survey, and we trust that it will achieve its primary goal, which is to help industry executives see beyond the current environment and shape their own future. The survey includes the views of long-term and short- term South African insurance CEOs on emerging trends and issues, which we trust you will find useful to your organisation. We would like to thank all the executives who participated in this survey. I appreciate their openness, insight and the vision they provided on the various topics. I would also like to thank Dr Brian Metcalfe for the time and effort he put into the interviews, analysing the survey results and producing this report. We trust that you will find the survey useful. Should you like to discuss any of the issues addressed in more detail, please speak to the contacts listed at the end of the report. We would also appreciate your honest feedback to help us develop our future surveys. Victor Muguto and Ilse French Johannesburg 29 May 2012 The key objectives of the survey are to: Raise the awareness of insurers to emerging issues and trends in the South African insurance industry; Understand the views of industry CEOs about these issues; Provide insight into how the industry may evolve over the next few years; and Help South African CEOs to shape their own future. Strategic and Emerging Issues in South African Insurance

6 About the author Dr Brian Metcalfe is an Associate Professor in the Business School at Brock University, Ontario, Canada. He has a doctorate in financial services marketing and has researched and produced over 40 reports, such as this one, on behalf of PwC firms in 14 countries, including Australia, Canada, China, India, Japan and South Africa. Previous reports have examined strategic and emerging issues in corporate, investment and private banking, life, property and casualty insurance, insurance broking and wealth management. In 2011, he authored Strategic and Emerging Issues in South African Banking Other recent reports include Foreign Banks in China, Foreign Joint Venture Fund Management Companies in China and Foreign Insurance Companies in China. He has consulted for a wide range of organisations, including the Royal Bank of Canada, the Bank of Nova Scotia, Barclays Bank, Sun Life Insurance Company, Equitable Life of Canada and several major consulting firms. He has also taught an executive management course on financial services marketing at the Graduate School of Business at the University of Cape Town. This publication was researched and written by Brian Metcalfe, PhD. Information presented here, while obtained from sources believed to be reliable, is not guaranteed as to its accuracy or completeness. This report has been commissioned and distributed through PricewaterhouseCoopers Inc., Johannesburg. Additional copies can be obtained from Susan de Klerk, Insurance Knowledge Manager PwC South Africa 2 Eglin Road, Sunninghill, 2157 Telephone: Fax: susanna.de-klerk@za.pwc.com 6 PwC

7 Executive summary

8 Executive summary continued Background This survey focuses on strategic and emerging issues in the South African insurance industry. This is the fifth survey of its type in the insurance market done by PwC. Similar surveys have also been published for the banking industry. The survey attempts to provide an industry-wide perspective. However, where meaningful, it also highlights differences between the short-term and long-term perspectives. The survey is based on personal interviews with managing directors and senior executives of 29 insurance companies. The list below shows 32 companies. This is because only one interview was conducted with Chartis, Hollard and Regent, each of these are listed under both the short- and longterm insurance companies. Reinsurers and cell insurers are included in the overall industry charts and they are included in the long-term versus short-term breakdowns. The one hour interviews were conducted in Johannesburg and Cape Town during February and March Participants Short-term insurers interviewed: Absa Insurance Alexander Forbes Insurance Chartis Hollard Insurance Lion of Africa Mutual & Federal Outsurance Regent Insurance Santam SASRIA Standard Insurance Telesure Zurich Insurance Long-term insurers interviewed: 1Lifedirect Absa Life AVBOB Chartis Clientèle Life Discovery Life Hollard Life Liberty Life MMI Old Mutual Professional Provident Society PSG Regent Life Sanlam Reinsurers interviewed: Hannover Re Munich Re Swiss Re Cell insurers interviewd: Centriq Guardrisk 8 PwC

