Life insurers’ recurring premium business up as consumers opt for tax free savings

22 March 2017 Hennie de Villiers, ASISA

South African life insurers reported strong growth of 38% in recurring premium savings business for last year. This business consists almost exclusively of endowment policies, designed to encourage disciplined savings on a monthly basis for a fixed term.

The 2016 long-term insurance industry statistics released today by the Association for Savings and Investment South Africa (ASISA) show that consumers bought 775 956 recurring premium saving policies last year, compared to 560 717 in 2015.

Hennie de Villiers, deputy chair of the ASISA Life and Risk Board Committee, comments that this increase is most likely driven by consumer demand for the tax free savings and investment products launched in March 2015.

Tax free savings and investment products were introduced to encourage South Africans to become long-term savers. Individuals may invest up to R33 000 a year and R500 000 in a lifetime, free of capital gains, income and dividends tax.

De Villiers says unfortunately another year of tough economic conditions for consumers resulted in slow growth for all other savings and investment products in the long-term insurance space.

“In 2016, both recurring and single premium retirement annuity business slowed. We also noticed a suppressed take up of living and compulsory annuities, which could partly be due to the increase in the de minimis threshold in March last year,” he adds.

In terms of the “de minimis rule” retirement fund members may take in full proceeds that fall below the threshold of R247 500. The threshold increased from R75 000 in March 2016.

Consumers prioritise risk protection

The good news is, however, that despite financial hardship, consumers are making an effort to close their insurance gap, which is the difference between actual risk cover in place and the insurance need.

The 2016 Life and Disability Insurance Gap Study, conducted by ASISA in partnership with True South Actuaries & Consultants, indicates an insurance gap of R2.1 million for the average South African earner.

De Villiers says recurring premium risk business showed strong growth of 9% in 2016. Consumers took out 5.2 million new individual risk policies to cover events such as death, disability and dread disease, compared to 4.8 million risk policies in 2015.

He comments that the 7% drop in the first year policy lapse rate also highlights that consumers are serious about increasing their risk protection cover.

A lapse occurs when the policyholder stops paying premiums, usually for a risk policy. Unlike policy surrenders, the lapsing of a risk policy does not result in the destruction of a policy value. It does, however, remove the financial risk protection buffer leaving the policyholder and beneficiaries financially vulnerable in case of a life-changing event like death or disability.

De Villiers points out that the immediate benefit of saving the monthly premium by lapsing the policy comes at the cost of an asset in the future, namely the policy payout.

Total benefit payments up 4%

South African life insurers injected R429.3 billion into the economy last year through benefit payments to policyholders and beneficiaries. This is 4% more than in 2015, when total benefit payments amounted to R R412.2 billion.

“While for many consumers these benefit payments would have come at a time of planned financial need like retirement, others received the benefit payments following an unplanned traumatic event like death or disability,” explains De Villiers.

Of the total individual benefit payments to policyholders in 2016, more than R38 billion was paid to individuals who had experienced either death or disability in their family circle. This marks an increase of almost R5 billion from 2015.

However, he adds, some policyholders accessed their benefits by surrendering their savings policies, many out of desperation due to financial hardship.

Life insurers reported an increase of 16% in the surrender value of individual savings policies from R68.9 billion in 2015 to R79.8 billion in 2016. A policy is surrendered when the policyholder stops paying premiums and withdraws the fund value before maturity.

“Whatever the reason for the benefit payments made to consumers, the reality is that there was a risk or savings policy that provided a financial back-up to these South Africans when they most needed it.”

A strongly capitalised industry

As the custodian of a significant portion of the country’s long-term savings pool, the financial stability of the country’s long-term insurance industry is of critical importance, says De Villiers.

The life insurance industry held assets of R2.63 trillion at the end of 2016, which represents a 2% increase from the R2.58 trillion at the end of 2015.

De Villiers notes that in 2016 long-term insurance industry assets exceeded liabilities by more than four times the legal reserve buffer required, which means that South African life insurers remain strongly capitalised for the long-term.

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