Long-term insurance statistics confirm slowdown
How have the long-term insurers performed through recession? We can obtain an accurate picture of industry-wide performance from the half-yearly sales statistics produced by life companies for the Association of Savings and Investments South Africa (ASISA). This data is furnished by previous member companies of the Life Offices’ Association (LOA) and excludes data from investment houses with life licenses not previously with the LOA.
What does the data reveal about the state of the industry? The main trends include declining new life business, stabilising lapse and surrender rates and declining benefit payments. We also learn a great deal about consumer behaviour through recession. The numbers suggest new business written through recession will have greater persistency; but that’s a topic for another newsletter! What do the industry statistics compiled for the first half of 2009 tell us?
New individual business in decline
To begin we must point out that insurance is a grudge purchase. When consumers feel the pinch they tend to steer away from insurance transactions. This tendency is confirmed in the new individual business sales, which declined 14% in the first half of 2009 (compared to the second half of 2008). The long-term insurance industry attracted new individual premium income of R27.7bn, compared to R32.4bn. According to Peter Dempsey, deputy chief executive of ASISA, the slowdown was expected: “Given the magnitude of bad news that consumers have had to absorb over the past year, we are surprised that the slowdown did not prove more intense.” He observed that consumers “put on the brakes” early in 2009 after realising the extent of the global recession.
Despite the slowdown in new business the major players in the industry remain in robust financial health. “At the end of June this year excess industry assets were more than three times the legal reserve buffer required,” said Dempsey. What this means is life companies are well positioned to honour benefit payments due their policyholders.
Some good news on the ‘surrender’ front
Life industry savers are best served if they hold their insurance and savings products to maturity. Part of the reason for this is the severe penalties imposed by life companies on surrenders or lapses. Policyholders suffer from reduced values and other negative impacts of terminating part of their long-term savings plan. A policy is surrendered “when the policyholder stops paying premiums and withdraws the reduced fund value before maturity.” The latest half year served up a surprise 26% reduction in the surrender of savings policies. ASISA notes the value of surrendered individual policies decreased from R19.8bn in the second half of last year to R14.6bn in the first half of 2009.
Why the sudden improvement? The best guess is a change in focus by the country’s major insurers. Dempsey notes that “a number of companies intensified their focus on business retention” as sales dropped. He also observed that a significant number of struggling policyholders chose to surrender policies in the second half of 2008 – inflating surrenders in that period. “Those that could hold on to their policies would have done so given the lower fund values caused by volatile markets and falling interest rates,” said Dempsey.
There is a distinct difference between a surrendered and lapsed policy. A lapse “occurs when the policyholder stops paying premiums before the fund value exceeds the un-recovered costs, meaning the paid-up value is zero.” ASISA says the number of lapses also declined slightly (by 2%) on their second-half to first-half comparison. A total of R2.7bn in individual policies lapsed in the latest period.A closer analysis of life company data reveals some interesting trends. “The majority of consumers who took out policies between the end of June last year and the end of June this year made sure that they could afford their premiums,” said Dempsey. He was commenting after observing a spike in two-year-old policy lapses. These policyholders were “caught financially unprepared when the credit crunch shock waves hit South Africa.”
Billions paid out
There was a substantial 16% decline in benefits paid in the first half of 2009 (compared with the latter half of last year). ASISA observes that R75.7bn was paid out to beneficiaries, policyholders and pension fund members over the period. These include death and disability claims, maturity pay-outs, surrenders and pension and annuity payments. The reason for the decline in benefits paid is largely ascribed to the drop in equity markets through 2008 and until March 2009. The R75.7bn is shared by individual policyholders who received benefit payments of R43.6bn and group schemes and pension funds with R32.1bn.
Consumers will probably maintain a ‘wait and see’ approach to life insurance through the remainder of 2009. Poor performances on the JSE All Share “combined with a massive retrenchment wave [meant] consumers were no longer prepared to enter into long-term financial commitments such as taking out policies,” said Dempsey.
Editor’s thoughts: We were surprised by ASISA’s decision to assess life industry performance by comparing the second half of 2008 with the first half of 2009. This comparison paints a picture of renewed momentum across the industry, but is not as ‘useful’ as a comparison of the similar 2008 period. Are you convinced that policy lapse and surrender rates are improving? Add your comments below, or send them to [email protected]
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