9 Main findings South Africa is a top 20 insurance market Ranked by premiums Life United States 1 1 China 5 2 Japan 2 3 France 3 4 United Kingdom 4 5 India 8 6 Italy 6 7 Germay 7 8 Taiwan 10 9 South Korea 9 10 Canada Brazil South Africa Australia Luxenbourg Belgium Sweden Spain Switzerland Hong Kong Ranked by premiums Non-life United States 1 1 China 7 2 Germay 2 3 United Kingdom 3 4 Japan 4 5 Netherlands 6 6 France 5 7 South Korea 10 8 Italy 8 9 Canada 9 10 Spain Brazil Australia Russia India Switzerland Turkey Belgium South Africa Mexico Source: Swiss Re Economic Research & Consulting (2012) This report is based on interviews with 29 chief executives and senior executives of South Africa s long-term and short-term insurers, cell insurers and reinsurers. South Africa is the leading insurance market in Africa and ranks as one of the world s top 20 markets for both life and non-life insurance. Based on research compiled by Swiss Re in 2012, South Africa continues to be ranked in the world s top 20 markets for both life and non-life premiums. The life and non-life markets will continue to hold their 13 th and 19 th posisitions by The main findings of the report are as follows: A regulatory tsunami The industry is currently being subjected to an unprecedented overhaul of the regulatory framework in which it operates. This includes Solvency Assessment and Management (SAM), Treating Customers Fairly (TCF) and outsourcing agreement regulations together with the proposed pension fund and National Health Insurance reforms. Participants believe that the regulatory burden will continue to increase substantially over the next three years. While many recognise the need for and are generally supportive of more comprehensive regulations, they emphasised that the regulations will be accompanied by higher costs. One large long-term insurer estimates implementation costs in excess of R800 million while other participants estimate costs to range between R200 R300 million, with smaller companies suggesting R25 R50 million ranges. Short-term insurers predictions were in the R50 to R100 million range. Participants agreed that the proposed twin peaks approach to regulation would bring benefits but did not believe it would increase access to insurance or reduce the cost or complexity of compliance. The majority of participants also contend that the increased volume of regulation is dampening risk appetite, stifling growth and slowing international expansion. Smaller insurers believe the burden of regulation can be more efficiently handled by the larger companies. The survey found that over half the participants have made steady progress in the implementation of SAM. The most difficult steps in this process were identified as the development, validation and approval of internal models and compliance with the use test. Participants believe the new model of micro-insurance regulation offers fresh opportunities and more than a dozen companies said they were interested in setting up separate entities to compete in this sector. Treating Customers Fairly TCF will have a profound impact on the industry. While many participants indicate that they have to embrace consumerism, they acknowledge that a major cultural shift is required and this will take time. Some participants speculated that TCF may turn out to be the most challenging and most costly of all the new regulations. Strategic and Emerging Issues in South African Insurance

10 Executive summary continued IFRS 4 Phase II Participants had deep reservations about the implementation of IFRS 4 Phase II. They believe that IFRS 4 Phase II and SAM to be an integrated project. However many question the costs and subsequent benefits of adoption. Move to mobile technologies Participants believe that smart phones and tablets will present the most important opportunities for technological innovation over the next three years. They predict that the most important applications of the new technologies will centre on direct insurance and online distribution, real-time data mining and new actuarial systems. They contend that these innovations will improve both operational efficiency and customer relations. Participants also felt that the new technologies provide the most innovative and technologically savvy insurers with a competitive advantage. Non-traditional insurers such as mobile phone companies have already obtained insurance licences from the Financial Services Board(FSB) to enter the insurance market. Given their huge technology and customer bases, mobile operaters would become formidable competitors as the use of technology increases. Buoyant growth expected Participants predict continued growth. Although percentage growth estimates in 2012 were less optimistic than in 2010, growth rates of 15-20% are expected for long-term insurers and 10-15% for the short-term insurers. Continued cost cutting Twenty-seven respondents indicated that they will continue to reduce operating costs over the next three years. Half of these indicated they will target up to 5% resuction in cost cuts and the other half between 5% 10%. Risk management Own Risk and Solvency Assessment (ORSA) received a positive endorsement. Twenty-seven companies believe it enhances risk management. Participants reported that they commenced the deployment of ORSA within their respective companies. They described the allocation of effort between policy development and embedment, process development and implementation and reporting development and enablement. The majority of participants also confirmed, once again, that risk management has added substantially more value to their companies. Two-thirds of respondents allocate risk-based capital to different business units to measure return on capital. Change drivers Participants believed that regulation and management of capital are now the two most important drivers of change. These were followed by changing demographics/internet/mobile technology and disintermediation. 10 PwC

