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Strategic and Emerging Issues in South African Insurance 2012

Fifth edition

June 2012

Maximising value from today’s opportunities

www.pwc.co.za/insurance

© 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.

Strategic and Emerging Issues in South African Insurance 2012 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

4 PwC

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 risk-sharing 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.

Foreword

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.

Victor Muguto Long-term Insurance Leader PwC Southern Africa

Ilse French Short-term Insurance Leader PwC Southern Africa


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.

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.

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

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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.

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 2011. 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.

Additional copies can be obtained from Susan de Klerk, Insurance Knowledge Manager – PwC South Africa 2 Eglin Road, Sunninghill, 2157

Telephone: +27 11 797 5148 Fax: +27 11 209 5148 Email: [email protected]

About the author

Executive summary

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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 long-term 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 2012.

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.

Short-term insurers interviewed:• AbsaInsurance • RegentInsurance• AlexanderForbesInsurance • Santam• Chartis • SASRIA• HollardInsurance • StandardInsurance• LionofAfrica • Telesure• Mutual&Federal • ZurichInsurance• Outsurance

Long-term insurers interviewed:• 1Lifedirect • LibertyLife• AbsaLife • MMI• AVBOB • OldMutual• Chartis • ProfessionalProvidentSociety• ClientèleLife • PSG• DiscoveryLife • RegentLife• HollardLife • Sanlam

Background

Participants

Reinsurers interviewed:• HannoverRe• MunichRe• SwissRe

Cell insurers interviewd:• Centriq• Guardrisk

Executive summary continued


Main findings 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 13th and 19th posisitions by 2021.

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.

Source: Swiss Re Economic Research & Consulting (2012)

South Africa is a top 20 insurance market

Ranked by premiumsLife 2011 2021UnitedStates 1 1China 5 2Japan 2 3France 3 4UnitedKingdom 4 5India 8 6Italy 6 7Germay 7 8Taiwan 10 9SouthKorea 9 10Canada 11 11Brazil 17 12South Africa 13 13Australia 12 14Luxenbourg 14 15Belgium 19 16Sweden 15 17Spain 16 18Switzerland 18 19HongKong 21 20

Ranked by premiumsNon-life 2011 2021UnitedStates 1 1China 7 2Germay 2 3UnitedKingdom 3 4Japan 4 5Netherlands 6 6France 5 7SouthKorea 10 8Italy 8 9Canada 9 10Spain 11 11Brazil 13 12Australia 12 13Russia 14 14India 18 15Switzerland 15 16Turkey 26 17Belgium 16 18South Africa 19 19Mexico 23 20

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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.

IFRS 4 Phase II

Participants had deep reservations abouttheimplementationofIFRS 4Phase 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.

Executive summary continued


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.

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.

Non-executive directors and audit committee members are also in high demand.

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First Second Third

Products

Alternativerisktransfer Guardrisk Centriq RMB

Assistancebusiness MomentumHollardLife/Sanlam/Clientèle

Creditlife AbsaLife HollardLife RegentLife

Groupbusiness–Investment

OldMutual Sanlam InvestmentSolutions

Groupbusiness–Risk OldMutual Sanlam Momentum

Investmentproducts Sanlam Discovery OldMutual

Liferiskproducts Discovery Sanlam OldMutual

Motorinsurance Outsurance Santam Telesure

Property(excludingmotor)

Santam Mutual&Federal Hollard

Healthinsurance Discovery LibertyLife Chartis

Other

Customerrelationshipmanagement

Discovery Outsurance Santam

Innovations Discovery Outsurance Hollard

Marketingstrategies Discovery Outsurance Telesure

Technicallycompetentstaff

Santam Discovery OldMutual/Sanlam

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.

Peer ranking overview

Market environment

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The short term companies surveyed employed 15 991 people. They estimated that by 2015 they would employ 17 353, a 8.5% increase.

The number of brokers and intermediaries for short-term insurers was calculated to be 15 847. By 2015 the participants predicted that this number will decline by 9.1% to 14 408.

The number of branches is expected to decline from 179 branches in 2012 to 162 branches by 2015. 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 2012.

Data on policyholders should be treated with caution because some companies are unable to distinguish between customers who may hold multiple policies.

2012 2015 Change % ChangeBranchesinSouthAfrica 179 162 (17) (9.5)Brokers/Intermediaries 15847 14408 (1439) (9.1)Full-timeemployeesinSA 15991 17353 1362 9.0Policyholders(millions) 9.6 12.7 3.1 32.3

2012 2015 Change % Change

BranchesinSouthAfrica 1514 1562 48 3.2

Brokers/Intermediaries 37840 51540 13700 36.2

Full-timeemployeesinSA 57667 61600 3933 6.8

Policyholders(millions) 22.2 28.6 6.4 28.8

Short-term companies

Long-term companies

Long-term insurers plan to increase the number of branches by just 3.2% over the next three years to 1 562 branches.

They plan to increase the number of brokers and intermediaries by 36% from 37 840 to 51 540. However, if one participant is removed from this calculation the remainder of the group predicts an increase of 9.8%.

Theparticipantsemployed57 667people in 2012 and anticipate employmentgrowthof6.8%to61 600by 2015. 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 2015.

Short-term insurers

Long-term insurers

Market environment continued


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.

Q What, in your opinion, are the most important changes taking place in the South African insurance market at present?

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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.

Q Can you identify the major strengths and weaknesses of the South African insurance industry at present?

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 third-party 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.



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?

Q In the wake of the recent wave of natural catastrophes, how do you see the South African Reinsurance market changing?

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 2020. 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.

Several participants observed that there has already been a hardening in rates since the beginning of 2012.

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.

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Note:Basedonresponsesfrom19companies

15.8% 21.1% 31.6% 10.5%

5.2% 15.8%

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.


8.3%

16.7% 25.0% 16.7% 8.3%

16.7% 8.3%

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?

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.

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

Com

pet

ition

leve

l

Significantoperationalandorganisationalchange

Fundamentalchangeinstrategyandpositioning

Nochange

CompetitiveresponseMinorchange

Intensive

Moderate

Light

None

Com

pet

ition

leve

l



Nochange





14.4% 7.1% 7.1%

28.6% 7.1% 7.1%

28.6%


7.7% 7.7% 61.5% 7.7%

15.4%


46.6% 6.7%

26.7% 20.0%

Credit life

Credit life displays noticeable change from 2010. In 2012, 28% of participants view it as intensively competitive, compared to almost 50% in 2010. This trend began in 2008. In addition, over 70% of participants acknowledge that they had made no changes to this product over the last year.

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.

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.

Intensive

Moderate

Light

None

Com

pet

ition

leve

l



Nochange


Intensive

Moderate

Light

None

Com

pet

ition

leve

l



Nochange


Intensive

Moderate

Light

None

Com

pet

ition

leve

lSignificantoperationalandorganisationalchange


Nochange


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11.1% 22.2% 11.1% 16.7%

22.2% 5.6% 11.1%

21.1% 15.8% 31.5% 26.3%

5.3%



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.


33.3% 27.7% 16.7% 11.1%

5.6% 5.6%

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.

Property (excluding motor)

Two-thirds of respondents believe property is an intensively competitive market. This is very similar to the opinion expressed in 2010. However, only two companies have made fundamental changes to strategy and positioning.

Intensive

Moderate

Light

None

Com

pet

ition

leve



Nochange


Intensive

Moderate

Light

None

Com

pet

ition

leve

l



Nochange


Intensive

Moderate

Light

None

Com

pet

ition

leve

l



Nochange





9.1% 18.1%

27.3% 27.3% 9.1%

9.1%

Health insurance (not medical scheme business)

Health insurance is considered moderately competitive and there has been little change to strategy in this business line.

Intensive

Moderate

Light

None

Com

pet

ition

leve



Nochange


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Q What are the major drivers of change in the insurance industry today? Can you rank them from 1 to 5?

0 20 40 60 80 100 120

Foreign entrants seeking growth in emerging markets

Mergers/consolidation

Other

Inflation and exchange rate volatility

Unstable capital markets

Opportunities in the rest of Africa

Global economic downturn e.g. Eurozone crisis

Uncertain and volatile economic environment

Disintermediation / breakdown of trust in intermediaries

Changing demographics / urbanisation / rise of new middle class

Internet and mobile-based technologies / social media

Consumerism and changing customer behaviour

Capital requirements

Regulatory and reporting changes

Based on responses from 29 companiesScore

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.

Prospects for growth — Liberty

LIBERTY yesterday said it saw growth opportunities in SA’s long-term 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.”

Source: Business Day, 2 March 2012



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 2012. Capital requirements, a new driver in 2012, was ranked in second place by both short-termandlong-termparticipants.

