Page 27 - MC14326 all pages

The South African Insurance Industry Survey 2016 | 23
The premier buyer of goods shipped from South Africa,
and a key influence on commodity prices worldwide, the
world’s second-largest economy is this year expected to
post its slowest rate of economic growth in 25 years. As a
result, the real value of South Africa’s exports will grow by on where their risk exposure and capital base is situated.
only around 3 percent during 2016 compared to a 2010-15
average of 4.7 percent per annum.
The country’s demand for imports has ebbed alongside
a slowdown in economic growth and weakness in the
Rand inflating purchasing prices from abroad. The latter
has undone the potential benefit to local consumers of
weaker global commodity prices. The real value of imports
is expected to expand by 3 percent this year, thereby
eroding all of the potential benefit that real exports could
have generated in terms of GDP. Were it not for the large
amount of grains that will have to be imported this year as a premiums and therefore display a reduced demand for
result of drought conditions, import growth could have been
smaller.
Taking into account the outlook for household spending,
investment, government expenditure, exports and
imports during 2016, it is unlikely that South Africa will
see any significant employment growth this year. Real
disposable income will grow marginally at best and at a rate
significantly below an average of 2.7 percent per annum
seen during 2010-15. This is setting off alarm bells for the
local insurance industry.
The following paragraphs identify eight areas where a weak
economy could negatively affect insurance companies.
Investment income: Insurance companies make a
significant portion of their income from investment
revenues. During an economic downturn as currently seen
in South Africa, the returns on, for example, shares listed
on the stock exchange are below the long-term trend.
While equities do not directly mirror economy dynamics,
many – like the Johannesburg Stock Exchange (JSE) – are
very reliant on the health of a few core industries for their on external service providers as part of their package
performance. In a weak commodity price environment, the
fate of under pressure mining companies remains integral
to return on investment on the JSE.
Exchange rate shocks: Currency volatility associated with
low economic growth could affect some insurers depending
For instance, if risk exposure is domestic and (revenue
generating) capital is located largely offshore, shocks to the
exchange rate could have a real and significant impact on
investment revenues. Also from an offshore perspective,
weak confidence in a country’s economy could divert
foreign financiers’ attention away from local companies,
including insurers who might be in need of cash or alternate
financing.
Weaker demand: Cash-strapped households and
businesses have a weaker ability to fund insurance
this non-essential product. In turn, insurers will have to
work harder - at a lower rate of profit - to retain existing
customers and secure new clients. On a positive note, an
increase in price competition could make it a bit easier (i.e.
cheaper) for households and businesses to afford insurance.
The net effect of this supply-and-demand dynamic will
however take some time to play out. For insurers, this
could imply changes to some of their business models and
ownership structures to cope with a weak economy.
Operating costs: An insurance company is an employer
and consumer of goods and services just like any other
enterprise would be. In South Africa’s current context, this
implies increases in the cost of labour and electricity above
the consumer price inflation rate, while company revenues
might not grow at the same pace. The structure of South
Africa’s labour market and utilities industry does not leave
much room to manoeuvre for private companies on the cost
of workers and energy, resulting in operating budgets being
strained by stagflation – high inflation and low growth.
External service providers: Insurers are dependent
of services. For example, vehicle repair shops, private
hospitals, and construction companies are all part of the