11 Bancassurance challenge Although the majority of participants believe the South African model of bancassurance has been successful, nine companies disagreed. Those who disagreed argued that international evidence suggests that bancassurance is not the best model. While acknowledging the successes of Standard Bank and Absa, participants also cited FirstRand s creation of separate brand identities for Discovery and Outsurance and the unbundling of FirstRand/Momentum. Talent shortages The industry continues to be plagued by talent shortages. In 2012, the two most sought-after executive professional positions were specialist underwriters and actuaries followed by capital management and risk management professionals. Expansion across Africa Africa came out as the most desired destination for geographic expansion followed to a much lesser extent by Asia. Interest in South America has declined significantly. The top three considerations for South African insurers moving into sub-saharan Africa are, low penetration rates, higher margins and profitability, and the quality of local management. Meanwhile, the three most important barriers to entry were regulatory restrictions, cultural conflicts and lack of local insurance skills. Non-executive directors and audit committee members are also in high demand. Strategic and Emerging Issues in South African Insurance

12 Peer ranking overview This table displays a peer ranking of the top three companies in each business line. A more detailed set of results is shown later in the report. Products First Second Third Alternative risk transfer Guardrisk Centriq RMB Assistance business Momentum Hollard Life/ Sanlam/ Clientèle Credit life Absa Life Hollard Life Regent Life Group business Investment Old Mutual Sanlam Investment Solutions Group business Risk Old Mutual Sanlam Momentum Investment products Sanlam Discovery Old Mutual Life risk products Discovery Sanlam Old Mutual Motor insurance Outsurance Santam Telesure Property (excluding motor) Santam Mutual & Federal Hollard Health insurance Discovery Liberty Life Chartis Other Customer relationship management Discovery Outsurance Santam Innovations Discovery Outsurance Hollard Marketing strategies Discovery Outsurance Telesure Technically competent staff Santam Discovery Old Mutual/Sanlam 12 PwC

13 Market environment

14 Market environment continued Short-term insurers The short term companies surveyed employed people. They estimated that by 2015 they would employ , a 8.5% increase. The number of brokers and intermediaries for short-term insurers was calculated to be By 2015 the participants predicted that this number will decline by 9.1% to The number of branches is expected to decline from 179 branches in 2012 to 162 branches by Two participants influenced these branch reductions. The number of policyholders for short term participants is predicted to expand by 32.3% over the next three years from 9.6 million to 12.7 million. This number is lower than the numbers accounted for in the 2010 report. This is because one of the participants in 2010 provided readjusted data in 2012 and one participant did not provide an estimate in Data on policyholders should be treated with caution because some companies are unable to distinguish between customers who may hold multiple policies. Short-term companies Change % Change Branches in South Africa (17) (9.5) Brokers/Intermediaries (1 439) (9.1) Full-time employees in SA Policyholders (millions) Long-term insurers Long-term insurers plan to increase the number of branches by just 3.2% over the next three years to branches. They plan to increase the number of brokers and intermediaries by 36% from to However, if one participant is removed from this calculation the remainder of the group predicts an increase of 9.8%. The participants employed people in 2012 and anticipate employment growth of 6.8% to by This figure is higher than in 2010 as a result of two companies revising their 2010 estimates. Finally the long-term participants project that policyholders will grow from 22,2 million in 2012 to 28.6 million in Long-term companies Change % Change Branches in South Africa Brokers/Intermediaries Full-time employees in SA Policyholders (millions) PwC

15 Q What, in your opinion, are the most important changes taking place in the South African insurance market at present? Virtually all the participants mentioned the regulatory environment as the source of the most important changes occurring in the industry at present. Regulation Regulation is discussed in depth later in the report, but in the context of the far-reaching changes, participants cited a number of issues including SAM, TCF regulations, pension fund reform, the National Health Insurance and binder agreements. Changes in the insurers business models This includes changes in distribution with the continued expansion of direct channels and recognition of the significance of this channel by established players such as Sanlam with MiWay and Old Mutual with iwyse. Intermediaries shake up Major changes are expected regarding the future role of intermediaries. Shake-ups are expected across the board. The rise of direct insurers, customer empowerment, price sensitivity, product changes and new regulations will fuel these changes. Consolidation has already occured at the highest level with Aon and Glenrand MIB and Marsh and Alexander Forbes. Expansion across the rest of Africa Some insurers believe margins in sub-saharan markets are more attractive than in South Africa. This may change as a plethora of different players implement their pan-african expansion plans. Increased focus on the consumer Although a consumerist trend has been underway for a number of years, it has moved up the agenda as a result of the Treating Customers Fairly regulations. More new entrants More direct players are anticipated in addition to the increasing interest of retailers and mobile phone companies. Claims A participant noted that there was a major focus in the industry on the procurement side of the business aimed at reducing rising claim costs. Strategic and Emerging Issues in South African Insurance