0 10 20 30 40 50 60

Other







Disintermediation / breakdown of trust in intermediaries


Internet and mobile based technologies / social media


Consumerism and changing customer behavior



Based on responses from 15 companies Score

0 10 20 30 40 50 60



Other






Disintermediation / breakdown oftrust in intermediaries

Internet and mobile based technologies / social media


Consumerism and changing customer behaviour



Based on responses from15 companiesScore

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.

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Increasing importance Least importance Most importance

All companies Average 1 2 3 4 5Alternativerisktransfer(10) 2.10 4 3 2 0 1Assistancebusiness(17) 3.59 3 2 0 6 6Creditlife(12) 2.92 2 3 3 2 2Groupbusiness(16) 2.81 4 2 5 3 2Investmentproducts(16) 3.17 5 2 1 5 5Lifepureriskproducts(17) 3.59 2 2 1 4 8Property(excludingmotor)(21) 3.52 4 1 2 7 7Motor(22) 3.68 3 1 5 3 10Healthinsurance(notmedicalschemesbusiness)(15)

2.47 4 4 2 3 2

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.



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.

0 5 10 15 20

2008

2010

2012

Other

Start-up institutions

Foreign insurers entering the market

New competitors moving from retailing into financial services

Niche players

Established broad-based financial institutions moving from one market to another

Established broad-based financial institutions already competing in your market

Number of companies

Based on responses from 26 companies in 2012, 30 in 2010 and 23 companies in 2008

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 2010.

The other significant competitive threat commented on was mobile phone companies.

Emerging issues


Q Do you believe that the bancassurance model has been successful for South African insurers?

No

Yes

Based on responses from 29 companies

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 2010.

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 long-term 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.

* Source www.insurancenewsnet.com 12 March 2012

28 PwC

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 ill-equipped to deal with the growing presence of direct insurers.

Q What are the biggest challenges facing bancassurance in the changing regulatory environment?

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 employee-benefit 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 2011

Emerging issues continued


Q In which areas are you currently experiencing the greatest shortage of skills?

0 1 2 3 4 5

Administration

Internal audit

Financial reporting

Compliance

Executive directors

Information technology (IT)

Risk management

Capital management

Audit committee

Non-executive directors

Actuarial

Specialist underwriting


Maximum score is 5

Increasing difficulty

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-out-of-5 to specialist underwriters.

30 PwC

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.

0 20 40 60 80 100 120

Cultural and language barriers

Other

Political risk

Influence of mobile / internet-based technologies

Competition from foreign entrants seeking growth in emerging markets

Maturity of the market / penetration rates

Competitiveness and appropriateness of existing products and services

Customer attitudes towards insurance / mistrust

Access to previously uninsured market

Lack of skilled resources / specialist talent

Uncertain economic environment

Compliance and regulatory requirements

Score




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.

0 5 10 15 20 25 30

Europe and USA

China

South America

Asia

Rest of Africa


Number of companies

“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

www.reuters.com 9 March, 2012

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: www.pwc.com/ke, 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

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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.

0 5 10 15 20 25 30 35

Other

Product offerings

Parent company influence

Number of existing insurance clients of entity

Quality of local management and staff

Margins / profitability

Insurance penetration rates

Score


Premiums in 2010 in Africa

Real premium growth

Worldmarket shareUSD bn

LifeNon-Life

Life

Growth rate 2010Annual averagerowth rate 2000-2009

Non-Life

8%

6%

4%

2%

0%

-2%

-4%

4719

1.9%1.1%

Source: Swiss Re



0 5 10 15 20 25 30 35 40

Shareholder opposition

Other

Resistance to foreign entrants

Unexpected costs

Political interference/opposition

Lack of insurance skills

Cultural issues/conflicts

Regulatory restrictions

Score


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.

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Santam Looking to Grow into Africa

Santam, South Africa’s largest short-term insurer, has announced that it is looking to expand its corporate short-term insurance business into Africa to service South African companies with African operations.

Said Santam Head of Corporate Business, Richard Payne, ‘While the African corporate short-term insurance market is regarded as a small niche market, we have made it a priority for Santam to grow its presence in this area.’

Currently, in terms of premium spending, South Africa’s corporate short-term insurance market is believed to be worth between R3 and R3.5 billion, of which Santam has an estimated 27%, with the possibility to increase this through its move into Africa.

Santam aims to target many South African-owned companies in countries such as Tanzania and Kenya by setting up new operations. The insurance company already has operations set up and running in Zambia, Botswana, Malawi, Zimbabwe and Namibia.

With many South African mining, retail, construction and telecom companies looking to expand into Africa, Santam has even partnered with many local insurance companies to meet the diverse requirements of its clients.

However, Santam is not alone in setting its sights on Africa, as many larger international insurance companies such as Zurich, Allianz

and Lloyds are also beginning to stake their claim in Africa, in what is perceived in insurance circles to be an increasingly lucrative market.

Payne points out, though, that Santam has the edge over these companies in many instances because local Santam-affiliated insurance companies have a better understanding of the local market.

Source: www.insurance-guide.co.za, 31 July 2011

Old Mutual moves into West Africa

Old Mutual is entering the insurance market in West Africa with its purchase of a life assurance unit of Ecobank, which has its headquarters in Togo.

The CE of Old Mutual Emerging Markets, Ralph Mupita, said the insurer would buy Oceanic Life from Ecobank, which is also a strategic partner of Nedbank, the Old Mutual-controlled banking group. The value of the transaction was not disclosed.

Old Mutual’s deal with Ecobank comes a few months after Ecobank received $285m from Nedbank to buy Nigeria’s Oceanic Bank in terms of an agreement in which Nedbank has an option to acquire up to 20% of Ecobank within three years.

“Old Mutual confirms that a preliminary offer has been issued to Ecobank Transnational Incorporated (ETI) to acquire Oceanic Life, a part of the Oceanic Bank Group, which was acquired by ETI in October 2011,” Mr Mupita said.

“The offer brings the London-listed long-term savings and investment business a big step closer to launching its West African expansion strategy.”

Old Mutual said in a separate announcement that the investment in Oceanic Life was subject to regulatory approvals in Nigeria and South Africa. It did not indicate when these would be given.

Mr Mupita said once the approvals had been given, the launch of operations in Nigeria by Old Mutual would mark the dawn of a new era for the insurer.

“With excellent long-term growth prospects across the continent, we aim to provide a sustainable growth platform for Old Mutual by expanding selectively in West Africa and East Africa, utilising our business-in-a-box model,” said Mr Mupita.

“The transaction that we’ve set in motion with this offer exemplifies this and we look forward to being fully operational in Nigeria in the near future,” he said.

Source: Business Day, 23 February 2012



“There is opportunity for growth in the top end of the market in SA where there is a need for specialist insurance skills. There is also a whole new opportunity waiting to be exploited at the bottom end in the emerging markets.”

Adam Samie CEO, Lion of Africa

Business Day, 22 June 2011

Old Mutual steps up African expansion

Old Mutual is stepping up plans for expansion into fast-growing African markets, identifying several countries in which it hopes to sell mass market insurance products such as funeral plans and disability cover.

The London-listed insurer, which operates in six countries in the continent as well as South Africa, is considering entering markets with low levels of insurance penetration such as Tanzania and Ghana.

The proposals come after Old Mutual, which has been under pressure from shareholders to sell assets acquired during its aggressive pre-financial crisis expansion, made its biggest disposal yet in December by agreeing to sell its Nordic businesses for £2.1bn.

“Having stabilised the group over the past couple of years we’re looking to where we can expand,” said Julian Roberts, chief executive. “This is a 10-year strategy, a beginning of a journey.”

He added: “You see these African countries where they’re growing very fast. There are more people in the market, they’re spending more and they need savings, investments and insurance products.”

Analysts said there were still uncertainties about the overall strategy of the Anglo-South African insurer. They said it was now unclear whether Old Mutual would float its US asset management arm and sell its 52 per cent stake in Nedbank, the South African lender, which contributed £755m to adjusted operating profits of £1.52bn.

Any expansion into Africa by Old Mutual would be from a low base. The group’s presence in Namibia,

Absa acquires Islamic insurance firm

Absa Insurance Company has acquired, for an undisclosed sum, SA’s only company that provides Islamic insurance, Takafol SA. The acquisition comes less than a month after Absa bought a life insurer in Mozambique, and six months after starting a greenfield life insurance business in Botswana.

Takafol, which was established in 2003 to penetrate a market now estimated at almost R3bn in annual premiums, would become part of Absa Islamic Banking and operate as Absa Takafol. The integration of the administration of Takafol SA’s products would provide more direct control over underwriting, pricing and robust management, said the MD of Absa Islamic Banking, Amman Muhammad. “Furthermore, this new offering, as part of Absa’s Islamic range of products, will meet global standards of Shariah governance,” he said yesterday.

