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Life insurers perform admirably through pandemic

07 October 2020 Gareth Stokes

South Africa’s life insurance industry, which manages in the region of R3.1 trillion in assets, performed admirably through the first wave of the coronavirus pandemic. Large insurers not only settled the usual death, disability, dread disease and income protection claims; but also set aside more than R1 billion for around 458 000 policyholders who required premium relief assistance between March and July 2020.

Statistics for the half-year to 30 June 2020, published by the Association for Savings and Investment South Africa (ASISA), confirm that the sector weathered the COVID-19 storm. Hennie de Villiers, deputy chair of the ASISA Life and Risk Board Committee, said the sector entered the second half of the year “well-capitalised and remained in robust financial health”. But the question top of mind among financial advisers and life insurers is to what extent the post-pandemic economic fallout will impact on lapses and surrenders. A worsening of these measures might be inevitable against a backdrop of rising business closures and unemployment. 

Trust based on honouring claims

The ASISA report was produced per the requirements set out in the new Insurance Act and in line with the latest Solvency Capital Requirement (SCR). De Villiers reported that the industry’s free assets, totalling some R330 billion, comfortably exceeded the legislated reserve buffer. “This means that we can give policyholders and their beneficiaries the assurance that the industry is well-positioned to weather the [pandemic] storm, and that we will be able to honour every single valid claim,” he said. The ability to pay out claims is central to the trust relationship between customers, their financial advisers and the insurer. 

Some acknowledgement is due South Africa’s financial sector regulators for the hard work since the 2008 Global Financial Crisis (GFC). The regulatory framework they have since implemented makes it possible for large financial institutions to navigate financial market shocks with minimum disruption. The pro-consumer outcome is that South Africans can continue to transact for a wide range of life insurance products with complete peace of mind that the policy terms and conditions will be met. Any doubts over the industry’s resilience will have been swept aside following the R230 billion in claims and benefits payments made to policyholders and their beneficiaries in the first six months of 2020. These payments were made seamlessly despite unprecedented market volatility and tremendous pressure on both individual and corporate cashflows. 

Marginal decline in in-force policies

ASISA reported that there were 41.3 million individual recurring premium policies in-force by end-June 2020, compared to 42.5 million at the end of December 2019, representing a marginal decline of 2.85% over the half year. Around 33.8 million of these policies fall into the risk category, with 6.3 million falling under the ‘individual recurring premium savings’ banner. The number of single premium policies also declined marginally, from 2.9 million end- December 2019 to 2.8 million by the end of June this year. 

Financial advisers and life insurers will be disappointed by the small decline in total in-force policies under both headings. They will be closely monitoring the trend of lapses and surrenders exceeding the number of new policies brought in. De Villiers said that 5.4 million risk policies were lapsed compared to 4.6 million brought in over the six months; and 364 887 savings policies were surrendered versus 282 467 brought in. “When times are tough consumers are less likely to take out new savings policies and more policyholders surrender their savings policies to access their savings due to financial hardship,” said De Villiers. A surrender occurs when the policyholder stops paying premiums and withdraws the fund value before maturity. 

More lapses and surrenders through 2021

It is too early to predict the impact of lockdown and pandemic on South Africa’s life insurance industry; but the first half 2020 performance has raised concerns. Lower new business numbers could be attributed to the difficulties faced by advisers in reaching and advising clients during lockdown; but lapses and surrenders are typically a consequence of policyholders’ personal financial situations. At the time of writing, Statistics SA confirmed 2.2 million job losses between Q1 and Q2, with South Africa’s extended unemployment rate topping 42%. It is unlikely the lapse and surrender experience will improve in the second half against estimates of three million job losses for the full year. And the trend could easily persist deep into 2021. 

Financial advisers will have their work cut out to assist their clients to maintain essential risk and savings policies as the financial pressures introduced by lockdown and pandemic take hold. “Policyholders who continue to face financial difficulties, and who might not be able to afford their premiums at the end of their premium relief period, should contact their financial adviser or insurer to discuss potential solutions,” concluded De Villiers. Insurers remain keen to help; but will assess ongoing assistance to policyholders on a case by case basis. 

Writer’s thoughts:
Financial advisers and life insurers have teamed up during lockdown to try and prevent struggling policyholders from lapsing their risk covers or surrendering their savings policies. The question becomes: What happens when a struggling policyholder is unable to resume his or her premium payments after six months of premium relief? Will this policyholder be in a better or worse position if forced to give up the policy at a later stage? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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