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Policyholders and beneficiaries receive R458 billion in benefit payments from life insurers

14 September 2017 Hennie de Villiers, ASISA

Despite facing strong economic headwinds, South African life insurers honoured claims by policyholders and beneficiaries worth R458 billion in the year ended 30 June 2017. This represents a 9% increase in benefits paid when compared to the previous 12-month period. At the same time life insurers managed to grow assets by 2% to R2.7 trillion.

The long-term insurance industry statistics for the 12 months to 30 June 2017, released today by the Association for Savings and Investment South Africa (ASISA), show that industry assets continue to exceed liabilities by more than four times the legal reserve buffer required.

Hennie de Villiers, deputy chair of the ASISA Life and Risk Board Committee, comments that the industry remains in robust financial health and well positioned to honour future policy claims.

“Our industry exists primarily to help consumers insure against risks such as death, disability and critical illness and the certainty of a benefit payout from a life company is critical for consumer confidence. Our industry has demonstrated financial stability and resilience in a difficult environment, while at the same time consistently honouring benefit payments.”

In the 12 months to the end of June 2017, more than R57.4 billion was paid to individuals who had experienced death, disability or a severe illness in their family circle. This marks an increase in benefit payments of more than R7.5 billion from the previous 12 months to June 2016.

De Villiers highlights the significant increase of 21% in claims against individual disability policies in the 12 months to June 2017. “An unusually high increase in disability claims is usually indicative of consumers under severe strain. Financial stress leads to both mental and physical illness, which invariably results in higher disability claims.”

According to Statistics South Africa, there was a decline of 48 000 formal jobs in the first quarter of this year alone combined with a R19 billion drop in total earnings paid to employees over the same period.

De Villiers says fragile consumer confidence due to low economic growth, political turmoil and the risk of credit rating downgrades also reflected in the new premium income for the year ended 30 June 2017.

New premium inflows

Total new premium income for recurring and single premium business increased by only 2% to R151.3 billion at the end of June 2017 from the R148.8 billion collected to the end of June 2016. However, the number of total policies sold decreased by 12% from 8.7 million policies sold in the year ended June 2016 to 7.7 million policies sold in the 12 months to June 2017.

De Villiers says surprisingly, recurring premium savings policies and retirement annuities showed the most resilience and actually achieved growth in policy numbers.

He says the 11% increase in the number of recurring premium savings policies sold 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.

The number of recurring premium retirement annuities sold over the 12 month period to the end of June 2017 increased by a humble 2%.

He comments that all single premium business categories recorded a significant drop in new policies sold, which is a sure sign that consumers have adopted a wait and see approach.

In the 12 months to the end of June 2017 there was a decrease of 18% in the number of single premium living annuities sold, while compulsory annuities decreased by 37% and retirement annuities by 11%.

Surrenders and lapses

A policy is surrendered when the policyholder stops paying premiums for a policy that has accumulated a fund value. Policyholders often resort to surrendering their savings policies due to financial hardship. However, surrendering a policy is rarely in the long-term interest of the policyholder, because it is almost impossible to make up for the compound growth lost.

A policy is lapsed when the policyholder stops paying premiums for a risk policy that does not accumulate a value or for a savings policy or retirement annuity that has not yet grown a benefit. Policyholders tend to lapse policies when they can no longer afford the premiums.

The lapsing of a risk policy removes the financial risk protection buffer leaving the policyholder and beneficiaries financially vulnerable in case of a life-changing event like death or disability. Therefore, 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.

Policy surrenders

Individual policies worth R78.1 billion were surrendered in the year ended June 2017, compared to R74.6 billion in the year before. De Villiers says this represents an increase of 5% in the surrender rate, which is an encouraging drop from the 18% increase in the previous reporting period.

He says the value of surrendered policies should be seen in the context of the total value of in force policies - a large portion of the life industry’s R2.7 trillion assets.

Policy lapses

De Villiers says the lapse rate experience for first year policies is interesting in that lapses of risk policies and retirement annuities showed a strong decline of 12% and 34% respectively. First year savings policies, on the other hand, experienced an increase in lapses of 16%.

He points out that the lapse rate is strongly influenced by economic conditions as well as by financial advisers making sure that clients really need the products they are buying and that they can afford the premiums for the duration of the contract. The total overall decline of 26% in the lapse rate for first year policies, despite the financial pressure experienced by consumers, is an indication of the quality of advice provided by financial advisers to their clients in these difficult times.

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