The acquisition provided Absa with an opportunity to grow in SA and Africa. “Absa Takafol will see us expand our service offering beyond banking and provide customers with an unparalleled Islamic value proposition,” Mr Muhammad said.

“Since our launch in 2006, Absa Islamic Banking has succeeded in gaining market share through our continuous innovation and by

offering a specialised Islamic product portfolio,” he said.

Takafol had been the only firm of its kind in SA offering short-term Islamic insurance for business cover, vehicle, personal and household cover. “We have been promoting their products, especially the Islamic vehicle insurance option for our vehicle finance, which is the only asset finance we do at the moment,” Mr Muhammad said. Absa had now decided the market could be further exploited and regional expansion pursued if the firm was integrated into the group.

Absa, owned by UK-based Barclays, is pursuing a “One Absa” strategy with a core strategic objective to expand through organic and acquisitive growth in SA and Africa.

The African expansion would be on the back of Barclays, where the two would jointly grow in existing and new markets. “For us, this is a key strategic acquisition and we will be looking at all possible Islamic banking products that we can introduce,” Mr Muhammad said. “For example, home insurance and Islamic travelling insurance, because if you are a Muslim and want to travel to Europe, you need travel insurance and at the moment you are forced to get conventional insurance,” he said.

Source: Business Day, 9 September 2011

Kenya, Zimbabwe, Swaziland, Botswana and Malawi accounted for only about 3 per cent of profits in 2011.

Old Mutual is to enter Nigeria, agreeing last month to make a small acquisition, although Mr Roberts said the expansion would be predominantly organic. “We’re not looking to just have dots in the map of every African country,” he added. Several companies in other sectors are eyeing Africa expansion in an attempt to capitalise on robust economic growth.

Source: Financial Times, 9 March, 2012

36 PwC

Q Which will be the key areas of growth in your diversification strategies over the next three years? Please rate them 1 to 5 where 5 is very important

0 1 2 3 4 5

Pension fund administration

Health administration

Micro-insurance

Asset management

Direct insurance offerings

Core insurance products


Increasing importanceLong-term insurers

0 1 2 3 4 5

Pension fund administration

Health administration

Asset management

Micro-insurance

Direct insurance offerings

Core insurance products


Increasing importanceShort-term insurers

Both long- and short-term insurers provided insight into their future areas of growth.

The long-term insurance companies believe that growth will be funded by their core insurance products, direct channels, asset management and micro-insurance.

All four areas scored above 3 on a scale of 1 to 5. Five companies assigned the maximum score of 5 to direct insurance offerings, while four companies assigned 5s to micro-insurance.

Short-term insurance companies focused on three key growth areas, core products, direct insurance and micro-insurance. Six companies

scored the maximum score of 5 for direct insurance and five companies attributed 5s to micro-insurance.


Restructuring

38 PwC

Q Is your organisation likely to seek an overseas strategic investor by 2015, and if so, what would you hope to gain from the association?

0 1 2 3 4 5 6

International brands

Actuarial skills

Technical skills

New products

New capital

IT and operational systems

Access to an otherwise restricted market

Regional network to help youexpand outside South Africa

Management expertise

Number of selections

Based on responses from six companies

Only six companies responded to this question and most were short-term insurers. As a result we can conclude that South African insurers are not actively seeking strategic investors.

Those that are receptive are primarily motivated by management expertise, access to a regional network or otherwise restricted market followed by a variety of attractions such as IT systems, new capital, new products or technical skills.

Restructuring continued


Q Do you agree or disagree with the following statements?

Our organisation is already structured in the way we want


Neither

Disagree

Agree

Neither

Disagree

Agree



Neither

Disagree

Agree

Neither

Disagree

Agree


Neither

Disagree

Agree


Our organisation will undergo significant M&A over the next five years

Our organisation will seek a foreign strategic investor or a partner in a significant new venture in the next five years

Joint ventures and partnerships will be key to our expansion plans

Our organisation will undergo a significant business disposal over the next five years

Ten companies believe they will undergo significant M&A over the next five years.

Ten companies think they will seek a foreign strategic investor in a new venture.

Nineteen companies will engage in joint ventures or partnerships.

Only two companies will make significant business disposals.

Only three companies believe they are structured to service the future and have no need to change.

To help understand strategic intentions, participants were asked to agree or disagree with the following statements. The findings are revealed in the various responses.

40 PwC

Q What are your top five distribution challenges, ranked in order of importance?

As noted elsewhere in this survey, the industry is challenged by the cooperation and coordination of intermediaries.

These concerns are reflected in the top three distribution challenges noted:

• Improving distribution productivity;

• Aligning the customer, company and salespersons’ interests; and

• Leveraging technology to add value.

These challenges are followed by additional concerns surrounding compensation, recruitment, training and retaining salespersons as well as broker education.

0 10 20 30 40 50 60 70 80

Breakdown in consumer trust of intermediaries

Ageing broker networks

Broker education requirements

Recruiting, training and retaining salespeople

Aligning compensation programs with desired behavior and performance

Effectively using technology to create distinctive value with customers

or producers

Aligning customer, company and salespersons interests

Improving distribution productivity

Score


Restructuring continued

Regulation and governance

42 PwC

Q Do you see the intensity of regulation of the insurance industry increasing or decreasing over the next three years?

Participants feel that they are operating under a heavy burden of regulation.

No less than 25 companies believe it will increase substantially over the next three years.

Only three companies think it will increase slightly while one company believes it will stay the same.

Increase substantiallyIncrease slightly

Stay the same


8

22

2010

Increase substantiallyIncrease slightlyStay the same


3

25

1

2012

By comparison in 2010, 22 predicted substantial increase, while eight companies thought there would be slight increases.

Regulation and governance continued


Q In your view, what will be the estimated cost to your organisation of implementing Solvency Assessment and Management and other regulatory changes over the next three years?

Participants were asked to provide an estimate of the cost of implementing SAM and other recent regulatory changes over the next three years.

One large long-term insurer estimated that the cost of SAM could be R120 million, TCF R80 million and FAIS R30 million. Howevertheycommentedthat ultimately the cost of TCF could be the greatest exposure of all.

A number of the smaller and medium-sized long-term insurers provided estimates in the R25-50 million range. Other larger companies estimated R200-300 million.

Short-term insurers provided more modest estimates of around R50 millionalthoughtwocompanies projected costs of around R100 million.

44 PwC

Q Do you believe the separation of prudential and market conduct aspects of regulation under the ‘twin peaks’ proposals will result in the following benefits?

0 20 40 60 80 100

Reduce cost and complexity of compliance

Improved financial inclusion of previously uninsured market

Increased access to insurance and financial services

Better public reporting

Reduction of systemic risk

Maintenance of financial sectors soundness and stability

Promotion of better internal standards

Better consumer protection

Improved financial stability in an increasingly uncertain world

Improved financial integrity across the industry

Improved market conduct across the industry

%


Agree

Disagree

Participants were asked to agree or disagree with a number of benefits associated with this approach.

The chart below records that the majority of participants are in agreement with the following benefits:

• Improved market conduct (96%);

• Improved financial integrity (86%);

• Improved financial stability (82%);

• Better consumer protection (79%);

• Better internal standards (79%);

• Financial soundness and stability (75%);

• Reduced systemic risk (68%); and

• Better public reporting (61%).

However, respondents did not believe that twin peaks will

• Increase access to insurance and financial services (82%);

• Improve financial inclusion (82%); or

• Reduce the cost and complexity of compliance (100%).

South Africa is on a path to implement twin peaks regulation, which separates regulation across two regulators – one focuses on prudential supervision while the other focuses on business conduct regulation.



Q Do you agree or disagree with the following statements about regulation?

Concerns about the burden of regulation are dampening risk appetite and stifling growth

Regulatory considerations are slowing the pace of international expansion

Regulation is creating a fairer playing field for institutions to achieve their growth targets

Disagree

Neither

Agree

Disagree

Neither

Agree

Disagree

Neither

Agree

Two-thirds of participants disagreed with this statement. Smaller insurers believe that regulation is a formidable burden that is more efficiently handled by the larger companies. One direct insurer suggested that with SAM they may be able to reduce their capital requirement.

Twenty-one of the 28 respondents believe that the heavy burden of regulations is dampening risk appetite and stifling growth.

The burden of regulation is also believed to be slowing the pace of international expansion. Twenty participants agreed with this statement.

46 PwC

Q In your view, how will SAM be of benefit to the South African insurance industry?

Participants in general believe that SAM will benefit the industry, particularly by improving risk management, which most believe will be the primary benefit.

