Intelligent Insurance Financial Services The South African Insurance Industry Survey 2017 August 2017 kpmg.co.za Intelligent Insurance Today’s leading financial services companies are operating in a new and more complex environment; one where the fundamental definition of how customers experience and interact with an insurer is being challenged and redefined. This is further complicated by millennials’ dramatically different buying patterns, alternate channels and changing expectations for consumer and digital experiences. This new consumer driven/ customer centric business model is one that many insurers recognise and are striving to adopt in order to win and retain customers. The South African Insurance Industry Survey 2017 Introduction 1 King Hammurabi had the coolest beard 3 Behavioural Economics Perception is King to reality's court Jester 9 The role of financial services in society 19 IFRS17 - Left out in the cold before it even gets a foot in the door? 27 Enhancing the strategic value of Internal audit 31 Will the surge of Millenials challenge traditional insurance? 37 Y Robot? Insurance on Demand, Virtual Agent's and Telematics . 43 Insurance evolved in the Digital Age 49 Changes to VAT compliance rules 53 Expense allocation – changes to Life Insurance Tax 57 ORSA A continuous improvement cycle 61 Microinsurance in Africa 67 Incremental Implementation towards a Market Conduct Framework 73 Short-term Insurance Industry results 79 Long-term Insurance Industry results 105 Reinsurance Industry results 121 We cannot wait until there are massive dislocations in our society to prepare for the fourth industrial revolution. Robert J.Shiller The South African Insurance Industry Survey 2017 | 1 Antoinette Malherbe Partner, Insurance Survey 2017 Financial Services Tel: +27 83 458 8484 Email: [email protected] If there is something to be learned from the year 2017, evolved and we look at the progress the market has made it is that change is inevitable. Globally, the world was towards achieving fair market conduct. shocked by two unthinkable events being Brexit and a In another shock event, the long awaited IFRS 17 on Trump presidency. From these examples it is evident insurance accounting was released. Our accounting article that one must always be ready to adapt, to be agile, probes whether this accounting standard will lead to better to be flexible as well as to be able to EVOLVE. embedded reporting for companies and financial statements It is with great pleasure and pride that the 2017 KPMG that are more understandable. Insurance Survey is unveiled. We have looked toward the As always, we have included and analysed the financial Gerdus Dixon future in this edition by asking pertinent questions such as: Partner, results of the year gone by for the short-term insurance, how should an insurance company EVOLVE to be a force to National Head of Insurance long-term insurance and reinsurance industries. be reckoned with, to remain relevant? Tel: +27 82 492 8786 We have made every effort to ensure that the content in Email: [email protected] To know where we are going we should first reflect on this publication is fresh, relevant and thought provoking. where we have come from. As such, we have included a We trust that you will find this publication insightful and idiosyncratic historic piece on the humble beginnings of the invite you to contact us should you require any additional insurance industry. This is the first from our thirteen pieces information or assistance. of thought leadership included in this edition. The insurance company of the future is going to be shaped and designed Antoinette Malherbe around various new and interesting concepts, and we Partner & Editor look at some of these including the impact of behavioural Gerdus Dixon economics, Millennials and the digital age. Partner & National Head of Insurance On the regulatory front, we have a feature on micro- insurance, we look at ORSA and how the process has The South African Insurance Industry Survey 2017 | 3 Derek Vice Senior Manager, had the coolest beard Financial Services Tel: +27 82 711 2519 Email: [email protected] King Hammurabi had the coolest beard. As Confucius said, “study the past if you Beards may be coming back in fashion would define the future.” So, let us do a bit but his was next level. He had a braided of studying. beard in some pictures. In other pictures, his beard was adorned baubles and bright "Definitions have never done shiny things. Surprisingly, this is not what anything but constrain." made him famous. His legacy relates rather Jonathan Safran Foer - Author to being the “author” of one of the first Some say that insurance started long before codified system of laws. The laws might not the reign of Hammurabi. Commonly cited have been humane by modern standards, examples are: early Arabian traders spreading but they did make provision for insurance. their cargo between camel teams to minimise Most significantly, a debtor did not have to losses from banditry; and Chinese merchants repay his debts if he fell afoul of unfortunate spreading their cargo between riverboats to circumstances.1 National insurance goes minimise the loss if one of these was sunk. way back. Under modern definitions, we would call this good risk management. In this article, I am hoping to take you on a journey through time and the evolution of insurance: from its humble beginnings as a bauble in Hammurabi’s beard; to the multinational safety blanket it is today. 