A huge protection gap to
be filled

South Africa’s life
insurance industry weathered the global financial crisis with
relative ease and has subsequently rebounded to reflect solid
growth in new business. Longer-term, growth potential for the
country’s life insurers lies in closing a massive protection gap
and, for big players, expanding into Africa.

Table showing the revenue accounts for the six months to 30 June 2010, of the SOUTH AFRICAN LIFE INSURANCE INDUSTRYAlthough South
Africa was hard-hit by the global economic crisis, with more than
am people losing their jobs, the life insurance industry came
through virtually unscathed.

The industry’s resilience is
illustrated by individual premium income. In 2008, income increased
by 11% to ZAR115bn ($16.7bn), compared with 2007, and remained
virtually flat at ZAR115.9bn in 2009.

In part, the resilience is
attributable to South Africa’s unusual employment structure which
is characterised by extremely high unemployment among unskilled
workers and negligible unemployment among highly paid skilled

An example of the dominance
of high-income earners in the life industry’s fortunes was seen
following the equity market’s commencement of a recovery in March

In the six months to December
2009, sales of ‘other single premium’, mainly investment-linked
policies, soared by 44% compared with the same period in 2008, to

Another factor that has
benefited South African life insurers is the absence of a
significant state pension scheme.

This has greatly increased
the role of individual retirement savings and group pension schemes
and, according to the Association for Savings and Investment South
Africa (ASISA), the South African retirement fund industry ranks
among the largest 15 internationally. It has some 8m members and
assets under management of about ZAR2trn.

The significance of private
pensions has also resulted in South Africa having one of the
highest life insurance penetration rates in the world.

According to Swiss Re, South
Africa’s life insurance penetration rate stood at 10% GDP in 2000,
on par with the UK and second only to Taiwan where the penetration
rate was13.8% of GDP.

Big protection

Pull quote by Peter Dempsey, deputy CEO, ASISADespite the very
high penetration of life insurance in South Africa a significant
gap still exists in the protection market.

This was highlighted in a
study undertaken by ASISA and the Actuarial Society of South Africa
(ASSA) and published in October 2010. ASISA was formed in 2008
following the amalgamation of four financial service industry
bodies including the Life Offices’ Association.

According to ASISA deputy CEO
Peter Dempsey, the study found that on average South African
earners are underinsured by 62% for death and 60% for

Dempsey noted that the only
group of people who have sufficient life cover according to the
study are high income earners older than 55. This, he explained, is
because this group has generally saved enough money and has often
also benefited from group life cover through years of membership of
an employer’s pension fund.

On the disability side,
however, this group also finds itself underinsured. According to
ASISA and ASSA, some 160,000 South African income earners die each
year and a further 52,000 suffer total and permanent

Dempsey noted that the study
undertaken in 2010 was the second of its kind, the first having
been undertaken in 2007. The 2010 survey, he added, was conducted
by actuarial consulting firm True South Actuaries & Consultants
in partnership with the University of South Africa’s Bureau of
Market Research. Researchers had access to more detailed data on
personal income than the 2007 study, which found there was a
protection gap totalling ZAR10trn.

Table showing the CAUSES OF DEATH CLAIMS at Discovery LifeIn the 2010 study
it was also possible to eliminate individual earners with no need
for insurance and, as a result, the findings are more realistic
than those in 2007, Dempsey said.

The 2010 study shows, he
continued, that South Africa’s 12.4m income earners between the
ages of 16 and 65 are underinsured by a total of ZAR18.4trn. The
insurance gap was calculated separately for death and disability
and is defined as the difference between the insurance need and the
actual cover.

Of the total amount, the
death insurance gap is ZAR7.3trn and the disability insurance gap
is ZAR11.1trn.

This translates into an
average insurance shortfall of ZAR600,000 per earner in the event
of death and an average shortfall of ZAR900,000 per earner in the
event of disability.

Dempsey pointed out the
increase in the gap from ZAR10trn in 2007 to ZAR18.4trn does not
indicate there has been a huge increase in the level of under

“Given the fact it was
possible to interrogate data in much greater detail in the 2010
study, and factoring in the growth in earnings over the three years
since the last study was conducted, we conclude the insurance gap
has not necessarily widened,” said Dempsey.

He added that the insurance
gap is likely to have remained static in real terms between 2007
and 2010, which is positive given the tough economic conditions
that prevailed during the period.

“What this means is that
consumers did not rush out and increase their levels of life and
disability insurance since the last study was done in 2007,”
Dempsey added.

“This is understandable given
the global financial crisis and the recession that

“But this also means people
held on to the life and disability protection cover they had. This
is positive and consistent with the lower policy lapse rates we
have seen in the industry.”

Chart showing Individual premium income of the SOUTH AFRICAN LIFE INSURANCE INDUSTRY, 2002-2010


Correctly, Dempsey emphasised
a total protection gap of ZAR18.4trn is so large it becomes
meaningless unless it is made relevant to individual

He added that middle- to
high-income earners in particular are usually quick to dismiss
these statistics, believing mistakenly low-income earners are
likely to be the only group hard hit by the loss of an earner due
to death or disability.

“This thinking is
fundamentally flawed,” Dempsey stressed.

“Our research shows consumers
earning more than ZAR16,700 a month will leave their families with
the biggest financial shortfall when they die or become

Consumers in this income
bracket were found to have average life cover of ZAR1, 802,173 but
require ZAR3, 325,942 cover, a gap of ZAR1, 523,768.

