Moneyweb reveals direct insurers are taking more and more market share from the traditional insurers

It appears that the South African insurance industry can expect some heavy battles for market share in the next year. As more South Africans go online and are increasingly comfortable with transacting and communicating online, more are reaching across to direct insurers for their insurance needs. This is some of the findings revealed on Moneyweb in a story by Jeanette Clark. The story which appeared on Moneyweb is titled “Big insurance players losing market share”

We would like to quote from this story:

“The big-four players in short-term insurance face fierce competition and are even losing some market share from the smaller direct writers such as Outsurance and Auto & General.

According to a report by the ratings agency Fitch these direct writers have increased their market shares, particularly in personal lines, at the expense of the larger companies.

“The increasing competition has put pressure on the larger non-life insurers’ profitability. Fitch expects earnings to remain under pressure in the near term,” the report reads.

Nicole Gibb, associate director in Fitch’s insurance team in South Africa, said in an interview that the bigger players are adapting and have created their own direct distribution lines in place to win back market share.

“It will take some time to see if they can get back their market share,” she said.

The fierce competition in the sector is a good thing as the four-big players still dominate the market with a combined market share of roughly 50%.

Santam is the leading short-term insurer with a market share of more than 22%. Second is Mutual & Federal with 11%, followed by Hollard with 9% and Zurich South Africa with 8%.

Outsurance has already increased its market share to 6%, while Auto & General is currently on 5%.

According to the report, direct sales now represent nearly 20% of the personal lines market, a market that was historically served by intermediaries.

Gibb says that Fitch maintains a cautious outlook regarding credit ratings for the short-term sector, as well as life insurers, in South Africa.

She adds that ratings are likely to stay constant if conditions remain as they are.

“If there would be an improvement in performance it would only be a slight improvement,” says Gibb, highlighting the volatile investment markets and continued pressure on consumers’ disposable income as constraining factors.

Gibbs also says that South Africa has been more sheltered than the rest of the world against the economic downturn. “South Africa obviously has been impacted and I do think a serious fall-out will filter down, but not on the same scale as for the rest of the world.”

Ratings actions are important for life and short-term insurers as higher ratings help these companies to issue debt more cheaply.

The insurers actually approach the ratings agency to obtain a credit rating.

“Within the insurance market ratings also demonstrate the security and strength of an insurer to its policyholders and can be a bit of a selling point for them,” David Prowse, senior director at Fitch’s UK team, said.

As far as growth opportunities go, Africa remains a possible market for both life and short-term insurers, Gibb said.

“The South African market is quite saturated for life-insurance products and the big players have been expanding into Africa. A very cautious approach is being taken when moving into these markets that are still relatively untapped,” Gibb said.

Expansion into Africa as a diversification strategy would initially be seen as a credit negative due to the risk involved with moving into new markets, Prowse said.

“Once the company has successfully diversified it becomes a credit positive as the risks are then spread more geographically,” he said.

Gibb admitted that some risk is involved when moving operations into Africa, but stated that the main insurers in the South African market have gone through safe channels such as bancassurance and into more stable countries like Kenya and Ghana, thus reducing the risk.

Conclusion and Advice

We should expect fierce competition in 2012 – and the recent announcements that the cellular operators Vodacom and MTN have secured licences from the Financial Services Board (FSB) to begin selling insurance products directly to their customers will further add fuel to this highly competitive environment!