1 http://www.investopedia.com/articles/08/history-of-insurance.asp 4 | The South African Insurance Industry Survey 2017 An insurance policy compensates the policyholder when "Success is not built on success. It is and to provide bonuses for those who were successful those bad things happen. It does not stop those bad things built on failure. It is built on frustration. at it”. 8 from happening. Sometimes it is built on catastrophe." Across the Atlantic the fledgling democracy of the The modern definition would also scope out the colloquial Sumner Redstone - Businessman and United States picked up this practice and continued the use of insurance in the following sentence: the USA’s media magnet relationship with risk management in that they advised nuclear weapons programme acted as insurance against The guild system in medieval Europe provided for group against certain fire hazards and even declined to insure the USSR through a contract of mutually assured cover. The members of guilds would contribute to a certain builds of high risk (such as all-wooden houses).9 destruction. History is full of examples of using the threat central coffer and these were used to pay-out if the guild One of the companies from this time, the Sun Fire of violence as a risk mitigation tool. However, even if we member’s trade establishment was destroyed by fire. The Office Limited (dating from 1710) is claimed to be the keep our focus on contracts (verbal or written) between guild would also step in and cover the members’ other oldest existing property insurance company.10 Today after parties intended to compensate for specified uncertain obligations.4 numerous mergers and acquisitions they operate as RSA events which adversely affect the policyholder, some of (Royal and Sun Alliance), one of the largest insurers in the the earliest examples still arise in classical antiquity. One of my favourite historical developments in insurance United Kingdom.11 are the fire insurance businesses that developed from "The ocean is the world's wildest place the ashes of the Great Fire of London. This fire, in 1666, Interestingly the Sun had offices in South Africa. In “consumed 13,200 houses, 87 parish churches, 1895, their headquarters moved from Cape Town to King because of how easy it is out there to St. Paul’s Cathedral, and most of the buildings of the City slip from the boundaries of law and Williams’ town. The head office building itself, which is authorities. It is estimated that it destroyed the homes of quite beautiful, still exists on the corner of Alexander 5 civilisation that seem so firm ashore." 70,000 of the City’s 80,000 inhabitants. ” This led to the Road and Cathcart Road and is a provincial heritage site.12 Rose George - Journalist establishment of the Insurance Office for Houses, which Sun Fire in South Africa subsequently became Protea Hammurabi’s gang were notably interested in credit insured brick and frame homes. Initially this office insured Assurance Company. risk. If a merchant received financing for a shipment, he 5,000 homes. would pay a premium for the right to cancel the loan if the "Death is the solution to all problems. shipment was stolen or lost at sea. Not only did this office act as an insurer, it also helped manage the fire risk. Initially each insurance company No man – no problems." Shipping was as a big a thing in those days as it is today. operated its own fire department to minimise the loss on Joseph Stalin - Dictator Around that time (give or take a few hundred years), the their insured’s property. This system was not particularly Life and health has been around as long as property inhabitants of Rhodes invented the concept of the general effective in that the fire brigades competed for space and insurance. Burial societies are not unique to modern average.2 The general average is a maritime practice that only protected their insured’s property.6 Houses were South Africa. In fact, the ancient Greeks and Romans continues until today. The general average is now part of marked with various insignia to evidence their insurance. had burial societies called benevolent societies. It seems international maritime law.