Like most sectors in South Africa, 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 31 December 2021 were analyzed for five major insurers. They included Discovery Limited (Discovery), Liberty Holdings Limited (Liberty), Momentum Metropolitan Holdings Limited (MMH), Old Mutual Limited (Old Mutual), and Sanlam Limited (Sanlam). The analysis was performed to compare the results to those of prior years, which illustrated insurers’ financial performance, with a particular focus on the performance of the core life business units.
Alsue du Preez, PwC Africa Insurance Leader, says the results are presented in the context of rapidly changing circumstances in which insurers are conducting their businesses. “Significant shifts are still occurring, the latest being the invasion by Russia of Ukraine and flooding in KZN, impacting not only the economy but environmental and social conditions,” she says. “These factors, as well as ongoing shifts in customer expectations and needs, have the potential to continue to materially influence future performance.”
It is against this backdrop that the industry has to deliver ‘business as usual’ sustainable growth and profitability, deliver on its purpose and be impactful to all stakeholders.
Sustaining profitable growth
To sustain profitable growth, Renasha Govender, PwC Actuarial, Risk and Quants Partner, says insurers need to find new customers and address unmet, new and evolving needs, while retaining ample margin.
“Whilst in the past they have been able to generate value from their investment strategies, regulatory costs and constraints have meant that innovation with regard to products, integrated services and partnerships have proven to be key necessary drivers for continued financial success within the industry globally,” she says.
Key indicators for the last decade demonstrate 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 achieved VNB margins of between 2.7% and 3.1% over the period 2011 – 2015 as highlighted in previous PwC publications on the life insurers results. However, these had already decreased to 2.4% in 2018 and 2019. The VNB margin achieved in 2021 is lower still at 1.9%, but an improvement from the result in 2020 of 1.49%.
In 2021, the five insurers achieved a VNB worth R6.9bn — 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% from 2019, but this was not sufficient to offset the fall in margins compared with pre-pandemic levels.
Macro-economic factors constraining profitable growth
Hampered GDP growth has been compounded by Russia’s invasion of Ukraine which has 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% this year (from 2.3% previously) with continued downside risk,” du Preez says. “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.”
Impact of higher food/transport costs on low/medium income households will impact their ability to afford new or existing insurance products
The upward pressure on food, fuel and electricity prices will adversely impact all households during 2022. However, due to varying spending abilities and priorities, households in different expenditure deciles will be impacted differently.
“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 says. “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.”
Low-income households spend more than half of their money on food and non-alcoholic beverages. This includes grain products (like bread and maize) which in coming months will cost significantly more due to higher international commodity prices.
As we now proceed out of the rollercoaster that was 2021, a fair amount of uncertainty lingers in the industry. Talk is now moving more towards whether cost savings insurance entities achieved during the lockdown will be sustainable, as well as what allowance should be made for the effects of COVID-19 on long term mortality and long-COVID.
Stronger performances in FY21 for the major life insurers continued to demonstrate strong operational and capital management, and the relative benefits of diversification amongst their business portfolios. “The post-COVID financial ‘recovery’ is pleasing to see, but the pre-COVID comparison, coupled with the difficult macroeconomic backdrop into the medium term, demonstrates the need for insurers to continue to innovate and invest on multiple fronts,” du Preez says.