Fitch Ratings says in a new report that most South African life insurers are expected to report improved net profits in 2013, driven in part by good returns on equity markets. However, insurers' high exposure to equities represents a significant risk to insurers' profitability in the event of a significant downturn in equity markets.
The five largest life insurance companies' gross written premiums have shown robust growth over the past two years, reflecting sales growth combined with healthy persistency rates. However, Fitch expects sales and retention rates to gradually come under pressure as disposable incomes and employment growth remain constrained, resulting in a drag on premium growth rates.
South African life insurers' capitalisation continued to demonstrate resilience in 2013. The median capital adequacy requirement cover ratio for typical life insurers was 3.0x at 30 June 2013(end-2012: 2.7x), compared with the minimum regulatory requirement of 1x.
Fitch Ratings says that South African non-life insurers' 2013 underwriting profits will be negatively affected by significant claims related to natural catastrophe events. However, earnings have strongly benefited from rising equity markets, partially offsetting the subdued underwriting performance.
Underwriting margins continue to be pressured by the high level of competition in the South African non-life insurance market. Financial strain on consumers and the overall difficult economic environment also make it difficult for insurers to achieve appropriate premiums for the risks underwritten.
The solvency positions of South African non-life insurers continued to be resilient in 2013. Most companies maintain a significant buffer over the regulatory minimum capital requirement. As part of the new interim measures ahead of the Solvency Assessment Management implementation, non-life insurers will be required to change to a risk-based approach to calculating capital requirements. It is not yet clear to what extent this will affect solvency margins.
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