Industry Outlook

The IIG Edu Portfolio kicked off with its first Insights session for 2022 with the theme of #ShowUp, truly came to the fore.

Our MC for the morning was none other than IIG’s newly elected President, Thabo Twalo, looking as dapper as the evening of his inauguration.

Thabo touched on the pandemic as well as the challenges in the Ukraine which have become the “big ticket” items in the world and have made everyone more connected but more polarized as well.

Industry Outlook secured an exciting panel of experts brought by our sponsors, Sasria, Allianz, Deloitte & Norton Rose Fulbright.

The first speaker was Jaco van der Merwe (Director, Deloitte) who leads actuarial services for Deloitte and whose experience spans a broad range of technical expertise in Insurance.

Jaco began by sharing that each time he conducts an industry update, he personally experiences some sort of radical change brought on by tsunamis of exceptional events hoping the following year would have some sort of normality but again we are now faced with turmoil as seen between Russia and Ukraine.

Research conducted by Deloitte in 2022 revealed several themes:

• Accelerated growth in 2022
• Non-pandemic challenges beyond covid
• Future of work: talent retention strategies
• Cybersecurity in an ever more digital world
• Digital strategies: automation vs service
• Trust and a “higher bottom line”

Jaco expanded on these themes as illustrated below:

1. Accelerated growth in 2022:

• Lingering covid-19 concerns
• Overall bullish about 2022 growth prospects
• Plans to invest in evolving pandemic-driven talent & tech
• Growing demand for insurance (esp. Life, China)
• Commercial cover leading growth
• Reinsurance rates to continue rising
• Cyber insurance rates sharp increases due to ransomware attacks

2. Non-pandemic challenges i.e., “beyond” COVID-19

• More than just covid-19 strains to worry about
• Rising inflation
• Surge in demand for goods, material, labour
• Pressure on claims costs: supply chain, shipping, motor parts, rental, chips
• Definite SA industry wide phenomenon
• Regulatory costs keep climbing e.g., IFRS17, market conduct, etc.
• Flat interest rates
• ESG and climate risk are also areas of pressure and concern
• TCFD – mandate reporting and disclosure pressures
• More than just climate, also there is a need for diversity I hiring & leadership development.
• Underserved markets and ethical decisions and conduct risk
• M&A activity expected – key means to expand beyond home markets
• Tax reforms & upheavals – many insurers reshaping their tax department operating models

3. Future of Work:

• Talent pool challenges:
• Economic recovery, digitalized operations, cybersecurity, modernizing marketing (specialized talent is rapidly exiting the country).
• Part-time transitional or contract workers
• Hybrid work policy, return to office strategy
• Customized workplace based on personas
• Insurers could face recruitment challenges in several key areas

4. Pandemic driven digital adaptations & accelerations:

• Emerging technologies where respondents expect to increase spending the mots in 2022:
• Artificial intelligence
• Cloud computing and storage
• Data privacy
• Data acquisition

5. Cybersecurity in an ever-more digital world:

• Top challenges facing respondents:
• Technology is not mature enough
• Regulatory and compliance
• Short-term focus on returns

6. Digital strategies: automation vs service can be combined with Trust & a “higher bottom line”:

• While digitization is an important priority, insurers also should not neglect the value of the human touch, given product and process complexities embedded throughout the insurance lifecycle.
• Insures are likely to be increasingly called upon to take steps to rebuild trust, contribute to a more just and sustainable world, and build a more equitable financial services industry where profit and societal impact coexist amicably.

Global Perspectives:

The future of small business insurance:

• Strong demand globally for more insurance
• Trust remains strong
• Demand for non-insurance services: SMEs want Cover+
• Advice is more important than price
• Engagement preferences varies widely

There was a brief Q&A before the 2^nd speaker was introduced.

Patrick Bracher – (Director of Norton Rose Fulbright), who’s knowledge embraces related financial service, life & non-life and is well known for his clear opinion and practical advice. 

Patrick reinforced the 1^st speaker’s information and provided an overview affecting the regulatory landscape:

• In 2021 – courts treated insurance as a matter of social policy
• This led to, and will lead, to blanket exclusions e.g., Disease cover and cyber cover
• Political risk insurance has become more expensive
• The insurance industry will avoid black swan events
• TCF does not mean pooling of risks greater than the pool
• The board is accountable for compliance & governance
• The Sasria risk pool is being made bigger by greater premiums
• Pandemic losses are a forerunner of potentially massive cyber losses
• Pandemic has been an eye-opener for business interruption losses from catastrophes, long-lasting effects, supply chain problems
• Self-insurance, risk management, risk mitigation and related advice will go far beyond insurance laws
• Major issue is access to distribution channels
• Highly complicated system of intermediary services, binder services, underwriting managers, outsourcing as non-financial services has arisen
• Patrick is strongly of the opinion that there is far too much regulation for an efficient industry

