The
The purpose of this research was to explain how the contextual dynamics impacted regulatory responses, and what was the subsequent effect on the short-term insurance industry.
The motivation for the study was to explain and understand market dynamics following the regulatory tightening of the insurance industry within a historical framework.
This article provides an empirical analysis of how regulatory intervention transformed market characteristics and thus contributed to an understanding of the localisation of a financial industry, namely the short-term insurance industry. This was achieved through a description of the regulation, including the exploration of possible consequences at the time of two major events in history.
In both cases the findings were that the market size contracted, corrected and expanded within a few years.
This article provides a practical analysis of local industry performance in an environment of legislative changes which may assist managers in a regulated industry.
The contribution is an industry analysis over an extended time frame which may add value in the adoption of similar domestication policies in the rest of Africa.
Regulatory and legislative changes are considered as one of the top 10 risks facing financial institutions, and this is mainly because of the high costs associated with achieving compliance such as security and reporting obligations, including failures, which potentially result in large fines (Aon Risk Solutions
Financial regulation aims to maintain market confidence, financial stability and protect consumers and the public at large. The concept ‘regulation’ connotes the intervention of the state in human affairs which are structured from ‘institutions’ and may arise from political processes at national levels (Richardson & Kilfoyle
In 2017, the
In this article, the impact of state regulation on the short-term insurance industry is considered by reflecting on both industry and a case study performance. Between 1960 and 1980, two distinct periods of political instability occurred. This prompted state intervention via regulation and the impacts on the industry were measured in terms of several indices such as number of insurers, premium and assets. The results of Santam, a local insurer operating within a domesticated insurance environment, were analysed to determine the direct effect of regulation on performance.
South Africa became a Republic in May 1961. The period leading up to this historic event was dominated by rising domestic opposition to racial segregation, because the black majority of the population were excluded from participation in the Union Parliament. The Sharpeville incident was a turning point in South Africa’s history, prompting the United Nations to call on the South African government to abandon its domestic policy of racial segregation. Mounting international criticism of the domestic policies and a flight of private capital resulted in a net capital outflow of R248 million between January 1960 and June 1961 and a decline of R173 million in gold and foreign exchange reserves in the corresponding period (Davenport & Saunders
A similar economic intervention was seen in response to the 1976 riots. A statement issued by the Ministry of Finance and Economic Affairs highlighted decline in the net inflow of foreign capital, and monetary and fiscal measures were announced to strengthen the balance of payments such as a temporary imposition of deposits on imports (South African Reserve Bank [SARB]
It is concluded in this article that increased regulation in the short-term insurance industry resulted in major shifts in the composition and registration of insurers, yet industry and individual company performance was not directly compromised.
A comprehensive analysis of regulatory regimes before 1914 was performed by Pearson and Lönnborg (
The historical perspective of the UK market provided an understanding of the South African situation because of similarities in both markets. Regulation in the UK after World War II was based on the old Victorian principle of ‘freedom with publicity’ with the onus on policyholders and shareholders to use the published information to monitor companies whilst companies regulated themselves. This model came under pressure in the 1960s with dubious entrants in the motor insurance market, large claims and market failures as well as the tariff crises of the 1970s, which led to the abolishment of the Fire Offices’ Committee (FOC). This caused tightening of regulation and the
France is an example where economic nationalism modified the insurance market. Between 1930 and 1938, measures were taken to codify and regulate the French insurance industry and restrict abusive practice, which led to collaboration between the profession and the government. World War II saw an expansion of insurers to foreign markets, targeting countries of the Union Française. Subsequent independence of most of these countries saw French insurers remaining but at reduced competitiveness compared to domestic insurers. Protectionist policies in these countries forced French insurers to focus on the home market, leaving foreign business down to 6.2%. Between the 1950s and 1966, France targeted new countries via investment in foreign companies, including as subsidiaries, such as industrialised markets, including their neighbours Belgium, Italy and Spain. They retained their role in historic markets via technical expertise or reinsurance. From the 1970s, French insurers focussed on and grew faster internationally than the domestic markets with operations abroad growing from 11% in 1969 to 15% in 1980 (Straus
In South Africa, the insurance industry was less regulated at the beginning of the 20th century, with the market being open to domestic and foreign companies. The earliest legislation affecting short-term insurers was promulgated in 1891. The Cape Colony legislation required registration, payment of a deposit and furnishing of annual returns to the colonial treasury. After unification in 1910, statutory regulation of the insurance industry was not a priority. Statutory regulation, aimed at short-term insurers, was only promulgated as the
The basic regulatory framework did not change fundamentally as the
The first Registrar of Insurance, George Beak, was appointed in terms of this act, reporting to the Minister of Finance. The day-to-day administration of the act was the responsibility of the Financial Institutions Office in Pretoria. The Registrar wanted policyholder protection, at the same time allowing insurers the freedom to develop and improve services (Benfield
As international pressures and the domestic volatility after Sharpeville intensified, the state sought to secure control over the financial resources of the country. Insurance companies held extensive premiums, available for transfer to assets but, as joint-stock companies, ultimately paid out as dividends to foreign shareholders. This constituted a visible capital outflow the state sought to reverse. An important step in keeping revenue earned in South Africa was to ‘domesticate’ the insurance industry. This strategy was aimed specifically at the predominantly foreign-owned short-term insurance enterprises and implied an end to foreign control of many companies operating in South Africa over many decades.
