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Retirement annuities lead the life industry charge

05 October 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

The world is in trouble. News from the US and Euro-zone is so depressing we fear tuning into the international news channels. It seems safer to view the Rugby World Cup and forget all about credit downgrades, debt ceilings and potential sovereign debt defaults. Thus far the rugby has proved a welcome distraction, but the turmoil on stock markets is never far from mind. Last I checked the JSE All Share index was down 6.8% year-to-date 30 September 2011 – and it looks increasingly likely the markets will end the year flat or slightly negative. What this means is the value of most local investors retirement savings will suffer another “hit” this year. Against this backdrop one would expect the life insurance industry to be suffering a dismal year. But it’s not all bad news...

Sales statistics for the long-term insurance industry, released 31 August 2011 by the Association for Savings and Investment South Africa (ASISA), suggest that the savings side of the business is progressing nicely. Local consumers committed to new recurring premiums worth an impressive R710.2 million over the first six months of the year. This represents a 22% increase in new recurring premium RA business compared to the previous half year (July to December 2010) and a 30% increase against the first half of 2010. It seems as if local savers have finally bought into the long-term saving concept, and are using their spare cash to bolster their retirement savings!

A well-established trend

“The substantial increase in new recurring RA premiums is a continuation of the surge experienced last year when consumers committed R1.1-billion in new recurring premiums to RAs, a 7% improvement on 2009,” said Peter Dempsey, deputy CEO of the organisation. Unfortunately single premium RA business couldn’t emulate this success. There was a 12% decline in such purchases in the six months to 30 June 2011. Why? There could be any number of reasons, including job losses and reduced year-end bonuses as companies cut costs to weather the slower than expected economic recovery.

Life insurers offer both savings and risk products. RAs fall into the former (savings) category while risk products provide cover for events such as death, disability and dread diseases. The latest figures, which for the first time separate new recurring premiums for savings and risk, show an 11% drop in new recurring premiums for risk policies. “We are now able to track trends specific to risk business and savings business,” observed Demspey. “We now know, for example, that 2.1-million new risk policies were sold in the first half of 2011, while consumers took out close to 252 000 new investment policies such as endowments.”

Mind the gap – shortfalls in both risk and savings remain

Financial advisers have their work cut out for them, because despite the volumes of new business policies written, South Africa is largely underinsured for death and disability. We are also frequently reminded of the inadequate state of retirement provisioning countrywide. In other words there are plenty of opportunities for intermediaries to sell life insurance products in both the risk and savings space. Independent research conducted for ASISA last year showed that the average South African income earner was underinsured by R600 000 in the event of death and by R900 000 in the event of disability. We’re talking about a massive insurance “gap”!

When the then Life Offices’ Association (LOA) first published this figure, in February 2008, they estimated that South Africans were underinsured by a staggering R10 trillion – a number that has since escalated to R18.4-trillion (by December 2010). Against this backdrop, Dempsey was disappointed by the latest risk sales statistics. “A drop in the sales of life and disability insurance is of grave concern,” he says. “Much work remains to ensure that more people get to benefit from the financial protection offered by life and disability cover.”

The insured (and his / her beneficiaries) don’t appreciate the “value” of life insurance death or disability products until an event occurs. In the first six months of 2011 the local life industry paid out benefits totalling R90.1-billion to policyholders, beneficiaries, and pension fund members as a result of death and disability claims, maturity pay-outs and pension, annuity and other payments.

An industry in good standing

A good measure of the “health” of the life insurance industry – and the general economy – is to consider policy surrenders, lapses and early terminations. A policy is surrendered when the policyholder stops paying premiums and withdraws the fund value before maturity – a move which always impacts negatively on the saver. The more people who voluntarily or involuntarily give up their covers the more cause for concern. Unfortunately the value of surrendered policies increased by 10% from R16.7-billion at the end of December 2010 to R18.4-billion at the end of June this year. Why the surge?

Dempsey says there could be several reasons for the increased surrender value, including a rise in Section 14 transfers (when a retirement annuity is transferred from one company to another it is recorded as a surrender) and better surrender values than in the past, because of good investment returns. The downward trend in the number of lapsed policies, down 4% in the first six months of 2011, is seen as a positive development. A lapse occurs when the policyholder stops paying premiums before the fund value exceeds the un-recovered costs, meaning that the paid-up (or surrender) value is zero!

Overall, the life industry remains in robust health. Total new premiums (recurring and single) showed an inflation-beating increase of 7% to R37.2-billion compared to the previous half year. At 30 June 2011 the life insurance industry’s total assets topped R1.33 trillion – well in excess of liabilities. Dempsey concluded: “The life industry remains in good health and well positioned to honour benefit payments due to policyholders.”

Editor’s thoughts: It seems the life industry impetus has swung from risk product to savings product… And in the savings space the impetus is on recurring premium rather than lump sum business. What is causing these shifts? And how has increased regulation affected the mix of your business in the life space? Please add your comment below, or send it to gareth@fanews.co.za

Comments

Added by John Slyer, 05 Oct 2011
I think that the public has bought into the erroneous statements that it is cheaper to buy assurance "direct", but because it is a grudge purchase, they don't get round to implementing it themselves.
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