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The role of the insurance industry in enabling meaningful transformation

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The non-life insurance industry is a critical component of our economy, providing the lubricant needed for companies and businesses to get their engines running again after catastrophic and unexpected events. In just the past five years, insurers helped people rebuild after several unprecedented events. The 2017 Knysna fires caused over R3 billion worth of damage, as at March 2022 the South African Special Risks Association (Sasria) had paid around R20 billion in claims following the July 2021 riots, and business stoppages in the wake of the Covid-19 pandemic have also shown the importance of the insurance industry in protecting jobs and livelihoods. 

While insurers often come under criticism when claims aren’t paid out after failing to meet specified criteria, it’s clear that the industry has pulled together for hundreds of thousands of people who have been left desperate or destitute. In fact, the insurance sector contributes billions of Rands annually to the South African economy, while employing thousands of people.  

But in a South African context, the insurance industry has a far more important role to play – as a catalyst for transformation. At the end of last month, the Financial Sector Conduct Authority (FSCA) issued a press release, inviting comments on their transformation strategy, which highlights the increased role and responsibility that insurers have in supporting transformation. The strategy aims to outline the FSCA’s approach to promoting financial inclusion within the existing policy framework and outline an approach for the FSCA to promote transformation under the future COFI Act framework.

Over the past thirty years, the non-life insurance industry has lagged its financial services peers when it comes to transformation. It really is long overdue that we start seeing black-owned and managed insurance businesses thrive in South Africa, particularly where there is an opportunity to employ thousands of people and support the country as it emerges from the pandemic and an economic recession. Besides transforming itself, the industry has arguably a more important transformative role to play in channeling procurement spend towards black owned SMEs. Procurement spend – or the amount of money which the non-life segment pays out on claims – runs into the billions, highlighting the immense transformation opportunity.

Structural challenges in our economy and access to finance are often quoted as a reason why the small business sector is not growing To illustrate the importance of the SME sector, according to The Banking Association of South Africa, SMEs comprise 91% of formalised businesses, employ about 60% of our labour force and contribute roughly 34% of GDP. Considering that around R77 billion was paid out in claims by non-life insurers in 2020 alone, if channeled correctly this presents a significant opportunity to support the small business sector and Black entrepreneurs in particular. Where entrepreneurs are successful in raising funding, their next challenge is to secure enough business to enable them to repay their funders. This is where insurers can play a more meaningful role.

Insurers direct most of this claims procurement spend across the value chain towards builders, electricians, panel beaters, glass and specialised automotive parts sellers and plumbers. While the industry has increased its focus on directing this spend to support transformation, more can be done to accelerate this to ensure that business is not serviced only by larger, white owned suppliers, who have historically attracted the majority of the spend. Developing the small business sector is not just critical in creating jobs and growing our economy, it is also critical to the sustainability of the insurance industry that relies so heavily on these suppliers to deliver a quality service to its clients.

The opportunities also extend to skills and knowledge transfer to assist small businesses to establish themselves in their first few years of operation and ultimately thrive as a business.

While most insurers do have procurement departments which appoint suppliers and partners, a concern is the lack of clarity as to where this procurement and supplier expenditure is channeled. If the industry is to be judged on its transformation spend, it needs to do more to ensure that there is complete transparency. It is also a golden opportunity for the industry to change the rhetoric around claims not being paid, to recognizing the industry’s role in settling claims and in so doing supporting transformation and economic growth.

The pandemic has rattled businesses for more than two years, and the July 2021 riots have woken many companies which previously may not have fully appreciated the necessity to insure their businesses and assets against unforeseen risks, to the benefits of investing in comprehensive insurance cover.

As premiums grow and significantly increase cash flow into the sector, there will be an additional impetus for medium and large insurers to become more inclusive and transformative. Considering that financial services is the most dominant sector of the economy – contributing around 20% of the GDP each year – it certainly highlights the need for the insurance industry to do more to support the emergence of black insurers and allied businesses, enabling them to become a large part of the country’s economic recovery and future.

Identifying and backing appropriate transformation initiatives should be seen as an opportunity for the industry to further promote its noble purpose through meaningful transformation and sustainability of the economy.