Not just Stanlib: Exit of the rich is hurting Discovery too

It really is rather remarkable that the CEO of Stanlib, Derrick Msibi, publicly vocalised what many business executives in the country are privately discussing.

In a wide-ranging interview with Business Day, he said the emigration of rich South Africans is “one of the reasons” the industry will “in the next two to three years face more headwinds than tailwinds”.

The latest Henley & Partners Wealth Migration Report states that approximately 400 high-net-worth individuals (worth $1 million or more) emigrated last year. Another 500 will leave this year.

It’s not just the very wealthy who are leaving. Households that many readers of this site would consider “middle class” – but are actually ‘rich’ (just not ultra wealthy!) – are also heading for the exits.

These are the people flooding neighbourhood groups on Facebook with their ‘urgent’ emigration sales. They typically live in properties worth somewhere between R3 million and R5 million. Kids are in private schools. You know the type.

South African Revenue Service (Sars) data shows that over 40 000 taxpayers have ended their tax residency in the last five years.

A UN report estimates that around 128 000 people left the country over that same period.

Read/listen: Spike in HNWIs interested in leaving SA

The impact isn’t only confined to investment managers. Any business targeting the well-off in the country is taking strain. Speak to any restaurateur in a ‘rich’ area, and they’ll volunteer how tough business is. Luxury car dealerships still do brisk business catering to tenderpreneurs, but not much else. Private school operators, even specialised bicycle shops, are feeling the pinch.

Impact on Discovery

This trend will surely go some way to explaining the stark declines in the number of members and beneficiaries on Discovery Health’s highest-end medical aid plans. Moneyweb has reported on this trend for a number of years now.

The Executive plan, for which principal members currently contribute a total of R9 122 per month, has lost a full third of principal members and over 44% of beneficiaries over the last decade. When comparing the first five years (2012 to 2017) with the last five years (2017 to 2022), the rate of decline has practically doubled.

The number of principal members dropped 13.4% in the first half of the decade, and 26% in the second half.

The actual numbers are sizeable (around 15 000 beneficiaries), but this is a segment of the market that is not at all price sensitive, i.e. they won’t be downgrading plans or shifting to an alternative provider.

One could, therefore, reasonably assume that the majority of the decline in this base is down to emigration (with the rest due to mortality).

The trend extends into the next-most-pricey set of plans in the Comprehensive series (total contributions for main members range from around R6 300 to R7 500 per month).

Here, the number of members and beneficiaries is down by a greater percentage. One could reasonably argue that some of the declines in these plans would be due to members downgrading, and there is likely a larger percentage of mortality in the base (the number of members older than 65 is greater than 30% on the Executive and Essential Comprehensive plans).

However, it is almost certain that a significant portion of the declines (possibly the majority) would be because of emigration.

The peculiar ‘benefit’ to the Discovery Health Medical Scheme (DHMS) is that, on average, members of these plans tend to use a greater amount of healthcare than they pay for.

For example, on the Executive plan, the average risk contribution per main member last year was R9 800. But the average member had average “relevant healthcare expenses” of nearly R12 800.

The loss ratio on this plan was 130%, while on the two Comprehensive plans (not including the newly launched Smart version), this ratio was 109% and 106%, respectively.

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These losses exist in DHMS, though overall the scheme has a loss ratio of 92.9%, with the difference between this and 100% (i.e. full utilisation) contributing to the scheme’s excess reserves.

Discovery Health, the administrator, still gets paid R400.50 in administration costs per main member and roughly R200 per beneficiary.

For every individual or household that emigrates, Discovery (the listed entity) loses that administration fee.

It also loses revenue – and profits! – on every additional product that an individual or household has across its ecosystem. Think car insurance, household insurance, life insurance, retirement annuities, and bank accounts.

Beyond Discovery, what of other banks that have successful private banking operations?

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