Participants made the following points:

• Better pricing;

• Less cross subsidisation;

• Improved decision making;

• Provided a useful blueprint;

• Formalises operational risk models;

• More effective use of capital; and

• Brings South Africa up to international standard.

However, a sizeable number argue that SAM comes at a significant cost.

Four participants argued that SAM provides no benefit. One contended that SAM was an overkill while another believes that it entails a lot of work to arrive back at the same position.

Several participants suggest that SAM will ultimately result in fewer, but stronger players.



Q How well prepared is your organisation for SAM?

0 20 40 60 80 100

Not started

Some progress

Significant progress

Completed

System and other implementation changes

Data cleanup

Prepare for dry run

Detailed implementation plans

High-level implementation plans

Gap analysis

SAM project approved by board

SAM implementation team set up

%

Based on resposes from 28 companies

Participants were asked to record their progress in relation to eight different components in the implementation of SAM. More than half of the participants have already completed four key tasks:

• Setting up an implementation team;

• Receiving board approval;

• Gap analysis; and

• Devloping high-level implementation plans.

Around a quarter of participants have completed detailed implementation and prepared for a dry run.

However, around 40% have only made limited progress on detailed implementation plans, data cleanup, system changes and a dry run.

Three companies said they had not yet prepared a dry run and one company said that they had not yet started a data cleanup.

48 PwC

Q In your view, how difficult will it be to implement SAM in the following areas?

Participants were asked to record the level of perceived difficulty in the implementation of SAM.

Ranked by level of difficulty the tasks required to implement SAM were:

• Internal model approval;• Internal model development;• Internal model validation; and• Compliance with the use test.

If ‘quite difficult’ is added to ‘very

difficult’, then once again the three model components have the highest scores, but participants also believe that cultural transformation and internal training and development will also prove demanding.

No CommentQuite easy Quite difficultVery difficult

Cultural transformation and change management

Internal training and education

Governance requirements

Own risk self-assessment (ORSA)

Producing sufficient documentation

Data requirements

Compliance with the use test

Internal model approval

Internal model validation

Internal model development



The Government announced plans to reform the retirement funding model in 2007. The introduction of a National Social Security Fund (NSSF) would radically change the retirement landscape.

The retirement market is currently serviced by the private sector and the creation of a NSSF will divert a large proportion of these assets.

The participants were asked to comment on the impact of the NSSF on their industry.

Although some further progress has been made on the configuration of the NSSF, most participants declined to comment, arguing that it is still too early to understand the nature of the impact.

The following comments were also made:

• It will reduce business opportunities;

• The lower end of the market will be affected most; and

• There is no accord between government and the private sector.

Q How will the proposed Social Security and Retirement Fund (SSRF)reforms impact the South African insurance industry?

Q What will be the key challenges to the introduction of the National Health Insurance (NHI) programme?

The participants were asked to outline the challenges related to the proposed National Health Insurance system. In April 2012 the NHI began pilots in 10 selected districts. It is intended that over the next five years, the NHI will be further piloted and the health system will be strengthened in terms of infrastructure, equipment, human resources, information management and the establishment of an NHI Fund.

The participants again believed it was too early to forecast the impact of an NHI, but offered the following observations:

• It will lower disposable income, since it is effectively a tax and thus leaves less expenditure for insurance;

• Insurance companies do not have a major stake in health care;

• It will impact the bottom end of the market;

• It will change product scope;

• There has to be a public/private partnership; and

• Increased taxes will mean less savings.

50 PwC

Q How will the proposed micro-insurance legislation impact your organisation?

In July 2011, National Treasury released a policy document entitled ‘The South African Micro-insurance Regulatory Framework’. The document outlines the need to improve access to insurance and strengthen customer protection.

More than a dozen participants indicated that they are interested in establishing a separate entity to address the new opportunities in this sector.

Some believed that the proposed legislation will help formalise the sector and result in a more level playing field where the established insurers will be able to compete with the previously under-regulated companies in, for example, funeral cover.

The ‘light’ regulation predicted in the sector appealed to a number of participants.



Q Recent regulatory developments include regulations on binder agreements’ and outsourcing. Have you considered the impact on your business and your ability to monitor the risk management and governance of third parties as envisaged by these developments?

Q What will be the impact of the Treating Customers Fairly proposals on South African financial services?

The Financial Services Board (FSB) released a Roadmap for its TCF initiative in March 2011. The intention is that TCF will be incorporated into legislative changes by 2014.

Participants indicated that TCF will have a major impact on the industry. Many respondents suggested that TCF would result in massive costs. It would affected not just customer-facing parts of the operation, but the entire company.

Although many participants said they have been addressing the need to embrace consumerism and put the client first, they believe a major cultural shift is necessary and it will take time.

Some believed that this regulation will be particularly difficult for the larger insurers to implement because of the scale and scope of their operations.

The focus on fairness means that not only must insurers address value for money, but also ensure that customers receive good quality service and delivery.

Binder agreements exist between insurers and third parties such as brokers, administrators or underwriting managers. The insurer mandates the third-party to perform functions on behalf of the insurer in the administration of policies and claims.

Again, the consensus among respondents was that amendments to the short and long-term insurance acts will have a major impact on the industry.

Comments made included:

• Need to have greater clarity from the FSB;

• Provides more certainty on roles and responsibilities;

• It will limit the ability to partner with third parties. It affects white label products.

• We have a detailed questionnaire to test business processes and functions of outsource players. In addition we conduct annual site visits to outsource players;

• This cuts to the heart of our business;

• Binder agreements will have a major impact. Too many intermediaries act as insurers;

• The intermediary model will become very expensive;

• This open up opportunities for the direct writers;

• We outsource a lot of functions which may now be brought back inside; and

• It will impact the ownership of brokers and underwriting managers.

52 PwC

Q. List the top three main concerns with the IFRS 4 Phase II proposals?

Q Does your organisation consider the IFRS 4 Phase II developments as part of an integrated project with other key reporting and regulatory proposals?

No

Yes


Solvency Assessment and Management

IFRS 4 Phase II (Insurance contacts) is being finalised by the International Accounting Standards Board (IASB) with a planned effective date of 2015/6.

The objective of the standard is to provide consistency on the measurement of insurance contracts and to improve investors’ comprehension of insurance companies’ profitability and financial position.

The majority of respondents consider SAM and IFRS 4 Phase II to be an integrated project.

Eighteen of 22 respondents agreed that SAM should also be an integrated project with the financial reports developments.

The participants expressed wide-ranging and deep concerns about the IFRS 4 Phase II proposals.

Below are a selection of these concerns:

• The end result will be that understanding insurance accounts becomes even more difficult for shareholders;

• Overly complicated. Does it add value?

• Lacks clarity at present;

• Further increase in reporting costs;

• IFRS 4 Phase II distorts everything and results in significant differences in revenue;

• Transition steps are unclear;

• Reporting format is no longer intuitive;

• Multiple reporting frameworks, IFRS, SAM, tax etc; and

• Needs more technical expertise which is already in short supply.



Q Has your organisation undertaken any of the following to prepare for IFRS 4 Phase II?

No


Yes

Formal budget for IFRS 4 approval by board

Performed detailed modeling

Doing high-level impact assessments

Started doing internal technical training and updates

Started to work in relation to the proposals

The five charts below illustrate the progress made by participants along this path.

The level of progress was as follows:

• Started to work on proposals: 83%

• Doing high level impact assessments: 71%

• Started internal technical training: 67%

• Performed detailed modelling: 25%

• Formal budget approval for IFRS4 by board: 13%.

Information technology


Q Identify three major technology weaknesses in the South African insurance industry?

Q Identify three major technology innovations that will have a significant impact on the South African insurance industry over the next three years?

The participants identified the following technology weaknesses:

• The proliferation of legacy systems, not all data resides on modern platforms;

• Products have been over engineered and are too complex for consumers to understand. They need to be simplified.

• Weak customer relationship management systems. Insurers do not know their customers;

• Industry is yet to adapt to the rise of social media;

• Outsource partners lack quality so opportunities are limited;

• Data entry and harmonisation along the distribution channel remains dysfunctional. As a result it is fragmented and results in inefficiencies;

• Bandwidth is inadequate;

• Internet is slow and expensive. It is too slow for selling, servicing and reporting claims; and

• Mobile technology is not incorporated into existing platforms.

Mobile technology will have a major impact on the industry. Smartphones and tablets were mentioned by all participants as the innovation that will have the greatest impact on the industry.

However, slow broadband was seen as a limiting factor in the application of mobile technology to sales, claims and information processing.

Several companies mentioned the marketing potential of social media.

One company cited the value of report consolidation offering a dashboard view of financial investments.

Other technological improvements included HIV saliva tests and telematics tracking for motor insurance.