Patrick briefly unpacked the COFI Bill as follows:

• COFI will be the focus of regulatory attention for the next 12 months
• Commencement date: 01 October 2022?
• Latest version COFI achieves a framework Act
• Repeals the LTIA, the STIA, FAIS FIPFA with material amendments to FSRA
• Everything in the Repealed Acts will be in conduct standards, which means a great deal of work
• COFI can be brought into force gradually

A few terms were then explained namely, Outsource Contractors; Transformation; Debarment; TCF; Distribution (sales & execution); Licensing categories which will now include 16x categories of license; Financial Advice; Administration; Insurance Underwriting Management; General Administration; Transitional Provisions and lastly Commissions and Fees.

The theme of Patrick’s discussion dealt heavily around transformation and the FSCA strategy which will revolve around the licensing requirements that they will monitor, enforce and promote. Transformation will also be helped by proportionate enforcement of COFI.

Patrick’s session was concluded with a short Q&A and a pause break was taken by all before the introduction of the 3^rd and final speaker.

Selin Ozyurt (Senior Economist for France & Africa, Euler Hermes) – who’s currently responsible for country risk analysis and monitors micro risk in African countries. She speaks French English Turkish and German.

Selin’s presentation covered the global economic and financial outlook in 2022, with the emphasis on the Russia-Ukraine war. Selin outlined the economic repercussions of the war via trade, commodities and financial markets channels, with a special focus on Africa.

As has become the common theme, it is clear that we are living in unprecedented times with COVID-19 now in backburner, the war between Russia-Ukraine has come into the forefront.

Russia’s invasion of Ukraine was unexpected, but the new angle in the conflict was the strong, unified and quick reaction from western countries. The West imposed economic sanctions to weaken Russia. However, Europe depends on Russian gas as well as other commodities. Western countries managed to freeze Russia’s assets at the central bank. As a response the Central Bank of Russia raised interest rates. Russian companies had to cede 80% of their FX revenues / balance of payment crisis. Foreigners were banned from selling their equities in Russia. Russia delivered a formal decoupling from western reliance, to become more self-sufficient, but Europe continues to purchase gas from Russia at extremely high prices.

The volatility of US Treasuries is approaching covid-crisis levels. This affects liquidity and is likely to create funding stress in the financial system. EUR spreads of Eastern European countries which have been widening in the previous weeks, among the most sensitive. Similar levels as seen with Covid shockwaves have been observed. There are big differences among dependency on Russian gas, as it travels via pipelines, it’s not easy to substitute/divert in great amounts. One of EJ annual renewable expansion can replace Russian gas in only 6yrs from now. The amended German Renewable Energy law targets this scale of additions over the medium term.

We don’t have a Plan B and as such discovered how overly reliant Europe is in specific sectors.

Russia-Ukraine Scenarios:

• Ceasefire (probability 5%) / conflict escalation (Probability 55%) / Black-out (Probability 35%) – harsh sanctions freeze economic & financial relations between Russia and the West.
• Global trade growth would be negatively impacted in volume terms by -2.0pp in 2022 and -1.0pp in 2023 and positively impacted in value terms, by +3.7pp
• Diverted trade flows from Russia are likely to support the trade balance of other commodities and certain countries like Argentina may benefit.
• Food prices hike continue to fuel inflation to double digits and weigh on household incomes. Adverse climate events also add to food insecurity and poverty in Africa Further monetary tightening is expected from major central banks in 2022 (South Africa, Ghana, Angola, Kenya and Nigeria).
• We expect GDP growth to reach +2% in 2022 and +1.5% in 2023. While commodity prices will continue to support the trade balance, structural woes (e.g., public sector inefficiencies
• North African countries are highly dependent on cereal imports from Russia & Ukraine.
• Net energy exporters (Algeria, Nigeria, Angola) will see an improvement of their current accounts in 2022.
• Food price hikes before the war had already fueled inflation to double digits.
• Key challenges & Opportunities – Countries with more established and favourable conditions will benefit rapidly from the free trade agreement: South Africa, Morocco, Kenya and Ghana / Macroeconomic and political stability. African continent is the key supplier of cobalt, nickel and other critical minerals for energy transition

Selin’s presentation was concluded with a short Q&A and thereafter Thabo invited back the earlier speakers to answer any pending questions jointly.

The IIG President once again thanked all sponsors for the day as well as all IIG members in attendance and reminded everyone to secure their CPD points via the IIG CPD Vault. He also encouraged all to support upcoming IIG insights which are advertised on IIG’s various social media platforms as well as the IIG website.