FINANCIAL SECTOR INSIGHTS | 15 FEBRUARY 2019 Room for consolidation in the insurance sector in Africa Absa | Corporate and Investment Banking > Insights and Events > Room for consolidation in the insurance sector in Africa Monique Pennells Head: Non-Banking Financial Institutions SHARE The insurance sector in South Africa could benefit from the consolidation of small, independent and unprofitable brands into bigger and stronger players. A regulatory push that requires higher and more stringent capital requirements will help the insurance industry to further develop in Africa. Currently, barriers to entry from a capital perspective are not sufficiently high and hence the long tail of small, unprofitable players. However, as we have seen (and continue to witness) across numerous African banking markets, more stringent capital requirements are likely to drive consolidation. Companies who fall short of new capital requirements are either forced to exit, merge or be acquired by bigger and stronger players. If insurance follows the same trends as we have witnessed in banking, then we could see the number of active companies in each market fall significantly over a short period of time. The benefits of consolidation Why are we proponents of consolidation? Because of the problems arising from the high levels of fragmentation. High fragmentation has a negative impact on both growth and profitability. Pricing tends to be extremely overly competitive, and at most times, irrationally so. Hence, it is not unusual to find that the income that companies earn from premiums is insufficient to cover their cost bases – which primarily includes general expenses and the claims paid out. As a result, companies easily slip into operating losses and have to rely on investment returns to deliver benefits (if any) on the profit line. This has proven to be an unsustainable path to value-creation as investment returns can oscillate significantly over time. For the industry to become more sustainable, the pricing of premiums needs to be sufficiently high to cover the combined operating and claims costs. A drive for more sophisticated products These profit pressures have been a deterrent in developing more sophisticated products for the African consumer. Focus, instead, tends to be largely centred on products where demand is supported by regulation. For example, in countries where motor vehicle or property (fire) insurance is compulsory, we find that general insurance products are largely focused on these segments. This has seen some companies focusing more on corporate businesses versus retail as the volumes in corporate allow for greater economies of scale and hence better profitability. Who are the buyers who will drive consolidation as regulatory support kicks in? As stated previously, we see existing local players as one group of potential buyers. Others include regional and pan-African companies. Over the last decade we have companies such as Sanlam, Old Mutual, MMI, Hollard and Britam expand outside of their home markets through acquisitions. We have also seen the entry of international insurers including AXA, Allianz and Prudential (UK) and Prudential (US). Monique PennellsHead: Non-Banking Financial Institutions https://cib.absa.africa/wp-content/uploads/2020/07/file_example_MP3_700KB.mp3 Related Articles Financial Sector Insights Technology transforming finance: The state of play in Africa Africa is emerging as a hotspot for innovation in financial ecosystems. Financial Sector Insights New entrants are disrupting the financial institutions group sector Challenger entrants are changing the face of the FIG sector, impacting this year’s significant trends.