16 Market environment continued Q Can you identify the major strengths and weaknesses of the South African insurance industry at present? As noted in the 2010 report, participants believe the industry is built on financial soundness and stability. There was a general consensus that the industry had successfully weathered the global economic crisis and was well regulated and governed. The overall insurance market was viewed as competitive with a high degree of innovation and new product design. The presence of a number of larger players brought both scale and strength to the industry. The continual entrance of new players and particularly the direct insurers encouraged competition, product development, new pricing and rationalisation. Although the skills shortage is discussed later in the report, participants believe the industry possesses quality personnel with world-class actuarial, IT, financial and management know-how. Examples of specific strengths include: Ability to innovate; Desire to service all segments, including the lower end of the market; Well capitalised with good penetration; Strong balance sheets; Focus on risk management; Rational pricing; and Strong brands. The principal weakness of the industry centred on the poor public perception. As one participant noted, in the past customers were subjected to high termination fees. Although this has now changed, the belief that companies are exploiting their customers continues. Several participants believe that the industry is now over-regulated. Although the quality of personnel was mentioned as an industry strength, many participants believe there are pronounced skills shortages. Examples of specific weaknesses include: The power base of brokers; Lack of industry data compounded by limited data sharing; Dominance of one or two major players; Inability of industry to influence or direct regulation; Poor performance on consumer education; High levels of fraud; Motor premiums are expensive, resulting in lower interest in coverage; South African companies are not well received in the rest of Africa; Ineffective competition means the industry has lost market to thirdparty asset managers; Too much competition based on price; Don t have the right risk metrics to introduce new products; Inability of intermediaries to reach all segments of the market; and Clumsy underwriting. 16 PwC

17 Q In view of changing demographics, ageing populations and the rise of mobile technologies and other changes, how will the insurance needs of South African policyholders of 2015 differ from those of today? Participants contend that customers will become more internet savvy and shop around more. This will further enhance the importance of price in insurance shopping. There will be more self service for commodity products using mobiles and tablets and face-to-face interaction will be confined to investment advice. Major change is not expected by 2015, but there will be a seismic shift by The limited broadband footprint represents a key challenge. Some examples of behavioural changes include: A move away from blanket insurance. Customers will be more selective, for example taking out theft insurance on items that are most likely to be stolen. Needs will not change but the way consumers buy products will change. First-time buyers are focussing on single items such as, mobile phone or flat screen TVs. Growth in black middle-class consumers. Not enough products in the retirement market, necessating new products to be developed and a greater focus on retirement planning. More unbundling of products. Increased transparency and flexibility of benefits. Q In the wake of the recent wave of natural catastrophes, how do you see the South African Reinsurance market changing? Several participants observed that there has already been a hardening in rates since the beginning of This trend was believed to be following changes that have already begun in the developed markets. One reinsurer suggested that South Africa is normally one year behind the international trend. Contrary to the global trend, South Africa is currently in a soft premium cycle due to a very competitive environment, especially for personal lines of business. Strategic and Emerging Issues in South African Insurance

18 Market environment continued Q In your view, what is the level of intensity of competition in the following markets, and how do you expect this to affect your competitive response? Market competition The following charts illustrate how companies perceive the level of competition in eight different segments of their business, and then how they have organisationally responded to that competition. Where segments have attracted responses from more than 20% of respondents, they have been shaded in grey. Intensive Moderate Light None Competition level 8.3% 16.7% 25.0% 16.7% 8.3% 16.7% 8.3% Competitive response No change Minor change Significant operational and organisational change Fundamental change in strategy and positioning Note: Based on responses from 12 companies Alternative risk transfer (ART) In 2010, one-third of participants believed that alternative risk transfer was intensively competitive. In 2012, this view was held by just one participant. Two-thirds believe ART to be moderately competitive and a quarter believe it displays light competition. There has been little change in this line over the last year. Intensive Moderate Light None Competition level 15.8% 21.1% 31.6% 10.5% 5.2% 15.8% Competitive response No change Minor change Significant operational and organisational change Fundamental change in strategy and positioning Assistance business Assistance business includes funerals, support for family and education. It has become more competitive and experienced more change. Almost 80% of participants view it as intensively competitive. Eight participants indicated that they have made significant or fundamental changes over the last year. Note: Based on responses from 19 companies 18 PwC