The
Intervention by the state via the introduction of ‘regulation’ to keep premium income in the market of origin was in response to market distortion caused by international adversity against South Africa, which jeopardised the flow of foreign investment into the country. The state used regulation of,
Sharp rise in newly registered short-term insurance companies during the last half of the 1960s was primarily registrations as foreign branches converted into registered companies. A significant number of short-term insurance businesses were therefore transferred in early 1965 from foreign branches into local companies. Examples include the transfer of Law Union and Rock Insurance Co. Ltd. to the London & Lancashire Insurance Company of South Africa Ltd., registered on 01 January 1966 and North British & Mercantile Insurance Company Ltd., transferred to Commercial Union Assurance Company of South Africa Ltd. registered on 30 June 1965. By June 1965, the number of short-term insurance companies rose to 26, as 17 new insurers were registered (Registrar of Insurance
Insurers struggled to comply with the requirements of the act and by 1967 the Registrar reported that between 01 August 1965 and 06 December 1967, 31 insurers were found non-compliant, five insurers transferred their businesses and 26 cases were granted extended timeframes to comply with the more stringent financial requirements of the act (Registrar of Insurance
A commission of enquiry into the financial structure and fiscal and monetary policies of South African authorities was appointed in 1967 under chairmanship of Dr D.G. Franzsen. The purpose of the enquiry was to propose measures that would promote economic growth and financial stability in the Republic. Foreign-controlled insurers were also included in the enquiry that at the time controlled 56% of the total short-term insurance assets. The government wanted the industry to be localised with 100% share capital available to South Africans. Another goal was to retain funds locally and to optimise tax receipts in the Republic. The commission recommended to encourage distribution of shares to South Africans all existing foreign insurance business had to be incorporated in the Republic and existing branches had to be converted into local companies within a period of 3 years which would be subsidiaries of foreign insurers (Franzsen Commission
The Franzsen Commission recommendations were finally incorporated in the
Another reason for the regulation of assets held by the South African industry was for government to secure the investment funds of both short-term and life insurers to fund local industrial development whilst the country was affected by international sanctions. The investment of these assets had a stabilising effect on the general macro-economic development of the economy. The primary rationale for this statutory change was therefore to protect South Africa’s strategic financial services sector, of which the insurance sector formed a key part (Verhoef
According to Benfield (
The number of insurers registered outside the country declined significantly from 90 to 26 between 1960 and 1970, as depicted in
Annual changes in assets of insurers and private pension funds (R millions).
Prescribed assets | 1963 | 1964 | 1965 | 1966 | 1967 |
---|---|---|---|---|---|
Government stock | −1 | −15 | +3 | +71 | +71 |
Public corporation, local authority, stock and loans | +54 | +71 | +75 | +50 | +74 |
Total prescribed securities | +53 | +56 | +78 | +121 | +145 |
, Adjusted to annual rate.
In 1961, the Franszen Commission (
Number of assets of insurance companies 1950–1980.
