Kudos to your favourite life insurer, again…

Clients and financial advisers who rely on life insurers for their risk protection, and livelihoods, can continue to breathe easy for now, as the county’s leading life insurers appear to be in the clear: their resilience confirmed in the latest industry update, courtesy the Association for Savings and Investment South Africa (ASISA). According to the association, its members’ collective sustainability is not in question, with one-and-all reportedly “in robust financial health and well capitalised to honour the long-term contractual promises made to customers”.

Maintaining double the reserve buffer

ASISA reported that on 30 June 2022, the life insurance industry held assets totalling ZARR3.51 trillion against liabilities of ZAR3.18 trillion, leaving the industry with free assets of ZAR335.8 billion, or more than double the reserve buffer indicated by the Solvency Capital Requirement (SCR). This is great news given recent outcomes of solvency related regulatory interventions in the medical schemes and non-life insurance sectors, with Constantia Insurance and Health Squared Medical Scheme on the skids. The double-the-reserve achievement should be viewed in light of the two-year-long impact of the 2020-21 COVID-19 pandemic on life insurers’ claims experiences; the investment return stresses introduced to all stakeholders by severe market volatility; and, of course, spiralling inflation. 

Hennie de Villiers, deputy chair of the ASISA Life and Risk Board Committee, said that this was the first time since 2020 that the industry’s collective reserve buffer had been this robust, adding that SCR was introduced to ensure that insurers were able pay claims and policy benefits “even in times of market turmoil and / or unusually high claims”. As it happens, the period 2020-22 delivered each of these scenarios ‘by the bucketload’. Nevertheless, ASISA members met claims and benefit payments totalling ZAR270.2 billion in the first half of 2022, including payments made to policyholders and beneficiaries for retirement annuity and endowment policy benefits as well as claims against life, disability, severe illness and income protection policies. “These payments would have been received by consumers following either a tragic life event like death or disability, or a life stage change like retirement,” explains De Villiers. 

Savings fares worse than risk

On the negative side, the latest statistics hint at a consumer segment under increasing strain. The ASISA long-term insurance statistics show that in stark contrast to the same period in 2021, consumers not only bought fewer risk policies in the first six months of 2022, but also lapsed a higher number of policies. A lapse occurs when the policyholder stops paying premiums for a risk policy with no accumulated fund value. The pandemic response of buying and retaining risk policies ‘at all costs’ thus appears to be easing. 

At the start of 2022 there were 34.3 million recurring premium risk policies (made up of life policies, funeral policies, credit life policies, disability policies, severe illness policies and income protection policies) in force. Six months hence the total had fallen to 34.2 million policies for a 0.1% decline. According to ASISA the period saw 4.4 million new risk policy sales, 4.3 million lapses, and almost 200000 policies submitted over the period. This lacklustre experience is best unpacked from an economic context, with consumers being lashed by inflation, unemployment and slower-than-expected economic growth post-pandemic. De Villiers points out that consumers have had to absorb unprecedented fuel price increases as well as higher food prices and rising interest rates in the first half of this year. 

Tough to pay premium when unemployed

At the same time, 64% of South Africans between the ages of 25 to 34 were unemployed, according to the Quarterly Labour Force Survey (QLFS) for the first quarter of 2022. “South Africans in this age group are meant to be economically active, and under normal circumstances should be concerned with buying risk cover to offer financial protection to  their growing families as well as cover credit purchases such as mortgage bonds,” says De Villiers. He added, however, that many of those who are employed are likely to be reluctant to commit to monthly premium payments while living costs are at an all-time high. 

The statistics also confirmed a marginal decline in the number of individual recurring premium savings policies, such as endowments and retirement annuities, from 5.75 million policies at the start of 2022 to 5.71 million at the end of June 2022. A downward trend is establishing, with 5.96 million in force recurring premium savings policies at the end of June last year. De Villiers noted that the number of policy surrenders remained a concern. While 293423 new policies were sold during the six-month period to the end of June 2022, 319318 policies were surrendered. A surrender occurs when the policyholder stops paying premiums and withdraws the fund value before maturity. It is commonplace for consumers to surrender their savings policies during tough times… 

Lapse risk policies as last resort

Lapsing risk policies should, however, be carefully weighed up. According to ASISA, long-term risk protection cover should be viewed as a valuable financial asset which becomes difficult (costly) to replace later in life. “If you are struggling to make ends meet, the temptation to let go of your life and / or disability cover can be overwhelming; but before you do, weigh up the expense of your monthly premium against the dire financial impact the loss of your income could have on your family,” De Villiers concluded. “Rather speak to your financial adviser or insurer first if you are struggling to keep up with premium payments.” 

Writer’s thoughts:

The life industry faces an ongoing battle to limit lapses and surrenders, yet millions of such events take place each year… What does the industry’s high lapse and surrender experience say about the financial needs analysis undertaken during policy sales, especially insofar as affordability? Are consumers seeking financial advice, and if they are, are they being correctly advised? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

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