19 Intensive Moderate Light None Competition level 14.4% 7.1% 7.1% 28.6% 7.1% 7.1% 28.6% Competitive response No change Minor change Significant operational and organisational change Fundamental change in strategy and positioning Note: Based on responses from 14 companies Credit life Credit life displays noticeable change from In 2012, 28% of participants view it as intensively competitive, compared to almost 50% in This trend began in In addition, over 70% of participants acknowledge that they had made no changes to this product over the last year. Intensive Moderate Light None Competition level 7.7% 7.7% 61.5% 7.7% 15.4% Competitive response No change Minor change Significant operational and organisational change Fundamental change in strategy and positioning Group business Group business remains a highly competitive segment, with 85% viewing it as intensively competitive (two-thirds in 2012). It has also been subject to change, with 69% indicating they have made significant or fundamental changes over the last year. Note: Based on responses from 13 companies Intensive Moderate Light None Competition level 26.7% 20.0% Competitive response No change Minor change 46.6% 6.7% Significant operational and organisational change Fundamental change in strategy and positioning Investment products Investment products are split between approximately half the group that view the line as intensively competitive and have made significant changes and the other half that believes it has moderate competition and have made little change. In 2010, 91% of respondents believed investment products to be intensively competitive. Note: Based on responses from 15 companies Strategic and Emerging Issues in South African Insurance

20 Market environment continued Intensive Moderate Light None Competition level 33.3% 27.7% 16.7% 11.1% 5.6% 5.6% Competitive response No change Minor change Significant operational and organisational change Fundamental change in strategy and positioning Life risk products The level of competition in the life risk space appears to have increased. Almost 90% of participants now view it as intensively competitive. However, more than two-thirds of respondents say they have made no change or only minor changes to their life risk strategy. Note: Based on responses from 18 companies Intensive Moderate Light None Competition level 11.1% 22.2% 11.1% 16.7% 22.2% 5.6% 11.1% Competitive response No change Minor change Significant operational and organisational change Fundamental change in strategy and positioning Property (excluding motor) Two-thirds of respondents believe property is an intensively competitive market. This is very similar to the opinion expressed in However, only two companies have made fundamental changes to strategy and positioning. Note: Based on responses from 18 companies Intensive Moderate Light None Competition level 21.1% 15.8% 31.5% 26.3% 5.3% Competitive response No change Minor change Significant operational and organisational change Fundamental change in strategy and positioning Motor insurance Motor insurance is highly competitive. Only one of the 19 respondents chose to rate motor as moderate. Confirming the level of competition, more than half of respondents have made significant or fundamental changes to strategy and positioning over the last year. Note: Based on responses from 19 companies 20 PwC

21 Intensive Moderate Light None Competition level 9.1% 18.1% 27.3% 27.3% 9.1% Competitive response No change Minor change Significant operational and organisational change 9.1% Fundamental change in strategy and positioning Health insurance (not medical scheme business) Health insurance is considered moderately competitive and there has been little change to strategy in this business line. Note: Based on responses from 11 companies Strategic and Emerging Issues in South African Insurance

22 Market environment continued Q What are the major drivers of change in the insurance industry today? Can you rank them from 1 to 5? In 2012, regulatory and reporting changes towered above the other drivers of change. Capital requirements moved from fifth to second place and consumerism dropped to third place. Two new drivers, changing demographics and internet/mobile technologies were positioned close behind in fourth and fifth position. Disintermediation continues to be an important driver of change as the direct marketing sector continues to expand. The other category regarding drivers of change included a comment on economics of scale. Regulatory and reporting changes Prospects for growth Liberty LIBERTY yesterday said it saw growth opportunities in SA s longterm insurance sector, where a growing black middle-class market was emerging. The insurer, which is controlled by Standard Bank, also said it had accepted that the direct model of selling insurance and related products was here to stay despite misgivings by some traditional insurers still heavily reliant on brokers. CEO Bruce Hemphill said he was optimistic of further expanding market share in the emerging consumer market and had plans to exploit it in the coming years. There are significant opportunities to improve our performance in the market where we have seen a lot of demographic changes we have to react to, Mr Hemphill said. We want to be a major player in the emerging consumer market where there are a lot of people entering earning up to R12000 (a month), and these are a growing black market that we intend to be part of our customer base. Capital requirements Consumerism and changing customer behaviour Internet and mobile-based technologies / social media Changing demographics / urbanisation / rise of new middle class Disintermediation / breakdown of trust in intermediaries Uncertain and volatile economic environment Global economic downturn e.g. Eurozone crisis Opportunities in the rest of Africa Unstable capital markets Inflation and exchange rate volatility Other Mergers/consolidation Foreign entrants seeking growth in emerging markets Based on responses from 29 companies Score Source: Business Day, 2 March PwC

