Life Insurance Sector Shrugs off Volatile Equity Markets and Rising Interest Rates

The latest Ernst & Young Insurance index shows that life insurance confidence remained at the maximum level in the fourth quarter of 2007. This strong confidence was measured despite slower premium and investment income growth. Even so, despite the tapering off in growth, both categories of income remain nevertheless, strong.

This is the 18th quarterly survey conducted to measure confidence in the life insurance industry. Life insurance confidence leads that of the banking industry (96 points), and investment management confidence (98 index points). Comments Tim Rutherford, insurance industry spokesperson at Ernst & Young; ‘The perception of an industry under siege has passed. Life insurers fared well in 2007, and we expect the reporting season for the year to be solid. The interim results for the half-year to June were already buoyant, and indications are that operations were generally in better shape in the second half of 2007 for most life insurers.’

Continues Tim Rutherford, ‘ Investment income remained strong in the fourth quarter. This is despite more volatile equity markets, and is reflective of strong investment income stemming from commercial and retail property rentals, higher interest income earnings, and other realisations on investments.’

‘However’, cautions Rutherford, ‘ Life insurers are not expecting the strong investment returns to hold into 2008. The outlook is that investment income will contract in the first quarter of the year, and although they have proved to be pessimistic about investment income earnings, it is most likely that investment income growth will at least taper sharply downwards in the quarters ahead.’

Net Profit after Taxes

Also supporting higher confidence is:
* an improvement in lapse rates,
* continued improvements in efficiencies,
* a stemming in outflows from the life book, and
* improving risk profitability business.

Comments Tim Rutherford again, ‘ Operationally, the life insurers have been working at improving their processes and ways of conducting business. This has happened over a number of years, and is an ongoing exercise. I think we are starting to see the benefits from those projects paying off. Life insurers have not been alone as far as restructuring their businesses, but they probably felt the pressure more readily than most other industries. A few years back, they faced a contracting life book, squeezed profitability on the remaining business, and increasing costs of doing business.’

Continues Rutherford, ‘ It appears that the life book is at the very least not contracting any longer, with growth in inflows exceeding that of outflows for the last three quarters. Whilst it is too early to draw any definite conclusions, it appears that the life book is at least holding stable, after contracting considerably in 2003 and 2004, and more moderately into 2005 and 2006.’

Other findings include a fall in the lapse rate. The overall trend is one of improvement made in reducing lapse rates. Says Rutherford again, ‘ This is one of the areas where life insurers have placed a lot of emphasis on improving. In the past, rising premium income was often offset by sharply increasing lapse rates. Considerable effort has been made to ensure that a larger portion of new premium income was retained by reducing lapses post the sale.

Efficiencies have consistently improved over the last few years, despite higher employee numbers. Rutherford points out that it has been necessary to grow employee numbers to cope with higher capacity requirements. However, he adds that unlike the banking and investment management sectors, employee growth trends at life insurers have been more erratic. This is most probably due to the aforementioned restructuring of business processes and operations that the industry has experienced.

Concludes Rutherford; ‘In line with the other financial services sectors, life insurance industry confidence remains high. In fact, life insurance confidence is the highest of all the financial services sectors. Life insurers are not as prone to interest rate increases and volatile equity markets as immediately as their banking and investment management peers, respectively are. However, slower consumer expenditure is likely to ultimately impact the retail side of their business, particularly in new market segments, where life insurers are playing more and more. For the moment, however, they are benefiting from business restructuring and process re-design. Despite slower profits and premium growth, both remain at high levels.‘