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Clean bill of health for SA life industry

08 October 2013 Peter Dempsey, ASISA
Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa (ASISA)

Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa (ASISA)

Assets held by South African life insurers grew to R1.8 trillion in the first half of this year, representing a 5% increase from the R1.7 trillion held at the end of 2012.

Releasing the half-year statistics for the long-term insurance industry this week, Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa (ASISA), says the industry’s assets continue to exceed liabilities by more than triple the legal reserve buffer required by the Financial Services Board (FSB).

He points out that when considered against the International Financial Reporting Standards (IFRS) the life industry’s assets exceed liabilities by more than four times.

"This indicates that the industry remains healthy and well positioned to honour future benefit payments to policyholders,” explains Dempsey.

Premium Growth

In the first six months of this year consumers took out just over 5 million new individual risk and savings policies, paying monthly premiums of R8.6 billion.

Individual recurring (monthly premium) business typically consists of endowments and retirement annuity funds, as well as life, disability, dread disease and income protection policies.

Dempsey notes that recurring premium income for the period grew by 3% for risk policies, retirement annuities and endowment policies. Credit life policies, however, experienced a 23% decline in premium income in the first half of 2013, resulting in an overall 2% decline for total recurring premiums.

Single premium policies (investment policies, living annuities, compulsory annuities, retirement annuities), on the other hand, showed strong growth in the first half of this year. Consumers bought just over 95 000 single premium policies between January and June this year worth premiums of R39 billion. This represents a 13% growth in new single premiums.

Dempsey says total new premiums for the first six months of 2013 amounted to R47.5 billion, a healthy 10% increase over the R44.7 billion collected in the previous half year ended December 2012.

Benefit payments

Paying benefits to policyholders is the core business of the long-term insurance industry. Therefore, says Dempsey, a healthy increase in benefit payments is always good news for policyholders.
In the first half of this year the life industry paid R155 billion in benefits to policyholders, beneficiaries, and pension fund members as a result of death and disability claims, maturity pay-outs and pension, annuity and other payments. This is 27% more than was paid out in the second half of last year when total benefit payments amounted to R121 billion.

Dempsey points out that of the total benefits paid, R14.3 billion constituted death benefits paid to beneficiaries of individual and Group life cover. A total of R4 billion was paid in disability cover from individual policies and Group cover.

Surrenders and lapses

A policy is surrendered when the policyholder stops paying premiums and withdraws the fund value before maturity. Only savings and investment policies can be surrendered and the policyholder is then paid the fund value less any unrecovered costs.

The value of surrendered policies increased by 18% from R22.4 billion in the second half of 2012 to R26.4 billion in the first half of 2013.

Dempsey explains that the value of surrendered policies must be seen in the context of the total value of in force policies - a large portion of the life industry’s R1.8 trillion assets - and not just the new investment business written.

He says the increase in surrender values does not come as a surprise, given the state of the economy, the relentless increases in the fuel price and subsequently consumer goods, and job losses.

"While it is understandable that consumers will tap into their investments when they are no longer able to make ends meet, we need to caution policyholders against cashing in their policies unless this is a last resort since it is almost impossible to make up the value lost in later years.”

A lapse occurs when the policyholder stops paying premiums before the fund value exceeds the unrecovered costs meaning that the paid-up (or surrender) value is zero. In the case of pure risk policies, a lapse causes no immediate financial loss for the policyholder, as there was no policy value. The policyholder does, however, lose valuable life or disability cover, which might not be available at the same premium again.

Dempsey welcomed the decrease in the number of policies lapsed in the first half of this year. Between January and the end of June 2013 the total number of lapsed policies (risk, credit life and savings and investment policies) decreased by 8%.

He comments that this is likely to be linked to the decline in credit life business. "As soon as a consumer cancels a debt or defaults on credit repayments, the credit life cover falls away. This is then recorded as a lapse.”

The changing face of the industry

Dempsey says the half-yearly statistics show a definite trend towards linked policies.
"Over the last seven half-yearly reporting periods there has been a consistent shift towards linked policies, to the point where these policies now make up 47% of all policies.

"At the current rate of growth, we expect linked policies to exceed non-linked policies within the next year.”

The values of linked policies (new generation policies) are linked to the market value of their underlying investments and do not offer guarantees. As a result their cost structures are different from those of old generation policies.

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