23 Q What are the major drivers of change in the short-term industry today? Can you rank them from 1 to 5? The short-term insurers recorded the same top three drivers of change as their long-term counter parts. The sequence of regulation and reporting changes, capital requirements and consumerism also matched. However, regulation scored almost double the score of the second driver, capital requirements. Changing demographics and mobile technologies were viewed as more important drivers for the short-term companies. Disintermediation also scored much higher with the short-term companies. Regulatory and reporting changes Capital requirements Consumerism and changing customer behaviour Changing demographics / urbanisation / rise of new middle class Internet and mobile based technologies / social media Disintermediation / breakdown of trust in intermediaries Uncertain and volatile economic environment Opportunities in the rest of Africa Unstable capital markets Global economic downturn e.g. Eurozone crisis Mergers/consolidation Other Inflation and exchange rate volatility Foreign entrants seeking growth in emerging markets Score Based on responses from15 companies Q What are the major drivers of change in the long-term industry today? Can you rank them from 1 to 5? In both 2008 and 2010 consumerism was considered to be the most important driver of change for both the short-term and long-term insurers. In 2010 the short-term insurers placed dis-intermediation in third-place versus sixth place in Capital requirements, a new driver in 2012, was ranked in second place by both short-term and long-term participants. Regulatory and reporting changes Capital requirements Consumerism and changing customer behavior Uncertain and volatile economic environment Internet and mobile based technologies / social media Changing demographics / urbanisation / rise of new middle class Disintermediation / breakdown of trust in intermediaries Global economic downturn e.g. Eurozone crisis Unstable capital markets Opportunities in the rest of Africa Inflation and exchange rate volatility Foreign entrants seeking growth in emerging markets Mergers/consolidation Other Based on responses from 15 companies Score Strategic and Emerging Issues in South African Insurance

24 Market environment continued Q On a scale of 1-5, rank the importance of each of the following markets for your organisation over the next three years? (5 equals most impact) The participants were asked to review a list of nine different markets and to score their importance over the next three years. The average scores hide the high levels of importance attached to different markets by individual companies. For example, the motor insurance segment scored an average of 3.68 out of 5, but 10 companies awarded the maximum score of 5 out of 5. Eight companies assigned the maximum score of 5 to life pure risk products. Twelve companies assigned a score of 4 or 5 to assistance business, while 14 assigned a 4 or 5 to property insurance. Five companies assigned the maximum score of 5 to investment products. Increasing importance Least importance Most importance All companies Average Alternative risk transfer (10) Assistance business (17) Credit life (12) Group business (16) Investment products (16) Life pure risk products (17) Property (excluding motor) (21) Motor (22) Health insurance (not medical schemes business) (15) PwC

25 Q In your opinion, which category of institutions represents the most significant competitive threat to your organisation over the next five years? Please choose one answer only. The institution that represents the greatest competitive threat to participants in 2012 was identified as broad-based financial institutions already competing in the market. Comparison with responses in 2008 and 2010 illustrates how in 2012 this category represents the greatest threat. It reflects the importance of size and the way in which the larger players are now represented across the board with the addition of their direct offerings. Niche players and start-ups received no recognition in 2012 while only three participants mentioned retailers moving into financial services, the same number of responses made in 2008 and The other significant competitive threat commented on was mobile phone companies. Established broad-based financial institutions already competing in your market Established broad-based financial institutions moving from one market to another Niche players New competitors moving from retailing into financial services Foreign insurers entering the market 2008 Start-up institutions Other Number of companies Based on responses from 26 companies in 2012, 30 in 2010 and 23 companies in 2008 Strategic and Emerging Issues in South African Insurance

