There’s plenty at play in the financial services space. Fund managers – whether correct or not – base their investment decisions on macroeconomic indicators, sentiment, long-term return expectations and even short-term market fluctuations. Any warning signs will keep them sitting on the fence.
Financial services consumers have a different set of rules, but the most important seems to be affordability. At the end of the day their consumption decision hinges on disposable income. And – as we’ve been repeatedly reminded – the local consumer is extremely vulnerable at present. Half way through 2010 South Africa’s debt to disposable income ratio remains pegged around the 80% level – with debt service costs causing problems across the board. The 550 basis point decline in interest rates since December 2008 has done little to help, with many analysts suggesting the decline in mortgage and other debt repayments has simply been channelled to massive inflation-plus hikes in administered expenses. Financial insurance intermediaries are feeling the pinch too!
Confidence 1 – investment income 0
To find out more about the latest sentiment in the investment space we turn to the results of a Q2 2010 survey of confidence in the life insurance industry. The 28th consecutive report is based on research conducted for Ernst & Young by the Bureau for Economic Research in Stellenbosch. The Ernst & Young Financial Services Index measures the performance of the banking; investment management and life assurance sectors on a quarterly and consistent basis… And the latest survey shows confidence in the life insurance industry is on the rise.
Ernst & Young reports life insurance confidence rose sharply, from 77 index points in the previous quarter to its current level of 91. This means that nine out of 10 life insurers were satisfied with business conditions in the second quarter. A year ago only five out of 10 life insurers were satisfied. Is this a contradiction? The improvement through Q2 2010 seems to ignore weaker investor sentiment and volatile – often to the downside – equity markets. Confidence might be on the ascendancy, but investment income is in the doldrums. Perhaps the result illustrates differences in perception between profit driven insurers and return motivated investors. The insurers are feeling a bit ‘happier’ because of the buoyant profit growth achieved despite a period of stagnating premiums.
Tim Rutherford, Ernst and Young’s life insurance sector spokesperson observes: “Life insurers reported strong profits growth during the quarter, and this has undoubtedly driven the strong sentiment.” These higher profits are largely thanks to slower growth in operating expenses and sales remuneration. “Life insurers have had a strong focus on their cost base for a while, certainly since latter 2008, and into 2009,” he says. The survey mentions a number of interesting findings, including:
· The first absolute decline in headcount at both administrative employees and agents in the insurance sector since the survey’s inception;
· Growing new business volumes;
· A sharp rise in the administration expense / premium income ratio, despite slowing administration and marketing expenses (we assume this points to declining premium then); and
· Growth in investment related contracts higher than that of risk-based contracts, despite a steep decline in both categories.
An employment surprise – or not
The cost cutting drive through 2008/9 was achieved without an industry-wide reduction in headcount. But employment in the sector has slipped over the first half of 2010. Rutherford says the expectation is for headcount within insurance companies to remain flat in the next quarter, while agency headcount is likely to rise again – unless we enter the much feared double-dip recession. Banks certainly seem more concerned with the possibility than insurers. The Ernst & Young survey puts bank confidence at a record low in Q2 2010
During these difficult times insurers will take their victories wherever they’re on offer. “One area where life insurers appear to have made significant progress is in reducing lapses, and in slowing the level of policy surrenders,” observes Rutherford. ‘Life insurers have made their best progress yet in addressing lapse rates, since the survey’s inception seven years ago. And there appears to have been a focus too on simultaneously addressing surrender leakages, in tandem with the lapse reduction exercise.” If you look at this in a different light they’re basically admitting that the struggle has moved from one of signing on new business to safeguarding the existing book.
Don’t let pre-crisis confidence fool you
Improvements in profit aside – the survey result suggests insurance companies are in more trouble than they care to admit. The industry has perhaps fooled itself into believing in a recovery off a very low base – when in reality they have some way to go before pre-crisis business levels are met. For now, they’re talking pre-crisis confidence – but it’s going to take some time for business to return to similar levels.
Editor’s thoughts: It’s often difficult to correlate survey findings with the ‘on the ground’ business facts. It seems to me the major stakeholders in the insurance industry are too focused on their short-term profit rather than long-term annuity income. A great recovery from a low base doesn’t mean they’ve countered the massive reduction in new business suffered through 2008/9. Do you agree with the sentiment improvement measured by Ernst & Young? Add your comment below, or send it to gareth@fanews.co.za
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Added by John Smith, 22 Jul 2010