Anees Vazeer, chief financial officer at Lion of Africa Insurance recently published an article on Moneyweb expressing his concern over the weak Rand on the South African insurance industry.
Anees suggests that the sustained deterioration of the Rand could “catapult” our insurance industry into a struggling third-world industry. Foreign dis-investment, low capacity for reinsurance, and increasing premiums are major contributors to the claim.
If South Africa were to see a significant decrease — or worse yet a close — in investments from large international reinsurance players, local insurers could suffer. Reinsurance forms a critical part in allowing South African insurers to reduce capital requirements, diversify risk, and ultimately branch out and accept more business. Anees highlights poor results already announced by foreign owned insurance companies. One can wonder if insurers are already looking towards alternative risk transfer techniques for solutions.
Another threat the weak Rand poses is a forced increase in insurance premiums due to the increased cost of importing replacement assets. (Anees claims between 80% and 90% of all consumer goods, including cars, technological devices, electronics and most household appliances, are imported). SARB just recently revised the 2016 GDP growth down (again) 0.2% to 0.6%, and the 2017 and 2018 GDP growth forecasts down 0.1% each. With the burden of an already contracting economy and increasing inflation (also revised up by SARB from 6.6% to 6.7% in 2016), consumers may be forced to cancel their insurance contracts. This would have a ripple effect on the economy. One can wonder if insurers have already revised their lapse rate and persistency rate assumptions.
Anees also points out that short-term South African insurers, in particular motor insurers, are already under pressure with weakening results and extremely thin profit margins. He goes on to say that insurance plays a critical part in assisting municipalities to maintain infrastructure, and that the huge strain of foreign infrastructure imports could lead to deteriorating infrastructure, lower standards of living, and ultimately a “brain drain” in the long term. The solution? Innovation and diversification, as opposed to relying on a sustained appreciation of the Rand.