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Well positioned life sector consolidates its position

17 September 2014 Jonathan Faurie
Jonathan Faurie, FAnews Journalist

Jonathan Faurie, FAnews Journalist

Since the global financial crisis, there has been a certain measure of concern within the financial services industry over the decreased ability of insurers to generate new business.

When people are struggling with inflation, and in some cases struggling to make ends meet, the last thing on their minds is buying insurance. In fact for many people, insurance is seen as a grudge purchase. However, despite these challenges, capitalisation of the South African life industry is increasing at a steady rate.

Beating the reserve buffer

Research by the Association of Savings and Investment South Africa (ASISA) shows that the South African life insurance industry remains well positioned to honour future benefit payments to policyholders with assets exceeding liabilities by nearly three times the required legal reserve buffer.

After releasing the sales statistics for the South African long-term insurance industry for the first half of 2014, Peter Dempsey, Deputy Chief Executive Officer (CEO) of ASISA, mentioned that the industry held assets of close to R2.1 trillion as at 30 June 2014. This represents an increase of 7% from the R2 trillion in assets held at the end of 2013.

The portion of total assets held in cash remained at a historic low of 8%, which shows that policyholders prefer equity exposure for their life linked investment policies. “The proportion of assets held in equities has steadily increased since December 2008, when the equity portion of assets stood at 42%, to the present level of 65% of total assets,” says Dempsey.

He added that a similar trend has emerged in the Collective Investment Scheme (CIS) industry where five years ago, at the end of June 2009, 48% of assets under management were still concentrated in South African Interest Bearing portfolios. By the end of June this year the percentage of assets in the South African Interest Bearing category had reduced to 28%.

New premium inflows

In the first half of this year, to the end of June, the life industry attracted total new premium income - recurring and single premiums - of R56.3 billion, which represents a slight decrease of 1.8% from the second half of 2013. This was due to the continuous slowing in new recurring premium business.

Growth in single premium policies - investment policies, living annuities, compulsory annuities and retirement annuities - was flat with a slight increase of 0.2% to R47.8 billion in new premiums in the first half of this year. Single premium investments continue to make up the bulk of new premium income.

Dempsey noted that the reduction in recurring premium business and the slowing of single premium inflows is not surprising given the subdued domestic economic conditions experienced in the first half of 2014.

“Economic activity in South Africa contracted in the first half of this year and inflationary pressures intensified as petrol and food prices increased significantly. This put further pressure on already over-indebted households.”

Surrenders and lapses

Dempsey further adds that despite tough economic conditions and financial hardship experienced by many consumers, there was a decrease of 5% from R28.5 billion to R27.2 billion in the surrender value of individual savings policies in the first six months of this year.

“Considering that strong markets resulted in high investment returns on average in the first half of this year, the drop in surrender values indicates that fewer policyholder opted to cash in their policies.”

In addition he says, “the decrease in lapsed policies for the first six months of this year was encouraging. A lapse occurs when the policyholder stops paying premiums for a savings policy before the fund value exceeds the unrecovered costs meaning that the value is zero.”

The number of lapsed policies decreased by 8% from 1.7 million policies in the last half of 2013 to 1.6 million policies in the first six months of this year. While new recurring premiums for the 12 months ended 30 June 2014 amounted to R18 billion, first year premiums worth R1.8 billion were lapsed.

Benefit payments

In the first half of this year the life industry paid R159.9 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 1% less than what was paid out in the second half of last year when total benefit payments amounted to R161.5 billion.

“Of the total benefits paid, R20.2 billion constituted death and disability benefits paid to policyholders as well as beneficiaries of individual and Group life cover,” concludes Dempsey.

Editor’s Thoughts:
ASISA has identified the need for the life industry to improve it’s capitalisation in order to achieve financial stability in the country. Do you feel that this will be achieved or can more be done? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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