Why is this insurance giant contemplating an SA exit?
Over the past few days a story has emerged of a giant global insurance brand rethinking its role in South Africa and Africa.
Zurich Global, the parent of Zurich Insurance Company South Africa Limited, has announced that it will embark on a ‘footprint review’ exercise that might result in the brand disinvesting from its insurance units in SA and Morocco. Zurich SA is a major player in the South African short-term insurance market with a 4% share of gross written premium (per the 2014 Financial Services Board (FSB) insurance statistics).
“For such a major player to abandon the SA market will have a profound impact on the domestic insurance sector as well as the broader economy,” says Justus van Pletzen, CEO of the FIA (Financial Intermediaries Association of Southern Africa.
The FIA is also concerned that Zurich’s review of its Africa operations will contribute to the negative perception of SA as an investment destination and provide further ‘ammunition’ for the ratings agencies to downgrade the country’s investment grade to junk status.
More importantly it will contribute to a range of challenges for the country’s insurers, insurance brokers and risk managers as large commercial and corporate businesses struggle to place certain risks on cover.
“The loss of insurance underwriting capacity and capital investment in the financial services sector will have a profound impact on the FIA’s short term insurance broker members and their clients,” says Van Pletzen.
Why is Zurich reviewing its participation in the SA market? There are a number of factors that have informed their decision including the dire state of the domestic economy (SA’s sub-1% GDP growth forecast does not offset the risk in conducting business here), the relatively small contribution of the SA operations globally and increased regulatory intervention in the short-term insurance sector.
“We are concerned that Zurich’s review is in part informed by the FSB’s insistence on including the short-term insurance sector in its Retail Distribution Review (RDR) process,” says Van Pletzen. He adds that regulators in offshore markets have steered away from regulating short-term insurers and life and investment firms in the same way due to the vastly different nature of these businesses.
To make matters worse, what started as a review of retail distribution has now mothballed to include a number of interventions that interfere with ‘free market’ commercial practices that will affect insurers’ abilities to conduct their respective businesses.
The FIA has raised these and other concerns with the FSB in a firmly worded public response to the RDR debate. “We have warned the regulator about the unintended consequences of a rush implementation of its RDR proposals and suggested that they delay its implementation until the potential impact of the proposed changes are thoroughly researched and tested,” he says.
Both government and the financial services authorities need to appreciate that international firms are constantly weighing up the hassle of doing business in SA with opportunities elsewhere. If the business sentiment swings further – and other global players follow Zurich’s lead – then further disinvestment is inevitable. Unfortunately SA will not easily replace the lost capacity, expertise and jobs.
“The writing is on the wall,” concludes Van Pletzen. “SA has to create an investment environment that embraces free market principles and keeps ‘red tape’ to an absolute minimum – failing that Zurich’s review could be the one that triggers a stampede!”