Several participants mentioned Frank.net. Frank.net is owned by Liberty Holdings but operates as a completely independent business on a web-based technology platform.

56 PwC

Q What do you believe will be the top three applications of technology in insurance by 2015?

The most important applications of technology by 2015 were identified as direct insurance and online distribution.

This confirms the growing importance of the internet in insurance marketing.

These applications were followed by data mining and actuarial systems.

0 10 20 30 40 50

Other

Claims modeling

Linkages between insurance and call centre systems

Systems to deliver IFRS and regulatory compliance information

Smart systems to proactively manage risk

Actuarial systems

Real-time data mining capabilities

Direct insurance / online distribution

ScoreBased on responses from 28 companies

Information technology continued


Q What will be the key benefits of your IT investment in the next three years? Please score them 1-5 where 5 is considered to be of greatest benefit.

Twenty-seven companies recorded their perceived benefits from technology by 2015. The chart below illustrates that the greatest benefit from technology is improved operational efficiency, followed by better customer relations and a competitive advantage.

0 20 40 60 80 100 120

Contribution to overall company profit

Market expansion-flexibility/scale/reach

Regulatory reporting efficiency

Product and service enhancement

Competitive advantage

Improved customer relations

Improved operational efficiency

ScoreBased on responses from 27 companies

58 PwC

Cover2go

Through the use of Clickatell SMS, Metropolitan’s Cover2go opened the door to life insurance coverage for those who had little entry to it before – opening up an entirely new market full of potential. With this kind of ‘pay-as-you-go’ insurance, many lower income groups in under-serviced markets can get cover whenever and wherever they most need it.

Derek Pead CEO of Cover2go, a division of Metropolitan

Source: www.clickatell.co.za, accessed May 2012

Life insurance goes mobile

1Lifedirect broke the traditional life insurance mold when it launched as South Africa’s first truly direct life insurer, making life insurance accessible over the phone and on the internet. They then replaced the conventional HIV blood test with the convenience of saliva testing.

Anton de Souza, CEO of 1Lifedirect, says that as a company that leads through innovation, 1Lifedirect’s latest first-to-market m-commerce offering allows South Africans to purchase, view and administer up to R500 000 fully underwritten life cover using their mobile phones, in less than 10 minutes. “Part of 1Lifedirect’s value proposition is to be simple and convenient by giving clients the flexibility to deal with their personal insurance needs via their channel of choice, providing them with more personal control of their life insurance needs,” says de Souza.

South Africa has seen phenomenal growth in mobile Internet usage. Some of the reasons for this growth include the lack of fixed line implementation and the infiltration of so called “feature phones” and smart phones in the market.

Research puts the number of mobile subscribers worldwide at more than 4.9 billion and it is expected that by 2012 there will be 1 billion mobile internet users worldwide.

Closer to home, there are 39 million mobile users in South Africa with an expected 48 million users by 2012. SMS is still the most used mobile product and, on average, over 4 billion SMSs are sent out every year in South Africa.

South Africans have almost twice as many cellphones as TV sets, and there are more than four times as many households with a cellphone than a computer. 44% of e-mails are sent and received from a cellphone and 5.3 times more homes have cellphones than landline telephones.

Whilst texting and social media applications like Mxit and Facebook Mobile outpace browsing the internet on the phone, there are almost six times more cellphone subscribers than Internet users. In addition, as we have seen in the banking arena, cellphone banking services have grown more rapidly than online banking.

“Adoption rates and access to the mobile internet are set to change the way we access the internet. This may very well be the way life insurance is purchased in the future,” concludes de Souza.

Source: www.1Lifedirect.co.za, accessed May 2012

Information technology continued


Vodacom, 8-ta, MTN to enter insurance arena

South Africa’s largest mobile operators are eyeing the short-term insurance sector as a revenue booster.

Vodacom recently announced it would be offering insurance products on the cellphones, tablets and laptops it sells. This move could soon be followed by similar ones by MTN and 8-ta.

Last year, the Financial Services Board awarded the cellphone giant Vodacom a licence which enables it to sell insurance products. MTN, which also has a licence to sell insurance, told CitiBusiness it is “currently reviewing various opportunities in the financial services sector, however such considerations are still at the pre-conception stage”.

Mike Fairon, general manager of product innovation and development at MTN SA, said it “would not exclude venturing into such services in the future but cannot commit to a date yet. Should there be any developments in this regard, MTN will appropriately inform its stakeholders and the public”.

Telkom’s 8-ta says it is considering moving into the insurance market by the first quarter of this year to “assist subscribers to stay connected and to avoid interruption of services”, said Amith Maharaj, Telkom Mobile managing executive.

Maharaj told CitiBusiness that it would initially offer handset plus SIM and data devices (dongles) insurance to 8.ta subscribers at a competitive rate, drawing on existing Telkom resources and partners to sell this insurance. Cell C had not responded to queries by the time of publication.

Vodacom also plans to sell insurance directly to it more than 28,9 million subscribers without going through a third-party.

The move, which will assist Vodacom in diversifying its revenue stream, was motivated by the mobile operator wanting to improve the range of value added services available to clients, said Tshepo Ramodibe, Vodacom’s acting chief officer of corporate affairs.

Ramodibe added that with the new offering Vodacom hopes “to enhance the all-round customer experience so that customers’ lives are not put on hold if something unforeseen happens to one of their mobile devices”.

In the interim, Vodacom plans on expanding and improving on its handset insurance offering and adding additional insurance products for tablets and laptops.

At the time of the announcement last year, managing executive of the financial services division at Vodacom Mark Taylor said the company had been granted a short-term and a long-term insurance licence, allowing it to sell funeral cover as well.

“We will start with the short-term insurance product within the next few months and long-term will follow later,” he said. Vodacom has had an insurance offering for the past 14 years where it sold its products to customers via a third-party.

Neither Vodacom nor 8.ta were willing to share information on their pricing structure. Both players will compete with several new entrants into the insurance field, including Discovery and FNB, as well as veterans such as OUTsurance, Budget and Hollard Direct.

Despite entering a highly competitive market Ramodibe said Vodacom’s “current products don’t specifically compete with general insurers although there is obviously some overlap. They are very niche and linked to Vodacom’s core capability as a telco (telecommunications company)”.

Vodacom has also elected to underwrite its own insurance offering to “give it more control and flexibility when it comes to its insurance services”.

Source: The Citizen, 10 January 2012

Performance


Q What is your estimate of the annual growth in premiums of your business for 2012 and over the next three years?

Short-term insurance companies

The majority of short-term insurance companies anticipate revenue growth in the 10-15% range over the next three years.

Estimated growth in 2012 ranged from 7% to 20% and in 2015 from 7% to 25%. Six companies expect growth of

15% or higher in 2012 and in 2015.

Growth projections for 2012 and 2015 for the short-term insurance companies appear less optimistic than for the 2010 and 2013 time spans recorded in the 2010 report. At that time several companies predicted above 20%.

0 5 10 15 20 25 30 35 40 45 500

5

10

15

20

25

30

35

40

45

50

Expected annual growth rate in 2013

Exp

ecte

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nnua

l gro

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201

0

2010 Survey

0 5 10 15 20 25 30 35 40 45 500

5

10

15

20

25

30

35

40

45

50


Exp

ecte

d a

nnua

l gro

wth

rat

e in

201

0

2010 Survey

Long-term insurance companies

Only four long-term insurance companies expect growth below 10% in 2012 and this reduces to just two companies by 2015.

One long-term company hopes to grow by 25% in 2012 and then by 100% in 2015, while another company anticipates 30% growth in both 2012 and 2015.

Similarly the comparative charts for the long-term companies also indicate more optimistic growth performance in 2010 versus 2012.

0

2012 Survey

5 10 15 20 25 30 35 40 45 500

5

10

15

20

25

30

35

40

45

50


Exp

ecte

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nnua

l gro

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rat

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201

2


0 5 10 15 20 25 30 35 40 45 500

5

10

15

20

25

30

35

40

45

50


Exp

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201

2

2012 Survey


62 PwC

Q By what percentage can you reduce operating costs over the next three years?

Twenty-seven respondents suggested that they planned to try and cut operating costs over the next three years. Thirteen companies recorded cost reductions up to 5% and thirteen companies in the 6-10% range.

One direct insurer believed it could reduce costs by more than 10%.

Several respondents noted that although they planned to grow over the next three years they simultaneously expected to improve productivity and reduce costs.

10-20%

5-10%

0-5%


Q How have BEE share issue transactions affected your profits?

14 companies, reported that the impact of BEE transactions on profits was less than 2%, while two companies said it was less than 5% and two others said it was between 5% and 10%.

