In recent years, there has been consolidation among South Africa's leading non-life insurers. In April 2000, Santam acquired Guardian National to create the market leader in non-life insurance with approximately 25% of the market and net premium income of approximately $560m (£383m). With the completion of the CGU acquisition, the country's second largest insurer, Mutual & Federal, has premiums in the region of $460m (£314m). The impact of these two consolidations is to bring Regent and Sentrasure into the top ten with each accounting for a 1.4% market share.

Foreign insurers hold approximately a third of the South African non-life insurance market.

These include major insurance groups, such as Allianz, Munich Re and Zurich Financial Services (ZFS). Allianz announced in December 2000 that it would be significantly altering its South African operations by pulling out of the commercial insurance sector and refocusing on alternative risk transfer (ART) business. Other changes in the representation of foreign insurers have been the withdrawal of AXA, Generali and CGNU. ZFS bucked the trend in July 2000, by announcing it was increasing its stake in South African Eagle (South Africa's third-largest non-life insurer) from 58% to 83%.

A market feature of South African insurance is the increasing importance of Bancassurance groups. One example is the life insurer Sanlam, the majority shareholder in non-life Santam, which has acquired the majority shareholding in investment bank Gensec in addition to its minority shareholding in ABSA, the largest retail bank in South Africa.

The insurance market in South Africa faces several challenges to its profitability and future growth. With 15% of claims estimated not to be genuine, fraud continues to be a major issue, costing the industry an estimated R2bn annually. The eight leading non-life insurers have been trying to combat this since March 2001 by sharing client information. Additionally, life and health insurers face an increasing burden from HIV and Aids claims. The virus and disease affect some 13% of the population. A final issue for successful growth prospects in South Africa is unaffordably high premiums, which lead to poor levels of insurance penetration. Only 35% of vehicles are reckoned to be insured, for example.

Operating results for the South African insurance sector have begun to improve in 2000, following a poor 1999. Underwriting performance has continued to be poor, however, with 15 out of 25 insurers (as classified by the Financial Services Board) reporting an underwriting loss in the nine months to September 2000. The first quarter of 2000 was poor, with a substantial loss arising from severe cyclone and flood damage. Results for six months and nine months were an improvement, suggesting the market trend may be positive.

Market features
The numbers of approved South African insurers are as follows:

Premium distribution
The life sector has become increasingly important in South Africa. In 1999, following the considerable growth in the life industry, non-life premiums contributed just 16% of industry net premiums. The life sector is dominated by the three largest companies (Old Mutual, Sanlam and Liberty Life), which accounted for 65% of the market in 1999. The reinsurance sector continues to be dominated by large German companies such as Munich Re & Hannover Re – Hannover Re is the largest reinsurer in South Africa.

Monthly premium adjustments
The financial profiles of South African insurers generally show lower loss-reserve ratios than other direct writers elsewhere. Non-life business operates on a monthly renewal basis, however, and insurers can vary the rates from month to month. Insurers can therefore react quickly to a deteriorating loss situation by increasing rates instantly. In addition, policyholders must notify insurers of claims within a three-month span.

After the 1976 Soweto uprising, the local and international markets would not cover damage arising from political disturbances. The local industry formed a special insurance entity, called the South African Special Risks Insurance Association (SASRIA), governed by the Reinsurance of Damage and Losses Act, but left entirely in the hands of the private sector. The government is the insurer of last resort. South African insurers act as agents for the state when placing cover with SASRIA and all insurers and reinsurers are required to hold reserves to cover losses in the event of SASRIA's funds being insufficient to settle claims. Despite the end of apartheid, SASRIA expects little change in its position.

Insurance supervision and regulation
The regulatory authority of the South African insurance industry is the Registrar of Insurance, part of the Financial Services Board (FSB), falling under the Department of Finance, which is situated at :

The Registrar of Insurance
446 Rigel Avenue South
Erasmusrand 0181
Pretoria 0001
Tel: (27)12 428 8000
Fax: (27) 12 347 0221

The Financial Services Board supervises the life and non-life insurance industries under the Insurance Act No 27 of 1943. The FSB houses the Registrar of Insurance.

The Common Law of South Africa is the Roman-Dutch law, which was introduced after the arrival of the Dutch settlers at the Cape of Good Hope in 1652. Despite the influence of English law, the law of insurance in South Africa is still governed by the Roman-Dutch law. Following the seizure by the English of the Cape of Good Hope from the Dutch in 1806, a general law amendment was promulgated in 1879 in the then Cape Colony. This stipulated that the law for fire, life and marine insurance was officially English law. Following the Anglo-Boer War, this law of insurance was applicable in the Orange Free State and the South African Republic (the old Transvaal).

