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Long term industry recovers

23 March 2004 Angelo Coppola

The registrar of Long-Term insurance has just released his annual report for 2002, yes 2002.

Regarding the long-term insurance industry, net premium income for primary insurers increased by 16.6% during 2002, compared to an adjusted figure of 1.5% during 2001.

The adjustments made in 2001 were due to numerous financial year-end changes by insurance companies.

Products offered by life insurers are becoming increasingly more sophisticated, providing specific solutions to specific client segments.

Benefit payments increased by 23.8% compared to an adjusted figure of 12.6% for 2001. The major contributing factor to the increase in the benefits during 2002 was surrenders. Lower investment returns contributed to the higher increase in surrenders.

The excess of income over expenditure for primary insurers declined from R51.3 billion in 2000 to R15.6 billion in 2002. Assets showed a marginal decrease of 0.7%.

The decrease in the assets of primary insurers was mainly due to the strengthening of the rand and lower equity markets.

The ratio of assets to liabilities for primary insurers declined from 1.23 in 1999 to 1.10 in 2002.

Long-term insurers continue to deal with many issues on different fronts. Critical to the enhancing of public confidence in this industry are transparency and disclosure, fair dealing, handling of consumers' complaints and consumer education.

The industry is making a concerted effort to deal with these issues in terms of its broader role in society. Dealing with the HIV/AIDS pandemic remains an important challenge, especially retaining the right to underwrite.

Various issues are still occupying the programmes of international bodies, especially those of the Financial Stability Forum. The insurance related issues, some of which are already pertinent to South Africa, are:

*Monitoring the movements in asset prices and effects thereof on balance sheets. Specific mention is made of increasing "back-up in bond yields".

*The greater transparency in the reinsurance sector is to be welcomed.

*Information gaps still exist with regard to credit risk transfers. Stock must be taken of institutional participation and supervisory information needs.

*International coherence in the critical corporate governance areas is supported. Auditor oversight, audit and accounting practice standards and conflicts of interest related to rating agencies and financial analysts are mentioned.

*Exposures to health related risks, e.g. asbestos and officers and directors’ liability insurance is a cause of concern.

*Capacity to deal with large-scale disasters.

*The lower interest rate environment and interest related guarantees.

*Different types of off-balance sheet financing and Special Purpose Vehicles.

*Newly licensed insurers are in a position to adjust their products to the new environment but existing insurers find it more difficult having existing policies on their books.

*Effects of proposed international accounting standards on the fair value calculation of specific assets and liabilities and other related issues.

The effective management of capital remains increasingly important to all insurers, with many adopting new and innovative ways of improving the management of their capital.

Internationally many firms' balance sheets are under pressure, with falling solvency levels focusing attention on optimising the allocation of capital across business activities.

Catering for the different needs of the different social strata, while allocating resources and capital to sustain development in the face of challenges of other product providers, would remain of the utmost importance.

Corporate governance is receiving the necessary attention by boards of directors and the challenge is the implementation thereof in a sustainable and effective way.

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