Year-end of insurer (‘000) | No. of life and short-term foreign insurers | No. of life and short-term local insurers | Total No. of life and short-term insurers | Total short-term assets | Total long-term assets | Short-term |
GDP at current prices (‘000 millions) | Short-term |
---|---|---|---|---|---|---|---|---|
1950 | 84 | 88 | 172 | £20 144 | £192 963 | 10.4 | £1313 | 1.5 |
1955 | 96 | 91 | 187 | £38 048 | £340 103 | 11.1 | £1798 | 2.1 |
1960 | 90 | 91 | 181 | £53 173 | £481 593 | 11.0 | R5349 | 2.0 |
1965 | 80 | 17 | 97 | R139 560 | R1409 000 | 9.9 | R8071 | 1.73 |
1970 | 26 | 100 | 126 | R384 658 | R290 0000 | 13.3 | R12 400 | 3.1 |
1975 | 9 | 87 | 96 | R521 164 | R4796 000 | 10.9 | R27 370 | 1.9 |
1980 | 1 | 89 | 90 | R1 240 789 | R14 395 000 | 8.6 | R62 397 | 2.0 |
Notes: †, Short-term exclusive of registered foreign and domestic professional reinsurers; from 1949 to 1961 premium after deduction of approved reinsurance excluding former insurers. The years are in accordance with the year-end of insurers on 31 December of each year. GDP, gross domestic product.
The assets held locally increased dramatically as a direct result of the statutory investment requirements introduced during 1965 and there was a significant shift in prescribed securities such as government stock, public corporation and local stocks, as depicted in
In 1950, foreign insurers’ assets were almost double that of Union’s insurers. Assets measured as a percentage of gross domestic product (GDP) remained unchanged at 2% between 1960 and 1980, notwithstanding the 1965-enactment.
It cannot be claimed that more stringent regulations curtailed the industry as the total premium income and assets furnished by the short-term industry grew at a sustained rate between the enactments of the domestication requirements and the end of this period under review. In addition, short-term premium measured as a percentage of national income displayed a sustained growth trajectory. (‘Domestication’ is a common term adopted by the insurance and reinsurance industries for the transition of insurance companies from overseas companies and branches to locally registered entities. The term was formally adopted in 1969 by the South African Registrar of Insurance.)
Contraction in the number of insurers did not appear to have impacted the industry performance, measured in terms of total premium income (
Short-term net premium income in South Africa, 1950–1980.
The South African economy thrived after World War II aided by international economic reconstruction and supported GDP growth (at constant prices) of 8.5% per annum between 1948 and 1970 (Feinstein
The national significance of the short-term industry to the national economy is depicted in
Short-term premium as a percentage of national income 1950–1980.
The objective of this case study review is to determine if the strengthening of regulatory controls to localise an industry impacted the performance of a local insurer. Santam Insurance is a local short-term insurer established during 1918 by a local group of men determined to grow the economy and stem the outflow of fire premium to foreign, mostly British, parent companies. In the chairman’s address at the first annual general meeting (AGM) held in 1919, Hofmeyr confirmed the reason for its establishment: ‘The Company is established exclusively with South African capital, so that all profits will remain in the country’ (Santam Insurance
The historical development of this company from humble beginnings to market leader could be explained within the framework of Chandler’s (
Santam started as a modern enterprise just after World War I. The executive management comprised a group of salaried employees. The
Santam showed low yet consistent growth since its establishment. By 1952, on a national scale, it ranked seventh out of a total of 108 foreign and local insurers operating in the Union. Measured in terms of local short-term premium, Santam comprised only 11.4% or £506 557 of the total market premium of £4 444 275 (Registrar of Insurance
Management made no reference to potential adverse effects of foreign investment following the Sharpeville riots. By 1967, Santam was ranked first amongst domestic short-term insurance companies, reporting an annual income of R6 889 000, followed by S.A. Eagle group at R6 569 000 and Rand Mutual at R5 477 000 (The Cape Argus
The net profit of Santam Insurance (
Santam’s net profit from 1961 to 1980.