The principal statute governing insurers for the whole of South Africa was implemented in 1943. The Insurance Act No 27 of 1943 and the related Financial Institutions Amendment Act of 1976 were the primary acts under which insurers operated until 1999. The 1998 Short-term Insurance Bill was implemented to bring legislation up to date and will be further amended by the Insurance Laws Amendment Bill 2001.

A full copy of the Short-term Insurance Bill (SIB), the Long-term Insurance Bill and proposed amendments can be found at and a summary can be found on the website of the FSB.

The SIB is intended to introduce a new approach to the regulation and supervision of non-life insurers. Key changes in the SIB are:

  • the “miscellaneous” class definition has been split into liability, engineering and miscellaneous
  • the registrar is to have more specific powers of enforcement. The registrar has wider rights to require cessation of business or to apply for the winding up of an offender. A right of appeal to the FSB against any decision of the registrar, is to be established
  • all insurers, direct, indirect, foreign or domestic, must register to conduct insurance within South Africa
  • insurers now will not be restricted to purely insurance business and may undertake ancillary businesses – however, the registrar has the right to impose conditions or limitations on the insurer in respect of this business, if the registrar believes they may pose a risk to the policyholders or assets of the insurer
  • new guidelines on the use of derivative instruments are in place
  • new statutory returns have been introduced.

    Fundamentally, the test for “financial soundness” for the non-life insurer will change substantially. The 1943 Act viewed this as a question of solvency ratio alone. The SIB involves new, explicit and more comprehensive tests that a non-life insurer must undergo. These include:

  • The 1943 Act stipulated a solvency margin of not less than 15%. The instigation of “financial soundness” replaces the solvency margin per se. Additional assets relative to premium (ie shareholders' funds) will be referred to as the Statutory Surplus Asset Ratio and will form only part of the financial soundness measures.
  • Appropriate asset liability matching.
  • More conservative IBNR and outstanding reserve requirements. The deduction of commission in the calculation of the unearned premium reserve will be changed from gross paid to net paid.
  • Credit for reinsurance ceded is only given to approved reinsurers. Foreign reinsurers may only gain the status of approved reinsurers if an irrevocable guarantee has been provided.

    Lloyd's under the new SIB is unable to gain regulatory approval in terms of company law and it therefore has a special dispensation under the SIB, providing security in South Africa by way of a trust account. Lloyd's has opened an office in South Africa to service local clients and become more visible to the local market.

    Other recent legislative changes
    Following an actuarial investigation by the FSB, it was discovered that the state Road Accident Fund (RAF) was not currently established on a viable basis, so a commission of enquiry has been established to make remedial recommendations.

    Following a consultation process in 2000, it has been decided, in principle, to remove the statutory maximum commission payable on insurance policies. It is expected that legislative proposals will be issued shortly. In late 2000, policyholder protection rules came into force that require intermediaries and insurers to disclose relevant information to prospective policyholders.

    The Insurance Amendment Bill, which amended section 20 of the Insurance Act 1943, was submitted during 1997 to the Cabinet. This covered premium collection processes, intermediary approval to collect non-life premiums on behalf of the insurer and other policyholder protection measures.

    During the first quarter of 1997, amendments to the Insurance Act 1943 came into operation, allowing foreign investment under controlled circumstances. This is in respect of foreign investments over and above those assets held to match foreign liabilities.

    The Insurance Laws Amendment Bill 2001 will see various technical amendments to correct and improve the Long-term (LIB) and Short-term Insurance (SIB) Bills.

    The Insurance Act 1943
    Under the Insurance Act No 27 of 1943, every registered insurer was required to submit an annual return within four months of the financial year end to the registrar, which must also have been independently audited. The accounting policies used in the annual returns were frequently more restrictive than those accounting policies adopted for the published financial statements.

    Lloyd's underwriters, or agents for, had to be registered under the Insurance Act and file statutory returns for monitoring.

    Insurers could invest up to 90% of their assets in a combination of shares and land, but the entire portfolio had to be held in South Africa.

    There were no restrictions on the placement of ceded insurance, but a new law is to be introduced which will limit foreign reinsurance to 50% in the aggregate on premium.

    Foreign insurers were subject to a 15% tax on business and a requirement that all the directors be native South Africans.

    Accounting conventions

    1. Solvency
    Insurers must maintain an excess of insurance assets over liabilities of at least 15% of premium income, or R3m, whichever is the greater. The SIB has imposed further “financial soundness” measures on top of Statutory Surplus Asset Ratio (see above).

    2. Asset valuation
    It is here that the principal problems of analysis arise. Bearing in mind the disclosure exemptions that allow, for instance, write-downs of book values, companies may carry investments below cost, at cost or at market value. Provision must always be made when values fall below cost but this need not occur for dated stocks intended to be held to maturity. This, of course, means that bonds that fall below cost need not be revalued. Therefore, a company with a substantial bond portfolio can have a major overstatement of asset values.

