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Category Life Insurance

Life insurers feel the pinch as recession tightens

07 July 2009 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

Declining demand has settled like a cold frost over the so-called ‘green shoots of recovery’ in recent weeks, sending investors diving for cover. Share prices on stock exchanges around the globe have given up ground on the back of poor US job numbers and falling oil prices. What does this mean for South Africa? Most of us – with the exception of a few trade unions in the mining and construction sectors – realise that the technical recession signalled in Q1 2009 is going to bite deeper and last longer than previously imagined.

How poor is the economic outlook? According to BoE Private Clients’ provincial barometers – which measure levels of business activity in four of the country’s nine provinces – business activity in South Africa plummeted in May 2009, with the financial services and manufacturing sectors hardest hit. Business activity in the country’s powerhouse province, Gauteng, was 16% lower year-on-year to May 2009, with the Free State (-8.4%) and the Western Cape (-7.8%) not far behind. The Eastern Cape business activity barometer recorded a massive 18.2% slowdown over the same period. Economist Mike Schussler, who helped devise these measures of provincial economic strength, says the May 2009 numbers were disappointing, and that we’ll have to wait another month or two before the business cycle turns.

Has the financial services sector seen the worst?

One way to assess the impact of softer business conditions on the financial services environment is to unpack the latest Ernst & Young Financial Services Index. The quarterly survey is conducted by the Bureau for Economic Research (BER) in Stellenbosch and attempts to “measure the performance of the banking; investment management and life assurance sectors.” Results from the Ernst & Young Life Insurance Index, 2nd quarter 2009, were released on Monday, 06 July 2009.

Confidence in the life assurance space remains virtually unchanged from the 50 points measured in Q1 2009, and significantly below the 100 points recorded through the latter half of 2007 and early 2008. Confidence in the life industry sector has held up better than other sectors like banks. According to Tim Rutherford, insurance industry spokesperson at Ernst & Young; “the fundamentals for life insurers have not changed much in the 2nd quarter of 2009.” Even so, “weak investment income” remained of concern across the financial services sector. “Despite greater stability in global financial markets, investment income continues to fall,” said Rutherford. Lower interest rates, which form part of the raft of anti-recession monetary policy interventions, have significantly reduced interest earnings. The result is a third successive decline in quarterly insurance company earnings.

Interest rate developments could put a damper on life insurance earnings for the balance of the year. Rutherford notes that “those companies that may have scored from having a low portfolio of listed equities last year will now be faced with income contractions, given the low interest rates currently prevailing on bonds.”

The impact of low confidence on business volumes

Life insurance consumers have shifted focus slightly to accommodate difficult market conditions. But Rutherford says thing aren’t as bad as they could be. “Although local economic fundamentals remain weak, they are not causing a major fall-off in premium levels just yet,” he said. Premium income growth slowed somewhat in Q2 2009 but remained steady over the last few quarters. Rutherford notes that the overall levels achieved in the first two quarters of this year are in line with comparable periods in both 2007 and 2008. Rutherford warns against like-for-like comparisons over the last three years due to the shift in consumer savings patterns. Local consumers have steadily shifted their savings from the life insurance sector to other industries over the last decade. “As a result, the life sector has seen a reduction in demand for life related savings products,” said Rutherford. His view was confirmed by a sharp contraction in investment product related inflows in the latest quarter. This trend is unlikely to reverse in the near future.

Other survey findings point to net cash outflows across the industry, a moderate contraction in surrenders and lapses, a rising industry headcount (despite most insurers putting new hires on the backburner) and a steady increases in the value and profitability of new business. In some senses the industry has gone into survival mode. Rutherford says “life insurers have all focused on retaining business that may otherwise have been lost,” adding that convincing consumers to retain their policies was easier than finding new business.

The life insurance sector is tied to the overall economy. Provided South Africa Inc improves through the second half of 2009, the insurers will follow. Any macro-economic improvement, says Rutherford, will “allow life insurers to benefit from stronger investment income flows once again, which coupled with sustained premium flows, should provide for bottom-line growth.”

Editor’s thoughts:
When economic conditions sour, businesses have to alter their strategies to survive. Life assurance companies had to juggle soliciting new business from bombed-out consumers and retaining their existing clientele. Do you think life insurers have sacrificed new business in favour of retaining existing policies? Add your comments below, or send them to gareth@fanews.co.za

Comments

Added by Garrick, 09 Jul 2009
Iv'e been in the industry for nearly 28 years and, frankly, the life offices are orchestrating their own demises largley due to appalling customer care ( both client and intermediary ) and disregard for any aspect of service both before, during and after the sales process. Furthermore - insofar as their internal remuneration structures are concerned they continue to base their business model almost entirely on NEW BUSINESS whilst caring not one jot for the poor souls who have paid premiums through thick and thin over many years. Well - their efforts (sic ) will not go unrewarded as they appear to be inheriting a younger generation who will not be entrusting any funds - and in particular savings - to them anytime soon. One wonders how much longer these bastions of inefficiency can continue before these paper empires collapse under their own maladministration.
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