Year | Net profit (South African rand) | Growth (%) | Consumer price index (%) |
---|---|---|---|
1961 | 133 660 | (34) | - |
1962 | 237 100 | 77 | - |
1963 | 515 000 | 117 | - |
1964 | 600 600 | 166 | - |
1965 | 601 000 | 0 | 3.32 |
1967 | 1 393 700 | 132 | - |
1968 | 1 446 800 | 4 | - |
1969 | 1 581 000 | 9 | - |
1970 |
1 352 100 | (14.4) | 5.26 |
1972 |
1 865 000 | 38 | - |
1973 |
2 926 800 | 57 | - |
1974 | 4 373 600 | 48 | - |
1975 | 4 327 300 | (1) | 12.28 |
1977 | 3 255 100 | (25) | - |
1980 | 6 774 300 | 108 | 15.84 |
Notes: From 1974, net profit after adjustments/tax provisions, including unappropriated profit. ‘Group profit’ is as presented in each of the annual financial statements of the relevant year as ownership structures and reporting requirements changed. Consumer price index (CPI): From 1960 onwards, the annual inflation by year for South Africa is shown comparing the December CPI, annually to the CPI of the previous year (Inflation data: Viewed 21 February 2017, from
Data set in brackets are values which are compared to the preceding year.
, Santam Bank Group consolidated financials only.
Santam Insurance entered a period of negative growth by 1975, yet by 1976, measured in terms of premium income, was ranked the largest short-term insurer in the Republic of South Africa. Net profit growth was corrected only in 1980 (
Santam did not acquire any branches of or foreign insurers during the ‘domestication’ transition. Therefore, it cannot be argued that Santam’s performance was the outcome of the acquisition of foreign insurers compelled to incorporate in the local market following local regulatory domestication. Instead, Santam introduced innovative insurance products such as the multiplex policy which escalated its performance phenomenally during the 1970s. The important indicators are highlighted in
Growth of Santam between 1961 and 1980 (in South African rand).
Year | Net profit before tax | General reserves | Assets | Gross premium | Net premium |
---|---|---|---|---|---|
1961 | 163 741 | 565 000 | 4 832 096 | Not applicable | 3 304 435 |
1965 | 601 000 | 800 000 | 7 933 800 | 6 388 000 | 4 482 000 |
1970 | 1 339 700 | 1 400 000 | 20 439 900 | 21 300 000 | 9 105 000 |
1975 | 4 327 300 | 1 400 000 | 51 546 300 | 47 586 000 | 40 877 000 |
1980 | 6 774 300 | 10 000 000 | 118 584 600 | 168 971 797 | 126 762 000 |
Annual compound growth rate (%) | 110.54 | 77.66 | 89.66 | 126.78 | 107.39 |
Notes: Gross premium was derived from Annual Reports to Registrar from 1965 to 1975, net premium 1980.
When South Africa became a Republic in 1961 and domestic policies of separate development sustained, a new phase commenced in the history of the South African insurance industry. The transition of this local market was consequently prompted by economic and regulatory intervention to domesticate the industry and internalise assets to achieve national stability and growth. The number of foreign short-term insurers declined from 90 in 1960 to only 1 in 1980 and all foreign assets furnished as security were consequently restricted to the Republic. The introduction of this form of regulation did not affect the industry performance (measured in terms of premium income, national income and contribution to GDP). Regulation as a market correcting instrument used by the state was in fact a response to market distortion brought about by its own domestic policies of separate development. The stability of performance of the short-term insurance sector, as well as the case of Santam, testifies to the soundness of the industry, both local and foreign firms. Regulation to secure domestication of the short-term insurance sector did not injure the industry but could have boosted the performance of traditional South African companies such as Santam and Mutual and Federal. This demonstrates the localisation of an industry formerly dominated by foreign insurers over a period of almost three decades. Domestication also ensured regulatory oversight, which contributed to the stable and sustained growth of the short-term insurance industry. Santam was exceptionally successful in translating later entry into strong growth and a leading industry position by the late 1980s.
The authors would like to thank Claudia Boffard for editing of the original thesis. The article is substantially derived from a thesis by Y. Hagedorn-Hansen ‘Transformation of the South African short-term industry: The case of Santam, 1918-2011’.
Prof. G Els is an author and also editor of JEF.
Y.H.-H. was the researcher of the original thesis from which this article is substantially derived. Y.H.-H. was also responsible for the first version of this article and substantial editing and additional research. Both G.V. and G.E. were co-supervisors of the original work and their involvement in this article included substantial subject-matter contribution, including editorial changes and overview.
Approval was provided by all three authors for publication of the final version of the article.
This article followed all ethical standards for research without direct contact with human or animal subjects.
A submission cost was covered by the Department of Accounting, University of Johannesburg, South Africa.
Data sharing is not applicable to this article as no new data were created or analysed in this study.
The views expressed in this article are the authors’ own and not an official position of the institution or funder.