Weak rand poses real threat to the insurance industry

Anees Vazeer, CFO: Lion of Africa

A sustained weak currency poses a real threat of catapulting the well-established successful South African insurance industry into a struggling third-world industry - with no foreign equity holders, low capacity for reinsurance and unaffordable premiums for consumers.

Disinvestment by foreign-owned companies

A major concern is the potential disinvestment by foreign-owned insurance and reinsurance companies as the continued weakening and volatile currency decimate their return on investment and capital.

Many of these are operating in South Africa through fully capitalised subsidiary companies, which offer local insurance companies high credit rated reinsurance balance sheets, a critical requirement in protecting the local balance sheets and reducing their capital requirements.

If these companies were to close their South African businesses the quality of and capacity for reinsurance will decrease.

Increased tariffs

Another threat is consumer resistance to the inevitable increases in insurance premiums. The weak currency increases the cost of replacing and insuring assets, of which 80-90%, including cars, technological devices, electronics and most household appliances, are imported.

Insurance companies are already experiencing an increase in the value of claims due to the higher cost of imported goods and will have no other option than to increase premiums.

In an environment where consumers are already under pressure due to a contracting economy and higher inflation, many will opt not to insure.This will not only leave them in a position where they are unable to replace their assets in the event of damage or loss, but will have a ripple effect on the economy of the country.

Motor insurance under pressure

As things stand, short-term insurance companies are already under pressure, especially on motor insurance. For many, the losses on their motor book is currently the most significant contributor to weakening results and extremely slim profit margins.

Almost all parts for vehicles, even those that are locally assembled, are imported and insurance companies won’t be able to absorb the increases in cost for very much longer. Again, this will inevitably result in increased premiums.

Maintaining living standards

In order for South Africa to be part of the global economy and be able to compete, it has to maintain high living standards to attract, and, more importantly, retain skills.

Living standards are dependent on municipalities for maintaining and enhancing infrastructure. Insurance plays a critical role in assisting municipalities in doing so, and with much of the infrastructure being imported in foreign currency, this places a huge strain on both parties when the rand weakens.

A depreciating rand will lead to deteriorating infrastructure, lower standards of living and a brain drain over a sustained period of time.

In order to survive and to ensure a viable and successful industry, economy and country, South African insurance companies will need to innovate and diversify as they cannot rely on a sustained appreciation in the value of the rand to secure their future.