Economic risks a 'challenge' to SA's life sector

The risk for South African life assurance companies are rated as 'intermediate' by S&P. Image: Ideas go free Fotolia

While S&P rates the South African life assurance sector's risk as intermediate‚ it warned that it views the economic risks as the sector's "greatest challenge".

This includes the low levels of investment in the country which could constrain household spending and consequently lead to a higher lapse rate in policies. The sector's overall intermediate rating puts it in line with developed and developing life markets such as Thailand‚ China‚ Japan and Germany.

S&P views the country risk as moderate. "Our assessment of country risk as moderate incorporates our view of South Africa's low economic growth‚ stable political institutions‚ modest financial system risk‚ and acceptable rule of law‚" S&P said.

The ratings agency said the sector's profitability‚ as measured by return on equity‚ was a positive factor in its assessment.

Data from the five largest assurers in the market show the three-year average return on equity for the sector is about 20%. "This benefits from strong underwriting margins‚ with value of new business at 3.1% for 2013‚ fee income and returns on invested assets‚" S&P said.

Quarterly survey

The 50 basis point rise in the repo rate in January had weighed on profitability‚ but on the other hand‚ the cost of complying with regulatory red tape was declining‚ it said.

EY's latest quarterly survey of the life assurance industry‚ released this month‚ found that the sector has responded well to the generally subdued economic environment.

According to EY the assurers' recent results show that the affluent segment of the market was a significant contributor to overall premium growth. The mass market‚ however‚ experienced weaker growth last year as it was hurt by strikes‚ unemployment and weak growth in disposable income.

S&P rated the product risk‚ barriers to entry and market prospects for the industry as neutral. SA has very high penetration of life assurance‚ with premiums having averaged around 11% of gross domestic product over the past five years.

S&P said this was a consequence of the state's limited provision of social security‚ as well as a well-established‚ sophisticated life assurance sector.

As a result‚ assurers are looking for opportunities among lower-income consumers‚ who are generally under-insured. They are also looking for growth in the rest of Africa‚ India and Southeast Asia.

S&P rated the short-term property and casualty insurance sector as intermediate.

This puts the South African sector on the same ranking level as China‚ Brazil‚ the UK and the US. "Despite poorer than average results in 2013‚ SA compares well with international peers‚" the agency said.

Short-term insurers faced a tough time last year as acute hailstorms and flooding brought more claims and a weaker rand raised costs on imported car parts.