In the same income bracket,
consumers have average disability cover of ZAR2,103,374 but require
cover of ZAR5,309,603, a gap of ZAR3,206,229.

Dempsey pointed out the study
also revealed that while consumers earning less than ZAR3,000 a
month have a life cover shortfall, the reverse is true for
disability insurance.

This, he explained, is
because of the government disability income grant which, due to its
fixed amount nature, is very effective at replacing lost income in
the lower income brackets.

ASISA and ASSA estimate
closing the life and disability insurance gap would require South
African earners to spend on average an additional 2.4% a year of
their personal income on life cover (an additional ZAR35-billion)
and 1.5% a year on disability cover (an additional

The need for adequate cover
is highlighted by data from Discovery Life, an insurer focused on
individuals in high income brackets.

The data reveals, in the
three months to 30 September 2010, trauma accounted for 30% of
death claims by number and 37% by value, the highest of all death
claims paid by Discovery in the period.

If even a portion of the
protection gap could be closed the South African life market would
appear to hold significant potential for growth. Achieving a 50%
closure of the gap would, for example, increase total individual
premium income earned by the industry by almost 40%.

Adding to the life industry’s
potential is solid growth in the upper income segment of the

In South Africa, consumers
are ranked in terms of living standard measures (LSM) which range
from the lowest income earners (LSM 1) to the highest income
earners (LSM 10). According to retail group Woolworths, the
upper-end LSM 8 to LSM 10 sectors are expected to increase by 1.7m
(22%) adult consumers by 2015.

If the life industry were to
suddenly enjoy a boom in demand for protection insurance it would
be domestic insurers that share the spoils. South Africa’s life
market is somewhat unique in having no major foreign life insurers

The reason is that during
South Africa’s Apartheid era foreign life insurers steadily exited
the country, with big-names such as Legal & General, Generali
and Prudential disappearing. Prudential has returned but only in
the capacity as an investment management house.

It would undoubtedly be a
daunting task to re-enter the South African life market which is
dominated by major players: Old Mutual, Sanlam, MMI Holdings,
Liberty Life and Discovery Life. According to ASISA, these big life
offices account for about three quarters of total premium income
and almost 90% of investment income and total assets.

MMI Holdings was formed in
late-2010 following the merger of Metropolitan Life and Momentum
Life and now ranks third-largest after Old Mutual and

South Africa’s life industry
enjoyed robust growth in the first half of 2010 with new business
premium income rising by 18.4% compared with the first half of 2009
to ZAR32.84bn.

Chart showing the total premium and investment income of the SOUTH AFRICAN LIFE INSURANCE INDUSTRY


However, growth in the second
half of 2010 will be off a high base of a strong showing in the
second half of 2009 which saw new business increase by a third
compared with the second half of 2008.

Whatever the potential of
their domestic market may be, South African insurers are looking
north to the rest of Africa for a growth-boost.

The world’s last real
frontier insurance market, Africa excluding South Africa generated
life and general insurance premium income of $12.3bn in 2009,
according to Swiss Re. This was a mere 5% of the $250bn total
premium income from all emerging markets.

Echoing a widely-held view
among South African insurers, MMI Holdings international operations
CEO Mervyn Cookson termed Africa a “strategic imperative” for the
insurer and one offering it the highest potential

MMI encompasses
Metropolitan’s operations in 7 African countries and Momentum’s in
11. While there is overlap — the total number of countries covered
is 12 — Momentum focused on health insurance and Metropolitan on
life insurance, noted Cookson.

Cookson added MMI has the
largest African footprint of any South African insurer, while the
average monthly premium collected by MMI in African countries
ranges from about $15 to $70.

According to Cookson, the
simplest route into Africa is to partner with local banks. MMI has
a joint venture with UBA Group, the third-largest bank in Nigeria,
Africa’s most populous country. But, he stressed finding the right
bank partner is not easy.

From a bank partner
perspective, Liberty Life has a distinct advantage in that its
parent, South African bank Standard Banks, is active in 17 African
countries outside South Africa. Liberty Life is active in six of

Sanlam is also forging ahead
in Africa. In addition to South Africa’s neighbouring states, it
has established a presence in Kenya, Tanzania, Zambia, Ghana and,
most recently, Uganda and Nigeria.

Notably, in 2010 Sanlam
formed a new life insurance company in Nigeria, FBN Life Assurance,
in a joint venture with the country’s largest bank, First Bank.
Sanlam owns 49% of Nigeria’s second-largest general insurer’s life
insurance unit.

Lagging its major rivals, Old
Mutual has only three units operating in countries not bordering
South Africa: Kenya, Malawi and Zimbabwe.

While South African insurers
are focusing on African middle-to upper-income sectors, by far the
largest potential market is in the micro-insurance sector. The only
major player tackling this market so far is German insurer Allianz
which has a presence in 12 African countries.

Conventional or
micro-insurance, Africa has unique challenges which South African
insurers are arguably likely to overcome more readily than their
foreign rivals.

Among the more difficult
challenges in Africa are under-developed accounting, legal and
regulatory standards and a skills shortage, says Ian Kirk, CEO of
South Africa’s largest general insurer Santam, a 58%-owned
subsidiary of Sanlam.

Kirk warns when contemplating expanding into Africa,
expect things to take a lot longer than they would in a developed