Insurance and financial wellness becomes important in current economic conditions

Jonathan Faurie, FAnews Journalist

We have focused a lot on the state of the retirement industry and the growing movement towards incorporating revenue generated from assets into a retirement pay out once one does retire. This is being driven by a few factors which includes smart investors

Two of the more typical asset focused investment vehicles are property and bonds. And while this can be seen as a smart investment, as it generates passive income, there are some significant short term risks which investors need to be aware of.

Listed Property is a short term risk

Highly risk-averse investors should be cautious of local listed property as prices can be volatile and the sector is expensive on a short-term view. However, listed property retains a compelling investment case for long-term, income-seeking investors looking for a growing income stream.

Evan Robins, senior portfolio manager at Old Mutual Investment Group, MacroSolutions says that while the sector has certainly fallen from its highs in May, it has gotten off relatively lightly on the whole, considering the level of increase in bond yields.

As bond yields have corrected from expensive recent levels, this has reduced a key risk to listed property which was vulnerable to such a correction. However, Robins expressed surprise that property had not reacted more severely to the bond market correction. “This cannot be explained by fundamentals as these did not improve, nor can it be ascribed to inflation concerns as property also became more expensive in comparison to inflation-linked bonds,” he explains. ”If property had reacted fully in line with bonds, the sector would have fallen an additional 10%.” A significant question is whether we now have a new spread level between bonds and property, or whether the current situation is an aberration.”

This suggests that while there is short term risk, there is growth in the market which is being driven by US and Chinese growth. So if one is active in the sector for a significant length of time, the short term risk should be mitigated.

Financial unwellness plaguing society

This assuming that your household is financially well. According to the latest Momentum South African Household Financial Wellness Index, more South African households are financially unwell in 2012 when compared to 2011.

Mark van der Watt, CEO of Momentum Retail, said the point of the dynamic wellness index is to measure the state of the nation’s financial wellness on a year over year basis and for the research to influence policy maker decisions and effect individual behaviour changes. After all, the financial wellness of the government, private companies and other organisations to a large degree, is dependent on the financial wellness of individuals and households.

Professor Bernadene de Clercq, head of the Personal Finance Research Unit at UNISA, said the 2012-results reveal that large numbers of households moved from being Drifting Unwell to Anchored Unwell and from Anchored Well to Drifting Well. Some 5.6% of households were Anchored Unwell in 2012 compared to 4.5% in 2011 – this translates into a net downward movement of approximately 164 000 households. Similarly, on a net basis some 112000 households moved from being Anchored Well to Drifting Well, meaning that only 26.4% of households were Anchored Well in 2012 compared to 27.2% in 2011.

Many factors contributed to South African households on average becoming more financially unwell in 2012. On the macroeconomic front, De Clercq said the struggling international economic environment had a negative impact on South Africa’s ability to generate faster economic growth from production. Coupled with a number of South African home grown problems, low economic growth negatively affected households’ ability to earn an income from employment. She says a comparison with 2011 clearly shows that the economy - shaped by current policies and an uncertain international economic environment - will not create the desired jobs and income required to improve the physical capital of households.

Affects insurance and financial wellness industries

While you may be sitting back and asking, “What does the above information have to do with brokers and investors?” you may not realize that it affects the industry more than meets the eye.

A somewhat sobering statistic which was released by momentum was that for every four jobs that are created in the industry, the number of unemployed people in society increased by 12 people. This is significant because unemployed people do not have spending power and cannot afford life insurance, retirement funds, medical aid and hospital plans. While it is a necessity to most, it is a luxury to these people.

These people then depend on children or other family members to support them, this puts significant pressure on another household which then also views products within the insurance and financial wellness industries as luxury items.

Editor’s Thoughts:
Although this paints somewhat of a conflicting picture of the South African economic market, it is a realistic picture. The property market is recovering, however it is a slow recovery which carries risk in the immediate future. And the need to protect the financial wellbeing of your household is becoming ever more important.

Perhaps now, more than ever, is the time for the public to look towards the insurance and financial wellness industries to secure the future. The role of the adviser and broker becomes extremely important as there is an opportunity to increase sales in long term investment vehicles which will give prudent investors access to capital when it is most needed. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughtsjonathan@fanews.co.za.