Economic trends impact employee benefits

12 December 2007 RGA - Reinsurance Group of America

The current state of the local economy, with inflation not meeting Reserve Bank targets and the 400 basis point rise in interest rate since June 2006 has resulted in a certain degree of uncertainty with regard to the economic prospects of the country. While this has widespread effects across a number of sectors, the life industry can expect a likely rise in disability claims by employees should economic conditions worsen.

“South Africa has benefited from favourable economic factors and a positive political outlook over the last few years,” comments Conrad Backeberg, managing director, RGA Reinsurance Company of South Africa Limited. “This has meant that disability insurance business was profitable, and that insurance companies could afford to offer employees more generous terms and conditions, lower premium rates and high amounts of cover without medical tests. The risk of an economic downturn has always been present, and current economic trends tend to indicate a pending rise in unemployment. Higher interest rates will lead to an increase in bankruptcy as more consumers fail to make their increased loan repayments.”

International studies have shown that there is a close link between disability experience and unemployment rates, as well as the total number of bankruptcies. “This is largely due to the fact that employees tend to claim on disability and employee benefits due to a perceived lack of job security,” continues Backeberg. “It is therefore important for companies to ensure that they pay close attention to claims management during periods of economic uncertainty, as it is the only defense against increased disability and employee benefit claims.”

However, the outlook is not all doom-and-gloom. Consumer Confidence Index (CCI) figures released by First National Bank (FNB) and Stellenbosch University’s Bureau of Economic Research (BER) indicate that consumer confidence increased by 4 index points during the fourth quarter of 2007, from 18 to 22. As this figure is still relatively high by historical standards, economists are not overly concerned, which bodes well for disability experience, as it is not likely to deteriorate before the World Cup in 2010. There exists general uncertainty in the market as to what will happen to the South African economy after the World Cup, and this causes some caution amongst industry players about the prospects of disability experience after 2010.
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