The development of flexible and customised insurance products in South Africa

Life insurance as a business

Life insurance is unlike many other businesses in that it has an uncertain future cost associated with the income it generates from premiums, as it relies on statistics and distribution around the mean. Statistical data such as population life expectancy tables are used by actuaries to determine the likely disbursements in the future in respect of underwritten policies. Actual payments will follow a distribution which may vary considerably from the expected mean value.

If the calculations are within range, the income is lucrative. It is well known that Warren Buffett started his empire focusing on investments in insurance business. Closer to home, Donald Gordon started Liberty Life selling life policies, and Liberty became one of the leading life insurance businesses in South Africa and made him very wealthy.

New trends in the insurance industry

Two new trends are discernible in the insurance business. The share of lower value funeral policies in the life insurance business has skyrocketed and undertakers, banks and insurance companies themselves have jumped on the bandwagon. This aligns with cultural practices and the high cost of funerals.

The table below from the WOW report on the life insurance Industry in South Africa shows that the pandemic changed people’s perception about the probability of loss of life and the resultant noticeable increase in written life insurance. In the face of a calamity, people are more ready to sign life policies. The table also shows that, regardless, life insurance business is forecast to continue to grow in the foreseeable future.

Competition and cheaper premium level of funeral policies is forcing insurance companies to minimise the intermediation costs. They are taking digitalisation and direct online access to products to the next level.

They have been concluding insurance online or by telephone for some time, but the ubiquity of internet access via smartphones has made conclusion of insurance contracts without human intervention on the insurance company’s side possible. Consumers now have the option of comparing different products online, compelling insurance companies to consider flexible product design for prospective clients. Clients’ ability to select options and conclude the purchase of an insurance product online is becoming a norm.

The impact of economic realities on the insurance industry

Economic circumstances remain the backdrop against which growth of insurance business is measured. As the WOW report highlights in the graph below, these have put a damper on recent growth, but not dented the profitability of life insurance businesses.

The regulatory framework

Starting an insurance company in South Africa requires compliance with the Financial Sector Conduct Authority (FSCA) and to fulfil the licensing requirements which include demonstrating financial soundness, having a viable business plan, and meeting governance and operational standards.

Aggressive marketing and pricing can be detrimental to the consumer, as some of the additional costs creep into premiums one way or another. Insurance companies must therefore also comply with stringent governance standards, including having a board of directors of good standing and establishing risk management frameworks. These requirements can make it difficult for smaller players, but the industry remains very lucrative.