S&P warns of hard times for insurers

Insurers will struggle to grow premiums and profitability amid weakening economic growth following this country’s credit ratings downgrades, says S&P Global Ratings.

Worsening economic conditions had increased risk for insurers, who relied on economic growth and consumer discretionary spend, said Neil Gosrani, director of insurance ratings at S&P.

Old Mutual Life Assurance Company of SA, Sanlam Life Assurance, Liberty and Santam were among South Africanbased insurers that had their national-scale credit ratings cut by one notch to AA- on April 7.

S&P had kept insurer ratings in line with the sovereign because they remained susceptible to macroeconomic stresses associated with a local currency sovereign default, given their asset and liability concentration in the domestic economy.

Ratings actions against insurance companies followed downgrades to SA’s foreign currency and local currency rating.

The downgrades centred on President Jacob Zuma’s cabinet reshuffle and the effect this would have on policy continuity, and economic growth and fiscal outcomes in turn, said Gosrani.

For short-term insurers, the immediate effect of a sovereign credit downgrade would be felt in rand weakness, which placed pressure on expenses, he said.

In particular, goods and services contracted in foreign currencies, such as motor parts, would be more expensive.

This could increase insurers’ loss ratios and the margin squeeze might be passed on to customers, said Trevor Baasdorf, a rating analyst at S&P.

Tighter controls over claims costs and operational efficiency in supply chains would help insurers protect against margin erosion, said Baasdorf.

Life insurers would be negatively affected as consumers were less likely to spend disposable income on life insurance products if they were under financial strain, said Gosrani.

Baasdorf said the insurance sector was still well capitalised.