5-10%

2-5%

0-2%


Performance continued

Risk management and fraud

64 PwC

Q Do you believe that Own Risk and Solvency Assessment will enhance the insurance risk management process in your organisation?

Own Risk and Solvency Assessment (ORSA) is the cornerstone of the EU’s Solvency II Directive. It requires insurers to make a self-assessment of the capital available to support their business risks.

Regulators then use this information to better understand the risks identified and judge the adequacy of capital available.

ORSA therefore adds a new risk disclosure to the regulatory environment and supplements solvency assessments.

Twenty-seven of the 29 respondents believed ORSA enhanced risk management.

Two companies, one long-term and one short term disagreed. The former argued that risk was an integral part of the insurer’s thinking. The latter emphasised that this is already undertaken in the industry and therefore there is no need for ORSA.

NoYes


Risk management and fraud continued


Q How are your Own Risk and Solvency Assessment development efforts divided between the following underlying activities?

Twenty-three participants, 12 long-term insurance companies and 11 short-term insurance companies, provided data on the division of their efforts on ORSA across three areas:

• Policy development and embedment;

• Process development and implementation; and

• Reporting development and enablement.

Given that total activities add to 100% the 12 long-term companies range from 100% on development and embedment to just 10%.Seven companies have allocated 50% or more to development and embedment. One company has allocated 80% to development and implementation but 10 have allocated 50% or less.

Regarding development and enablement, only one company has assigned more than 25% and three companies have allocated no effort to this aspect at this stage.

Two short-term companies allocated more than 50% to development and embedment, but most assigned around 50%. Two companies allocated just 10%.

Two companies allocated 80% and 70% respectively to development and implementation, while five companies recorded between 40% and 50%.

The least active area for the short-term insurance companies was also development and enablement. Two companies have allocated no effort to date while four have recorded 10% or less.

0

10

20

30

40

50

60

70

80

90

100


Number of companies

Long-term insurance companies

ORSA policy development and embedment

ORSA reporting development and enablement

ORSA process development and implementation


ORSA policy development and embedment

ORSA reporting development and enablement

ORSA process development and implementation

0

10

20

30

40

50

60

70

80

90

100

Short-term insurance companies

Number of companies

66 PwC

0 5 10 15 20 25 30 35

Enhancing external reporting

Improving investor relations

Setting risk-adjusted compensation

Improving M&A decisions

Assessing risk-adjusted customer profitability

Improving credit rating

Improving capital adequacy

Setting risk limits

Improving strategic planning

Assessing risk-adjusted product profitability

Defining risk appetite

Improving pricing policies


Score

Q In which of the following areas has economic capital delivered most value to your business? Rate on a scale of 1 to 5, where 5 equals substantial value to the business and 1 equals no value at all.

The top four benefits of defining economic capital were identified as:

• Improving pricing policies;

• Defining risk appetites;

• Assessing risk-adjusted product profitability; and

• Improving strategic planning.

This finding was based on responses from eight companies.



Q Does the risk management function at your organisation add more value to the business now than it did three years ago?

0 5 10 15 20 25

Substantially less value

Slightly less value

No more value

Slightly more value

Substantially more value

Number of companies

Based on responses from 28 companies in 2012, 30 companies in 2010 and 23 companies in 2008

2012

2010

2008

Risk management continues to add value to insurers. In 2012, 18 companies acknowledged it added substantially more value, nine companies said slightly more value while one said it added no more value.

In 2010, 22 companies said risk management added substantially more value, but at that time 30 companies not 28 companies responded to the question.

Q Does your organisation currently apply capital management as part of its risk management strategy?

No Yes


2008

2010

2012

In 2012, 28 companies said they apply capital management as part of their risk management strategy. Two participants responded that they did not.

This contrasts with 2010, when all 30 participants said they applied capital management.

68 PwC

Q Do you currently effectively monitor your asset/liability matching risk?


No Yes

2008

2010

2012

As in 2010, all participants monitor asset/liability matching risks.

One participant said this was under continual development while another claimed to use a variety of models and asset/liability matching played a critical role.

Q Do you allocate risk-based capital to different business units in order to measure return on capital generated by these units?

No

Yes


More than two-thirds of participants indicated that they allocate risk-based capital to different business units to measure return on capital.

One company claimed to do this by product and region. A large long-term insurer said they were just starting to do this.


Peer reviewRanking of peer companies by participants

70 PwC

Assistance business

The 29 participants provided a peer assessment of companies in the industry. A simple scoring method awarded three points to first place, two points to second and one point to third place. This allowed the insurance companies to be ranked according to a cumulative a total score.

Insurance companies were asked not to record an opinion unless they were active in that segment and were comfortable in providing

an accurate ranking in terms of success (performance, presence and momentum) as opposed to mere size. They were not permitted to rank their own institution. In some instances, respondents only nominate companies for first and second place.

Q Can you name the top three insurance companies in terms of success (performance, presence and momentum) across a variety of different markets?

Ranking First Second Third Score Change

Guardrisk 15 1 0 47 Centriq 2 9 0 24 RMBStructured 0 1 0 2 Hollard 0 0 1 1

* Based on responses from 17 companies

ProductsAlternative risk transfer

Ranking First Second Third Score ChangeMomentum 4 1 0 14 Hollard 2 1 2 10 Sanlam 1 3 1 10 Clientèle 3 1 0 10 Metropolitan 2 1 1 9 OldMutual 2 1 0 8 AbsaLife 0 1 1 3 Assupol 0 1 0 2 AVBOB 0 1 0 2 Discovery 0 0 1 1


Peer review continued


Ranking First Second Third Score ChangeOldMutual 7 0 0 21 Sanlam 0 2 1 5 InvestmentSolutions 1 0 0 3 Metropolitan 0 1 1 3 Discovery 0 1 0 2 LibertyLife 0 0 1 1



OldMutual 5 3 0 21 Sanlam 2 3 2 14 Momentum 2 0 1 7 InvestmentSolutions 1 1 0 5 Discovery 1 0 0 3 Metropolitan 0 0 2 2 LibertyLife 0 0 1 1


Credit life

Ranking First Second Third Score ChangeAbsaLife 6 2 1 23 HollardLife 3 1 1 12 RegentLife 2 2 0 10 StandardInsurance 1 2 1 8 LibertyLife 1 0 0 3 Sanlam 1 0 0 3 FNBLife 0 1 1 3 Metropolitan 0 1 0 2


Group business – investment

Group business – risk

72 PwC

Investment products

Ranking First Second Third Score ChangeSanlam 4 1 1 15 Discovery 4 0 0 12 OldMutual 1 3 0 9 Momentum 1 1 1 6 AllanGray 1 1 0 5 InvestmentSolutions 1 0 0 3 Investec 0 1 1 3 Metropolitan 1 0 0 3 Hollard 0 1 0 2 LibertyLife 0 0 1 1 RMBStructured 0 0 1 1


Life risk products

Ranking First Second Third Score ChangeDiscovery 10 2 1 35 Sanlam 4 3 1 19 OldMutual 3 1 4 15 LibertyLife 0 4 4 12 Momentum 2 2 2 12 Hollard-AltRisk** 0 1 1 3 1LifeDirect 0 1 0 2

* Based on responses from 19 companies ** Set up in 1999 by Hollard and Hannover Re

Motor insurance

Ranking First Second Third Score ChangeOutsurance 11 6 1 46 Santam 4 5 4 26 Telesure 5 4 1 24 Hollard 2 0 3 9 MiWay 0 2 1 5 Regent 1 0 0 3 Mutual&Federal 0 1 0 2 Discovery 0 0 1 1 Zurich 0 0 1 1 MUA** 0 0 1 1 Renasa 0 0 1 1

* Based on responses from 23 companies ** MUA is an underwriting manager, writing business on behalf of Compass Insurance



Property (excluding motor)

Ranking First Second Third Score ChangeSantam 14 1 1 45 Mutual&Federal 1 5 1 14 Hollard 1 2 5 12 Outsurance 2 1 2 10 Telesure 0 1 1 3 Etana 0 1 1 3 ACE 1 0 0 3 Absa 0 1 0 2 Chartis 0 1 0 2 Zurich 0 1 0 2


Health insurance (not medical scheme business)

Ranking First Second Third Score ChangeDiscovery 7 1 1 24 LibertyLife 3 0 0 9 Chartis 2 0 0 6 Momentum 0 2 0 4 Hollard 0 1 1 3 Guardrisk 0 1 0 2


Ranking First Second Third Score ChangeDiscovery 8 1 2 28 Outsurance 6 1 2 22 Santam 5 1 0 17 Hollard 0 5 2 12 OldMutual 3 0 0 9 Momentum 0 2 2 6 Sanlam 1 1 0 5 Telesure 0 2 0 4 MiWay 0 1 1 3 StandardBankbrokers 1 0 0 3 Centriq 0 1 0 2 Clientèle 0 1 0 2 AlexanderForbes 0 0 1 1 Mutual&Federal 0 0 1 1


