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Agents losing power?

26 April 2006 Angelo Coppola

Here is a technical response to the LOA restatement of RA premiums, highlights and interesting changes on who is moving RAs.

Yesterday we ran a newsletter on the restatement of the numbers around single premium RAs. Well, one industry analyst provided insight into what the issues are.

It appears that there may not be any need to restate earnings, due to the accounting treatment of investment products, under which most RAs are classified for IFRS purposes.

There is no impact on total sales but it is quite material for APE. For those like me APE means Annualised Premium Equivalent, and is also known as API or Annualised Premium Income.

Our source tells us that its equal to annualised recurring premiums and 10% of single premiums.

Impact
The error has no impact on the total premium income and the correction just requires a transfer from recurring premiums to single premiums. But there is an impact on industry wide sales figures when measured on the more commonly used APE measure.

As an example, there is a transfer of R71m from recurring premiums to single premiums in the second half of 2005. When measured as APE, this leads to a R64m reduction in APE (the APE is now R7.1m vs. R71m).

It is interesting to note that the adjustment relates only to agent new business. So if one analyses the industry by distribution channel (broker vs. agent vs. other), the share of business flowing through agents is now quite a bit lower than under the original numbers.

Our source says that they calculate that, using APE excluding premium increases, the 2005 industry new business can now be split 58% brokers, 38% agents and 4% other.

The impact on RA sales is noticeable. Originally the RP new business on RAs was stated as R1.586m, which would have been a modest improvement from 2004. The restated recurring premium new business volume is R1.297m which is a 15% decline against 2004.

He also mentions that the 5% decline that is referred to in the news release relates to new business including premium increases on existing business.

Editors thoughts:
While this newsletter may be a little technical, it does highlight a couple of issues:
1. Actuaries and accountants are human and occasionally get it wrong.
2. Statistics are a wonderful thing and can hide a myriad of myths in plain sight.
3. The RA business appears to be changing.

Quick Polls

QUESTION

Do you believe this is the toughest period for financial advice in many years?

ANSWER

Yes, it’s hard to navigate the challenges and difficult to adapt. I’m struggling.
No, I have managed to navigate the challenges and have adapted. I’m good.
50/50. I just feel like whether we like it or not, we have to ready ourselves for change… be resilient and scale for the future. It’s not about survival of the fittest anymore but survival of the quickest. We just have to move on with life.
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