A slow return to confidence in the life insurance industry

Gareth Stokes, FAnews Online Editor

Life insurance companies have survived a torrid 24-month period. Fair value adjustments wreaked havoc on income statements as investments fell through 2008 and the first quarter of 2009. Since then improving share prices have helped rebuild the confidence of a shattered industry. Ernst & Young says the latest survey of confidence in the industry rose to 71 points in Q4 2009 from 58 points in Q3. This was the 26th quarterly survey measuring confidence in the life insurance industry. The survey is conducted by the Bureau for Economic Research in Stellenbosch.

Tim Rutherford, Ernst and Young’s Life Insurance sector spokesperson notes that “Life insurance confidence has improved throughout 2009, despite a weak economy and struggling consumer expenditure.” Gains in confidence were largely led by revived equity markets that improved insurers’ income levels.

Major trends in domestic life insurance environment

The survey highlighted five trends in the domestic life insurance space. The first was a sharp contraction in investment product inflows. There could be a number of reasons for this including the possibility investors now favour retirement products in the collective investments space. A second trend was a continuing decline in risk contract profitability. Insurers aren’t making as much from risk business as in previous years. The third disappointing result from the survey was continued contractions in new business premium growth. On the plus side the survey pointed to an improvement in laps and termination rates and sustained low surrenders!

Ernst & Young observes that improvements in investment income offset the impact of the contracting premium income trends and deteriorating risk contract profitability. Life insurers reported improvements in net profit losses in the fourth quarter. “Net profits continue to decline, and have been doing so for five successive quarters, with the expectation that profits will still continue contracting into the new year, despite the renewed investment income growth,” said Rutherford. He believes insurers will be more concerned with premium growth than investment income in the coming year.

Fighting ‘sticky’ inflation

With the income picture looking gloomy insurers have had to turn to the operational expense side of their businesses for respite. Ernst & Young says insurance industry expenses have been ‘sticky’ through 2009. Sales remuneration is down on declining premium inflows, but administration; marketing and employee expenses have remained high!

“A few successive quarters of revenue slowdown before changes to the operational cost-base are made,” said Rutherford. Insurers have simply not scaled down their operations in response to slower business as yet. “In the case of asset managers and banks, slowing revenue typically resulted in a slowdown in costs six months later.” The situation is slightly different in the insurance sector because slowing premium income has partly been offset by rising investment income.

Insurance company cash flows remain healthy. According to the survey 2009 was the first year since 2003 in which benefit payouts contracted. The trend has exhibited in each of the quarter last year. Says Rutherford, “this helped offset the contraction in inflows during the quarter…”

A slow recovery

Rutherford concludes: “Although life insurers are not yet growing profits, their bottom-line profits appear healthier than they have for a while. Slowing premiums and reduced risk contract profitability appear to be the main challenges for life insurers. In addition high lapses, terminations and surrenders are also less of a concern than they have been through 2009, although these typically prove difficult to remedy and sustain.”

Editor’s thoughts: The report suggests insurance companies are struggling for new business, but fails to mention the tremendous pressures facing domestic consumers. South Africa’s are swamped by debt – and with promises of huge increases in administered prices through 2010 and 2011 their short-term prospects are not good! Do you expect a significant improvement in life industry business through 2010? Add your comments below, or send them to gareth@fanews.co.za