Customer relationships

74 PwC

Marketing strategies


Discovery 9 2 2 33

Outsurance 3 5 1 20 Telesure 3 3 1 16 Santam 2 2 1 11 OldMutual 2 0 2 8 Hollard 1 1 1 6 MiWay 1 1 1 6 LibertyLife 0 1 1 3 Etana 1 0 0 3 Sanlam 0 1 1 3 Momentum 0 1 1 3 Metropolitan 0 1 0 2 Centriq 0 0 1 1 Mutual&Federal 0 0 1 1


Ranking First Second Third Score ChangeDiscovery 15 2 1 50 Outsurance 6 3 1 25 Hollard 1 7 2 19 Santam 1 3 1 10 Momentum 1 1 2 7 MiWay 1 0 1 4 Telesure 0 1 1 3 Sanlam 0 1 1 3 InvestmentSolutions 1 0 0 3 LibertyLife 0 1 0 2 OldMutual 0 0 1 1


Innovations



Ranking First Second Third Score ChangeSantam 6 5 1 29 Discovery 7 0 2 23 OldMutual 2 5 1 17 Sanlam 4 2 1 17 Hollard 1 3 1 10 Mutual&Federal 1 1 1 6 Outsurance 1 1 1 6 LibertyLife 1 1 0 5 Etana 1 1 0 5 Momentum 0 0 4 4 Guardrisk 0 0 2 2 Telesure 0 1 0 2 Zurich 0 0 2 2 AlexanderForbes 0 0 1 1 Metroplitan 0 0 1 1


Technically competent staff

AppendicesMethodology and participants


Previous experience in the financial services sector has shown that personal interviews with senior executives using a standard questionnaire offers the best research approach.

The questionnaire was administered during interviews of approximately one hour. The author conducted all interviews during February and March 2012 in Johannesburg and Cape Town.

Responses have not been attributed to individual insurance companies, but rather collectively to all participants, which included three reinsurers and two cell insurers and in a more narrow focus of just those categorised as either short-term insurance companies or long-term insurance companies.

The time commitment and support by all insurance companies invited to participate in this survey was, as in previous surveys, outstanding.

The report attempts to provide guidance on the direction South African short- and long-term insurance will follow over the next three years.

Methodology

78 PwC

Name Position Insurance companyAntondeSouza ChiefExecutiveOfficer 1Lifedirect

EdwynO’Neill ManagingDirector AbsaInsurance

JannieVenter ManagingDirector AbsaLife

GariDombo ManagingDirector AlexanderForbesInsurance

FrikRademan ChiefExecutiveOfficer AVBOB

MichaelBlain ChiefExecutiveOfficer CentriqInsurance

JacquesSimmons FinanceDirector ChartisSouthAfricaBasilReekie ManagingDirector ClientéleLifeHerschelMayers ManagingDirector DiscoveryLifeHermanSchoeman ManagingDirector GuardriskAchimKlennert ManagingDirector HannoverReFrancoisPotgieter ChiefOperationsOfficer Hollard

SteveBraudoChiefExecutiveOfficerofRetailSA

LibertyGroup

AdamSamie ManagingDirector LionofAfricaNicolaasKruger ChiefExecutiveOffice MMIJuniorJohnNgulube ManagingDirector MunichRe

PeterTodd ManagingDirector Mutual&Federal

KatieMurray FinanceDirector OldMutualWillemRoos JointManagingDirector Outsurance

MikeJackson ChiefExecutiveProfessionalProvidentSociety

MikeSmith ManagingDirector PSGFutureWealth

JurieStrydomDeputyChiefExecutiveOfficer

RegentLife/RegentInsurance

JohanvanZyl ChiefExecutiveOfficer SanlamIanKirk ChiefExecutiveOfficer SantamCedricMasondo ChiefExecutiveOfficer SASRIA

LouisHayHeadofProduct,Pricing&Development

StandardInsurance

BruceHodkinson ChiefExecutiveOfficer SwissReLeonVermaak ChiefExecutiveOfficer TelesureGuyMunnochDennisBurtonPeterBezuidenhout

ManagingDirectorHeadBrokerRelationsChiefFinancialOfficer

ZurichInsurance

Participants


Short-term insurance companies:

• 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 insurance companies:

• 1Lifedirect• Absa Life• AVBOB• Chartis• Clientèle Life• Discovery Life• Hollard Life• Liberty Life• MMI• Old Mutual• Professional Provident Society• PSG • Regent Life• Sanlam

Reinsurance companies:

• Hannover Re• Munich Re• Swiss Re

Cell insurers:

• Centriq• Guardrisk

Insurance groups The information provided is considered proprietary and remains confidential. Results are therefore presented in an aggregated and anonymous group format, certified as either short- or long-term insurance companies. The members of the different groups are as follows:

Background dataInformation from Financial Services Board (“FSB”), Registrar of Long-term Insurance annual report 2010, and Registrar of Short-term Insurance annual report 2010.


Shortname Totalassets %OldMutualLife 406525341 27%SanlamLife 247799812 16%MomentumGroup 173957499 11%LibertyGroup 168329161 11%InvestmentSolutions 137801179 9%RestofLong-terminsurancemarket 385792139 25%Total 1520205131 100%

Shortname Grosspremiumswritten %Santam 13957070 19%Mutual&Federal 6504066 9%Hollard 5195707 7%Outsurance 4525573 6%Zurich 4212214 6%RestoftheShort-terminsurancemarket 38072007 53%Total 72466636 100%

Long-term

Short-term

Long-term insurance market share (% total assets)

Old Mutual Life

Sanlam Life

Momentum Group

Liberty Group

Investment Solutions

Rest of Long-term insurance market

27% 25%

16%

11%

11%

9%

Santam

Mutual & Federal

Hollard

Outsurance

Zurich

Rest of Short-term insurance market

19%

53%9%

6%

7%

6%

Short-term insurance market share (% gross premiums written)

82 PwC

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About PwC

96 PwC

PwC is truly a global organisation committed to helping our clients meet the challenges posed by the global economy. We are one of the largest knowledge businesses in the world – a leader in every market in which we operate. Worldwide, we possess an enviable breadth and depth of resources, yet we work locally, bringing appropriate local knowledge and experience to bear – and using the depth of our resources to provide a professional service, specifically tailored to meet our clients’ needs.

The service we offer to clients is underpinned by our extensive coverage and breadth of skills. When PwC was formed on 1 July 1998, it immediately became the largest professional services firm ever created. This marked a quantum leap in global professional services, bringing together thousands of people all over the world possessing considerable collective expertise and sharing a single goal of enhancing client value.

A world-leading professional services firm

Servicing our markets The objectives of our service offering are to build trust and enhance value for our clients and stakeholders. To meet the requirements of our clients, as well as regulators, our services are grouped into three distinct service lines, namely Assurance, Advisory and Tax.

We continue to operate as a multicompetency organisation offering a range of high-quality services to clients. In our business change is the only constant and we are continually adapting our range of services to ensure our sustainability and that of our clients and stakeholders. As market needs change, so will our service offering.

Assurance

Our Assurance group provides audit assurance to clients through PwC Incorporated on their financial performance and operations, as well as helping them improve their external financial reporting and adapt to new regulatory requirements.

The true value of an audit is not solely in ensuring compliance with exacting rules, regulations and standards. Instead it lies in our focus on substance over form and on progressing toward a reporting and audit model that communicates better information about a company’s long-term value and the risks that are being taken to achieve such value.

Our leading-edge audit approach can be tailored to meet the needs of any size organisation, as evidenced by our appointment as auditor to some of the largest organisations as well as to thousands of small and mid-sized businesses. In every case, our service offering is underpinned by our deep industry knowledge, wide international experience, and global network of skilled professionals.

This deep industry knowledge is one of the foundations of our success. Our teams are aligned to the industry groupings in which they have the most expertise, enabling them to deliver tailored solutions to complex issues in these sectors. Our traditional core competency has been augmented over the years by the development of additional services that address our clients’ requirements.

About PwC continued


Our audit clients include many of the top performing companies on the JSE Securities Exchange SA, as well as many small and mid-sized businesses. In addition to audit, other services provided include accounting and regulatory advice, and attest and attestrelated services.

Contact person

Brendan Deegan at 011 797 5473 or [email protected].

Advisory

Advisory provides advice and assistance based on financial, analytical and business process skills to corporations, government bodies and intermediaries in the implementation of strategies relating to:

• Creating/acquiring/financing businesses

• Integrating them into current operations

• Enhancing performance

• Improving management and control

• Dealing with crises

• Restructuring and realising value

Offered by trained professionals specialising in their respective fields and industries, we provide advisory services in an objective manner that help our advisory clients create stakeholder value, build trust and communicate with the marketplace.