    3.Technical reserves
    Claims reserves must include an IBNR and claims handling run-off provision. Under the SIB, credit for reinsurance ceded to any reinsurer under the 1943 Act is now given to approved reinsurers only. The SIB has added further conservatism to claims reserving.

    The unearned premium reserve is usually calculated on the “24ths method”, although the 40% basis is still used by some companies.

    Under the SIB, it will be a statutory duty for the insurer to consult with its auditor on the necessity of an unexpired risk provision. This additional reserve will also be applicable to monthly business.

    4. Shareholders' funds
    Since June 30, 1989, South African insurers have been required to maintain a contingency reserve. The reserve must be 10% of net premium income and can be built on at a rate of 2% of net premium income per year. This reserve cannot be drawn upon without prior approval from the registrar.

    5. Other
    The annual accounts must be audited by a qualified auditor who is required to report on whether the financial statements present a fair picture of the company.

    South Africa has a population of 40 million. The African National Congress (ANC), which scored a landslide victory in the 1999 general elections, remains well positioned as the premier post-apartheid party. In local elections held in December 2000, it won about 60% of the popular vote, slightly less than the percentage in the 1999 general election. The outcome confirmed the movement's dominance at all levels of politics in South Africa, pointing to a broad-based and fiercely loyal ANC constituency. Subsequently, there seems to be little doubt about the outcome of the next general election in 2004, despite debate over President Mbeki's leadership. This debate is unlikely to completely disappear until next year's ANC national conference.

    Standard & Poor's Sovereign Ratings
    Publication date: May 31, 2001
    Analysts: Konrad Reuss, London 020 7847 7102; Marie Cavanaugh, New York (1) 212 438 7343
    Local Currency Credit Rating A-/Stable/A-2
    Foreign Currency Credit Rating BBB-/Stable/A-3

    The ratings on the Republic of South Africa are supported by prudent fiscal policies and reforms that have brought spending under control and put deficits on a downward trend. National government deficits are projected to decline to about 2% of GDP by 2003 or 2004 from a budgeted 2.5% in 2001, which is a substantial improvement from more than 5% in the mid-1990s. Reductions in the Reserve Bank's forward foreign exchange book should also reduce future budgetary risks stemming from potential losses, which are ultimately a government liability. General government debt is forecast to fall to about 45% of GDP and should decline further with the planned sale of state assets.

    A relatively manageable external debt burden is also an asset. South Africa's external position has strengthened on the back of low current account deficits. Net external debt is projected to fall to about 38% of exports and net public external debt to about 36% of exports in 2001. With privatisation underpinning foreign direct investment (FDI) inflows, these ratios should improve further, while the term structure of external debt should lengthen to levels broadly in line with those of similarly rated sovereigns.

    An independent central bank committed to low inflation also bodes well. The Reserve Bank's new inflation targeting strategy is working well, and achieving the government's inflation target of 3% to 6% for 2002 has become a realistic prospect.

    Furthermore, the country's capital markets are liquid and it has a robust and well-regulated banking sector. The banking system's external obligor position (estimated at 10% of exports in 2001) is trending down and the sector's credit risk profile is below the average for emerging market countries.

    On the other hand, South Africa's ratings are constrained by modest, although slowly improving, external liquidity. Official reserves cover only about 60% of the annual external financing requirements, but the position will improve with the forward book now well below $10bn (£6.83bn) and declining, and because reserves should also benefit from the government's privatisation programme. However, the ongoing relaxation of exchange controls makes South Africa more vulnerable to volatile capital flows. This underscores the need for South Africa to improve its ability to attract FDI and for the Reserve Bank to maintain its floating exchange rate regime and rely primarily on its interest rate policy to safeguard reserves.

    Persistent structural economic weaknesses and social inequality also hold the country's ratings back. Although South Africa's growth performance is improving gradually, it will only slowly begin to ameliorate the country's chronic unemployment and social problems. Factors still constraining growth include low levels of savings and investment, and labour market rigidities. The rising incidence of HIV/Aids among the population will also impose a substantial burden in the coming decade, straining the health system and financial resources.

    Cautious fiscal and monetary policies, coupled with microeconomic reforms, should underpin South Africa's investment-grade ratings in the coming years. With a sound macroeconomic framework now firmly established, the government can turn to microeconomic reforms and a prudent progrowth fiscal policy. Real GDP should increase by 3% to 4% per year this decade – significantly faster than the average of just 1.3% in the 1990s. The government's credit standing would face downward pressure if fiscal discipline were substantially relaxed or political backing for economic restructuring stalled.

    Insurance analysts for South Africa:
    Alex Robertson London 020 7847 7051
    Jonathan Bint London 020 7847 7071

  • Topics