26 Emerging issues

27 Q Do you believe that the bancassurance model has been successful for South African insurers? Although bancassurance in South Africa was deemed to be successful by two-thirds of respondents, nine companies disagreed. Several banks singled out Absa and Standard Bank as examples of a successful application of the bancassurance model. They also noted the manner in which FirstRand spun off Momentum in A large insurer commented that bancassurance had not been successful anywhere in the world. This comment may have been influenced by the dismantling of many bank/insurance relationships following the 2008 financial crisis. Examples include ING s divesture of its insurance arm, Allianz s divesture of its banking arm to Dresdner Bank and Standard Life s to Barclays Bank. In March 2012, HSBC announced plans to divest its general insurance business in Asia and Latin America in two separate deals with AXA and Australian listed QBE Insurance. HSBC, however, maintained a longterm distribution agreement with both AXA and QBE*. Other participants believed that the banks were successful with products such as Credit Life but battled to move out of their traditional product range and compete successfully with the new niche players. A couple of participants drew attention to the way in which FirstRand had managed to create separate brand identities for Discovery and Outsurance, although they were part of the FNB stable. The successful navigation of the financial crisis by the South African banks was viewed as a contributor to the ongoing bancassurance relationship. Yes No Based on responses from 29 companies * Source 12 March 2012 Strategic and Emerging Issues in South African Insurance

28 Emerging issues continued Q What are the biggest challenges facing bancassurance in the changing regulatory environment? Regulatory developments continue to threaten the bank-insurance relationship. The TCF regulations were cited by participants. The new solvency regulations, SAM alongside Basel III were mentioned as a nightmare by several participants. Pricing of insurance products sold through the bank channel were also expected to attract attention. An unaffiliated insurance participant commented that they were attracting quality staff from bancassurance companies, who were overwhelmed by the growing bancassurance regulatory environment. Several participants noted that the bancassurance companies were illequipped to deal with the growing presence of direct insurers. Absa to take bancassurance to new African markets Absa Financial Services yesterday said it planned to expand its bancassurance business in sub- Saharan Africa by investing in both greenfield projects or acquisitions. The initial focus would be on the markets that parent Barclays already had operations in, CE Willie Lategan said yesterday. He did not provide details of any deals, but said announcements would be made once there were developments to report. The initial product range would include both short- and long-term insurance, as well as employeebenefit schemes. The expansion comes as a result of renewed focus on Africa following the decision to merge the Africa-focused units of Absa and its parent, UK-based Barclays, to be headquartered in SA and reporting to Absa group CEO Maria Ramos. Absa and Barclays are combining forces to expand in markets in Africa, an area that has also attracted local rivals such as Standard Bank and FirstRand. Mr Lategan said there was potential to expand insurance penetration in markets outside SA, which accounted for more than 90% of sub-saharan Africa s annual gross premiums. The unit started a life insurance business in Botswana Absa Life Botswana in March 2011, which Mr Lategan said had already signed 10,000 policies by June when Absa closed its books for the first half of its financial year. Absa Financial Services also announced in August the acquisition of Mozambique s Global Alliance Seguros. The firm, which last year generated a premium income of more than $25m, had already launched several life insurance products. Mr Lategan said long-life insurance products would be ideal in many countries, even though there was also potential for short-term business insurance. As economies developed, short-term personal insurance lines would also be in demand, particularly for vehicle and property insurance, he said. Mr Lategan said Absa Financial Services market entry strategies would differ from country to country because African markets were not the same, nor were their regulatory and capital adequacy requirements. Where it made sense, the unit would acquire an existing business, Mr Lategan said. But in other markets, a greenfield investment could be considered. Source: Business Day, 1 November PwC

29 Q In which areas are you currently experiencing the greatest shortage of skills? In 2008, the most important talent issue faced by South African insurers centred on black economic empowerment (BEE). In 2010, it was IT and in 2012 it centred on specialist underwriting. Specialist underwriters were followed by actuaries and then non-executive directors. However, 10 of the 12 different human resource positions scored above 3 suggesting that talent shortages exist across the industry. Ten companies attributed the maximum score of 5-out-of-5 to actuaries and non-executive directors, while 11 companies assigned 5-outof-5 to specialist underwriters. Increasing difficulty Specialist underwriting Actuarial Non-executive directors Audit committee Capital management Risk management Information technology (IT) Executive directors Compliance Financial reporting Internal audit Administration Based on responses from 29 companies Maximum score is 5 Strategic and Emerging Issues in South African Insurance

30 Emerging issues continued Q What do you regard as the principal challenges that your organisation will face over the coming year in your key growth markets? Please choose the top five. In 2008, 2010 and 2012 the top challenge for insurance companies was compliance and the regulatory environment. Eighteen companies ranked it in top position. In 2012, this challenge scored double its nearest rival the uncertain economic environment. Lack of skilled resources also remains an important challenge in keeping with previous reports findings. The other category included the following comments regarding challenges organisations will face: Effectiveness of IT systems; and Long-term payback horizons. Compliance and regulatory requirements Uncertain economic environment Lack of skilled resources / specialist talent Access to previously uninsured market Customer attitudes towards insurance / mistrust Competitiveness and appropriateness of existing products and services Maturity of the market / penetration rates Competition from foreign entrants seeking growth in emerging markets Influence of mobile / internet-based technologies Political risk Other Cultural and language barriers Score Based on responses from 29 companies 30 PwC