To best serve our advisory clients and build new businesses, we understand their needs through each stage of what we call the business lifecycle.

To this end, our advisory services are built around four key client priorities: transactions; performance improvement; governance, risk and compliance; and crisis management.

Our competencies span the breadth of these priorities, and we bring them to our clients in a variety of service offerings.

Transactions

Comprehensive services related to financial transactions, including financial due diligence, valuations, financial modelling, negotiating and structuring acquisitions and disposals, raising finance, and developing exit strategies.

Performance Improvement

Services to assist our clients in identifying and implementing cost saving initiatives, and improving management, control and quality.

Risk Advisory Services

Services to assist our clients in measuring and monitoring ongoing governance, sustainability and compliance infrastructures, and the efficiency and effectiveness of financial, non-financial and information technology controls and systems.

Comprehensive services related to business recovery, restructuring, dispute analysis and forensic investigations.

Contact person

Jacques Louw at 011 797 4400 or [email protected]

98 PwC

Tax

Taxation is one of the biggest cost items in any business, yet it is one of the most manageable. Using state-ofthe-art methodologies and technology, coupled with specialist skills, our national team of advisers can assist clients to manage their tax risk and where possible, minimise their tax burden by providing innovative, often proven, practical tax and business solutions.

Our advice covers all aspects of Southern African direct and indirect taxes, exchange control regulations and employee-related issues. Through our extensive network of offices we are also able to provide advice on structuring international business operations and investments.

Corporate Tax

Corporate Tax provides specialist advice to assist South African corporates to manage taxation costs and cash flows. Our specialists are informed on current regulatory and business developments, and use this knowledge to maximise the return to our clients through corporate tax planning.

Human Resource Services

We have an established human resource practice delivering solutions to the people-related issues encountered by our clients.

By combining our human resource and tax professionals, we are able to offer our clients breadth and depth of expertise in employment tax, reward, equity incentives, personal tax, social security and employment benefit services.

Our experts providing expatriate tax services examine all aspects of deploying people globally, from

creating non-standard assignment programmes to managing costs through effective tax planning, process improvements and outsourcing. They are supported by highly experienced immigration specialists in South Africa and worldwide, providing advice on the immigration law and various permit categories.

Indirect Tax

Encompassing value-added tax (VAT), customs and excise duties and RSC levies, indirect tax is an increasingly complex area; every transaction in a business is affected. Our Indirect Tax team advises corporate clients on local and cross-border issues, utilising our global expertise and networks. Our clients operate across the full spectrum of industry, and we use our expertise to advise them on the best solution to their local, regional, and international issues, often utilising our global network to bring best practice to our clients.

International Tax Structuring

We provide business solutions to specific, complex client needs that serve to manage global tax risk and, where possible, minimise the global tax burden, taking into account exchange control as appropriate. We work as part of an integrated local and international industry-focused team of business advisers, to provide specialist international tax and exchange control services.

Transfer Pricing

We develop transfer pricing policies that are practical, defensible and consistent with our client’s overall business strategy. Our services include transfer pricing risk assessments and full transfer pricing studies. We also provide advice on current and proposed transfer pricing legislation in South Africa and abroad.

About PwC continued


Tax Compliance Centre

We provide specialist income tax compliance services to companies, based on global best practice models. The Centre runs stateof-the-art income tax compliance processes, and has a dedicated compliance manager responsible for each outsourcing contract to ensure the timely and efficient delivery of tax returns. Tailored electronic tax data collection applications and robust risk management and quality control procedures ensure the delivery of high quality tax returns.

Contact person

Paul de Chalain at 011 797 4260 or [email protected]

Private Company Services

Business leaders regard business as personal. Our past and continued involvement with business leaders gives us a broad understanding of the unique demands and challenges facing private companies today. Our response is simple – to develop professionals who understand these challenges and rise to them. These Trusted Business Advisers (TBAs) work closely with our industry experts to provide tailormade solutions specifically geared to adding value in the private company environment. A TBA acts as a gateway to all the knowledge and expertise of our entire organisation, combined with comprehensive knowledge of local markets and industries. Through our TBAs, clients have access to an integrated service delivery approach encompassing any combination of our firm’s services.

Trust and excellence are the foundations of our relationships. We foster those relationships by engaging our clients in conversations around the issues, risks and opportunities of the day, in order to ensure that their businesses continue on the road to sustainable profitability and growth. We also know that life is about more than business. It is also about individuals. We therefore extend our involvement to offering advice on personal finances, taxation, succession, estate and retirement planning. We assist clients with every facet of their business in order to add real value, and help them achieve their business goals and dreams.

Contact person

Andries Brink at 012 429 0600 or [email protected].

100 PwC

One of the foundations of our success is our ability to adapt our services to meet the needs of our clients. Internationally, teams are aligned to the industry groupings in which they have the most expertise, enabling them to deliver tailored solutions to problems in these sectors.

The depth of our industry expertise, like our international perspective, is an attribute that our clients value highly. We invest significant resources in building and sharing such expertise.

We have organised ourselves around industries to:

• Share the latest research and points of view on emerging industry trends;

• Locate individual experts on each issue, wherever they are based;

• Develop industry-specific performance benchmarks, based on global best practices;

• Share methodologies and approaches in complex areas such as financial instruments and tax provisioning; and

• Collaborate on accounting or technical issues unique to a particular industry, especially when interpretive guidance is needed.

Our clients range from the country’s largest and most complex organisations to some of its most innovative entrepreneurs – we are privileged to work with such an unrivalled client base. We serve many of the leading businesses in every sector on which we focus; those businesses value our rigorous, practical approach, characterised by a detailed understanding of individual client issues and by deep industry knowledge and experience. We have organised ourselves around industries to:

• Share the latest research and points of view on emerging industry trends.

• Locate individual experts on each issue, wherever they are based.

• Develop industry-specific performance benchmarks, based on global best practices.

• Share methodologies and approaches in complex areas such as financial instruments and tax provisioning.

• Collaborate on accounting or technical issues unique to a particular industry, especially when interpretive guidance is needed.

Our industry groups are:

• Financial Services

• Consumer and Industrial Products and Services (CIPS)

• Technology, InfoComm, Entertainment and Media (TICE)

• Mining

• Public Sector

• Health Care

• Higher Education

• Agribusiness

A focus on industries

About PwC continued


The financial services industry landscape is continually changing and increasing in complexity, causing firms to face a diverse array of challenges and concerns. Corporate governance, risk management and regulatory issues continue to impact the industry. Firms have expanded international operations around the globe to tap into new markets as a source of growth, increase their competitiveness, satisfy demand and better leverage their expertise. To assist our clients, our professionals have in-depth knowledge of the issues driving change in the various sectors of the financial services industry.

This knowledge, combined with our specialised skills, enables us to design and implement cost-effective multidisciplinary solutions to meet the challenges and opportunities facing our clients.

Financial Services We act as auditors to more financial services companies in South Africa than any other professional services firm.

The leadership of our Southern African Financial Services practice would be pleased to hear from you.

Please contact:

Financial Services Leader:

Tom Winterboer +27 11 797 5407

Long-term Insurance Leader:

Victor Muguto +27 11 797 5372

Short-term Insurance, Investment Management and Medical Schemes Leader:

Ilse French +27 11 797 4094

Actuarial Services Leader:

Mark Claassen +21 21 529 2522

Banking and Capital Markets Leader:

Johannes Grosskopf +27 11 797 4346

Retirement Funds Leader:

Gert Kapp +27 12 429 0059

South Africa Private Bag X36 Sunninghill 2157

Tel +27 11 797 4000 Fax +27 11 797 5819

Contact: Tom Winterboer

Southern Africa Namibia, Windhoek

PO Box 1571 Windhoek

Tel +264 61 284 1000 Fax +264 61 284 1001

Contact: Louis van der Riet

Swaziland, Mbabane

PO Box 569 Mbabane

Tel +268 404 3143 Fax +268 404 5015

Contact: Theo Mason

Botswana, Gaborone

PO Box 1453 Gaborone

Tel +267 395 2011 Fax +267 397 3901

Contact: Rudi Binedell

Zimbabwe, Harare

PO Box 453 Harare

Tel +263 4 3383 628 Fax +263 4 3383 96

Contact: Clive Mukondiwa

Mozambique, Maputo

PO Box 2583 Maputo

Tel +258 21 307 620 Fax +258 21 307 621

Contact: Rob Walker

About PwC continued

www.pwc.co.za/insurance © 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.(12-11062)

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