According to a new report by specialist risk consultancy, Control Risks, one of the primary threats South Africa will face in 2011 is difficulty in encouraging foreign direct investment. Dave Butler, MD for Southern and Eastern Africa, comments: “This is due to both the global downturn as well as systemic domestic constraints such as infrastructure and human-capital shortcomings. In addition, the rand’s exposure to commodity-price and wider global volatility, as well as the current-account deficit, remain fundamental challenges for macro-economic management. A further hazard is our regulatory burden, as several new laws in the pipeline will add to the costs and risks of doing business in South Africa.”
This is cause for concern. Although South African fiscal policy encourages foreign companies to use South Africa as a base from which to expand into Africa, stronger differentiators need to be created in terms of our regulatory environment if we hope to see any significant improvement in our FDI levels – particularly when it comes to the insurance industry.
A fusion of increasing economic prosperity, favourable demographics and increasing consumer awareness has led to the emerging markets of Asia exerting ever greater influence on the global insurance industry. Economists are beginning to advise that companies without a significant exposure to Asia over the next decade may find themselves at a competitive disadvantage. As the Indian life insurance market is one of the fastest growing emerging markets in Asia, we need to ask ourselves what we are doing to attract investors away from the subcontinent.
The similarities between India and Africa are many, including the size of their populations (India – approximately 1,2 billion, Africa – approximately 1 billion), a high number of unbanked people, a low proportion of insured people, many families reliant on one source of income, a burgeoning middle class with disposable income and growing urbanisation.
Some of these issues, such as urbanisation, are resulting in an increase in health problems. In both regions, government facilities provide relatively basic health care and consumers are beginning to look for alternatives. A recent Deloitte study into the Indian insurance market notes that insurance companies looking to move into the health insurance market should be aware that specialist expertise is required given the high level of fraud, lack of credible data for pricing and the need to build trust with consumers who may be sceptical about companies paying out in the event of a claim.
Life insurance in India, like South Africa, has immense scope for growth due to the current low levels of penetration, an increasingly young population, rising disposable income in urban areas and greater awareness about insurance in these areas.
While, unlike India, South Africa has not placed any restrictions on inward investment, regulatory bodies (such as SARB and SARS) monitor debt-to-equity ratios for inbound investment. Our tax compliance burden is perceived to be greater than India. In addition, our regulatory environment is not necessarily globally aligned, with investors needing to be compliant with international reporting requirements as well as the specific requirements of SARS, the FSB and SAM (Solvency Assessment Management). Further regulation for the insurance market will come into being in 2012 for short-term insurers, and in 2014 for long-term insurers. This may mean that international investors will have to keep four sets of accounts.
Business and government are aware that India is a competitor, but our concern is that this has not led to South Africa differentiating itself in a meaningful way. Our level of compliance and our tax concessions are important features of our business landscape, however we must ensure that our regulations do not make us uncompetitive.