31 Q On which offshore expansion strategies do you believe South African insurers should focus? The rest of Africa continues to be recognised as the top region for expansion. Asia remains in second position with China, identified as a separate region in this survey, identified by two companies. South America was cited in 2010 by eight companies, but in 2012 only three companies mentioned it as a region for future expansion. Now we think it is the right time to grow our business in Africa you just have to go round the various African countries to see how it s very different from what it was, say five years ago. Julian Roberts Chief Executive, Old Mutual 9 March, 2012 Rest of Africa Asia South America China Europe and USA Number of companies Based on responses from 29 companies Low Penetration in Kenya Kenyans uptake of insurance cover, both at corporate and personal level, remains predominantly in the motor, fire, industrial and personal accident (mainly group medical cover) classes. This illustrates a poor attitude towards personal insurance cover in general. Low penetration of insurance in the Kenyan market relative to other more developed markets is attributable to the following factors: A general lack of a savings culture among Kenyans; Low disposable incomes for the majority of the population, with close to 50% of Kenyans living below the poverty line; Inadequate tax incentives that could encourage the middle classes to purchase life insurance products; and A perceived credibility crisis of the industry in the eyes of the public particularly with regard to settlement of claims. Source: accessed May 2012 FBN Life unveils strategy to deepen insurance penetration Penetration is the challenge of insurance in Nigeria due to the cost of reaching the uninsured but we are going to deploy information technology to reach the uninsured through the branch network of First Bank, said Val Ojumah, Managing Director/Chief Executive, FBN Life Assurance (jointly owned by First Bank of Nigeria PLC, and Sanlam) Nigeria represents an enormous market and insurance penetration is low; not more than 0.5 %. That is hardly scratching the surface. This represents an attraction for us and then we saw the right partnership in First Bank, said Andrew Greenwood, Chief Operating Officer and representative of Sanlam. Source: Vanguard, 9 March 2011 Strategic and Emerging Issues in South African Insurance

32 Emerging issues continued Q What are your top three considerations regarding investing in the rest of Africa? The three top considerations for South African companies looking at opportunities in other African markets were as follows : Penetration rates; Margins and profitability; and Quality of local management staff. Of much less significance were the number of existing clients in the market, the acquiring company s current level of influence and their range of products. Data published by Swiss Re indicates that premiums as a percentage of GDP in 2010 in South Africa was 12.0% for life business and 2.8% for non-life business. Swiss Re recorded that similar statistics for Nigeria were 0.1% (life) and 0.4% (non-life), for Kenya 0.9% and 1.9% and for Namibia 5.0% and 2.3%. Swiss Re notes that South Africa is the dominant market in Africa and accounts for 90% of regional life premium volume and half of the regional non-life premium volume. World market share for Africa is just 1.9% for life premiums and 1.1% for non-life premiums. Premiums in 2010 in Africa Life Non-Life Real premium growth 8% 6% 4% 2% 0% -2% -4% Life USD bn World market share 1.9% 1.1% Non-Life Growth rate 2010 Annual averagerowth rate Insurance penetration rates Margins / profitability Quality of local management and staff Number of existing insurance clients of entity Parent company influence Product offerings Source: Swiss Re Other Score Based on responses from 22 companies 32 PwC

33 Q What are your top three challenges regarding investing in the rest of Africa? The most important consideration for South African insurers investing in the rest of Africa was identified as regulatory restrictions. Cultural issues and a lack of insurance talent were also important challenges. Some of the examples that emphasised the challenges facing expansion into Africa include: In Nigeria, one company suggested there was political interference while another described the market as very tough. In Botswana, a participant suggested that the regulator required companies to use Botswana reinsurers. One participant said their African expansion had been negatively impacted by a bad experience in Namibia. Some of the more general concerns surrounding expansion in Africa included a lack of local knowledge, skill shortages, limited legal frameworks and non-compliance. Regulatory restrictions Cultural issues/conflicts Lack of insurance skills Political interference/opposition Unexpected costs Resistance to foreign entrants Other Shareholder opposition Score Based on responses from 22 companies Strategic and Emerging Issues in South African Insurance