Macroeconomic risks have chipped away at South African insurers' creditworthiness in the past few years, S&P Global Ratings notes.
In a report, the international credit rating agency says that insurers' operating environment could suffer if the South African economy deteriorated further. This could occur because of the sustained soft economic conditions, low disposable incomes, risk of rising lapse rates and high unemployment rates (29%).
S&P expects South African insurers' growth prospects to remain muted. Large players, which benefit from economies of scale and business portfolios diversified by product and geography, are better positioned to navigate the weak economic conditions.
Overall, S&P forecasts that the P& C and life sectors will both grow broadly in line with nominal GDP of 6.5% in 2020 and 6.6% in 2021.
Real investment yields remain low, with the risk of volatility increasing pressure on earnings. S&P therefore forecasts that the life sector's return on equity (ROE) will be 13%-15% in 2020 and 2021. For the P & C sector, S&P forecasts combined ratios of about 93%.
South African insurers write a significant proportion of their business domestically, and hold most of their assets locally.