As AIDS treatment in South Africa increases life expectancy, the funeral policy market can expect to see the development of new products which could boost South Africa’s gross household savings by as much as 15% and turn net household savings strongly positive.
This was a conclusion in a recent paper co-authored by independent researcher Marius Strydom, together with researchers from Stellenbosch University and Deloitte, which examines the impact of accelerated roll-out of antiretroviral treatment (ART) for South African life assurers, which will be presented on 23 October 2014 by the authors at the Actuarial Society of South Africa’s 2014 Convention, held in Cape Town.
Life expectancy in South Africa has risen in tandem with the successful roll-out of ART from a low of 54 years in 2003 to 61 years in 2012.
One of the factors driving this change has been the increase in ART eligibility threshold to 350 cells/μl in 2012 and the proposed increase to 500 cells/μl on 1 January 2015 which could drive life expectancy increases to 65 years over the next decade.
“All things being equal, the new business profitability on our model portfolio of funeral policies could be boosted by as much as 60% under our more aggressive mortality scenarios. Alternatively, a more aggressive mortality environment could offer funeral clients 29% more cover at the same premium,” says Carike Nel, consulting actuary at Deloitte, who together with Marius Strydom and Davy Corubolo, modelled the positive impact that changes in mortality outlook could have on the funeral market space in South Africa.
“We have seen an impressive increase in the number of patients in South Africa receiving ART, from below 50 000 in 2004 to more than 2.3 million in 2013,” says Marius Strydom, lead author and independent researcher.
“The government is committed to increasing its budget for ART, while at the same time the cost of ART is decreasing, which should continue growing the number of patients receiving treatment,” says Corubolo of the Department of Statistics and Actuarial Sciences at Stellenbosch University, who co-authored the paper.
“We believe that life insurers in South Africa are typically cautious in only allowing for mortality improvements once they manifest, and prefer not to anticipate improvements until there is sufficient evidence. This could mean that much of the impact of more aggressive ART roll-out is probably yet to be seen in life office results, pricing and product development,” Corubolo says.
The authors believe that their research indicates that an improved mortality environment could provide a boost to the funeral market, which could be shared by policyholders and shareholders.
The researchers also considered alternative policy designs to deliver the benefits of mortality improvements to policyholders, including funeral policies with sizeable cash-backs and funeral policies with surrender values.
“I am convinced that the more benign AIDS environment could lead to new policies in the South African funeral market and the wider entry-level market,” says Strydom.
“There is a potential for meaningful increase in entry-level sums assured and a strong pick-up in penetration levels in this space. The insurance gap for this segment could reduce from a high 55% to 42% under a more aggressive mortality environment.”
The researchers believe that there is an opportunity to design products that could encourage policyholders to maintain their payments. Low persistency in the funeral and entry-level space is one of the main stumbling blocks to offering better value for money to policyholders, but more aggressive marketing of policies with cash-backs and surrender values could help to turn this tide.
They also mention the positive impact that innovative product design could have on the savings rate in the South African entry-level space. Cash-backs on funeral policies could offer opportunities for reinvestment, while surrender values on funeral policies could directly boost the savings of policyholders. At the extreme, if mortality improvements were all ploughed back into savings products, South Africa’s gross household savings rate could increase by as much as 15% and turn net household savings strongly positive, according to the researchers.
“The entry-level space is ripe for positive developments,” Strydom says. “I also expect South African life offices to sustain high growth rates in this market space while maintaining margins. In addition, the economy as a whole will benefit from higher savings, higher consumption and less financial hardship due to the death of bread-winners.”
The full paper, “Accelerated ART roll-out – An investigation on the potential impact for SA life assurers” can be accessed at
http://www.actuarialsocietyconvention.org.za/assets/pdf/papers/2014%20ASSA%20Strydom.pdf.
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