Retirement annuities bolster long-term insurance
It’s official – retirement annuities (RAs) are still popular, with new recurring RA policy premiums growing by 16% to R1.7bn in 2012 from R1.5bn in 2011. This is the second year in a row that recurring premium RAs have attracted double-digit growth in new
Although there was a drop of 33% in new single premium RA investments in 2011, significant growth of 25% last year, from R5bn in 2011 to R6.3bn in 2012, reversed the trend. Peter Dempsey, Deputy CEO of ASISA, says the drop in 2011 may have been due to talk about changes to the retirement landscape in the 2011 budget.
Dempsey feels that clarity about the amount of the cap on RAs (R350 000 maximum) will give some certainty, too. “I think there will be people who will strive to capitalise on the limit while they still can,” he says. He predicts there will still be a rush on RAs this year, though mainly by higher-income earners who are already contributing, and a few savers who want to get in while they can to benefit from the current uncapped contribution limits.
“The real value of life insurance sits in its protection benefits and South Africans have received over R800bn, which has been injected into personal balance sheets over the past four years,” says Dempsey. “This shows the role the industry plays and the benefits it offers.”
Are South Africans still underinsured for death and disability?
On the risk products side, people are still underinsured, but Dempsey has reason to be optimistic.
“ASISA conducted a survey in 2011, with an independent actuarial consulting firm, and the results showed high levels of underinsurance,” says Dempsey. “The average level of underinsurance with regard to death is R600 000, and R900 000 in respect of disability. But last year’s results show a nice increase on the 2011 risk premiums, which we believe was helped by media coverage and a concentrated focus on this type of cover by insurance companies.”
Last year, consumers bought risk cover such as life, disability, dread disease and income protection policies worth R9.1bn – a whopping increase over the R8.1bn new premiums paid in 2011. They also maintained and increased recurring premiums for individual policies, including endowments, retirement annuity funds, annuities and also life, disability, dread disease and income protection policies. Total recurring premiums for existing business increased by 10%.
Overall the industry attracted R17.4bn in new recurring premiums last year. This represents an 11% increase over the R15.6 billion in 2011.
“This is a good outcome,” Dempsey says.
Increase in value of surrendered policies
A policy is surrendered when the policyholder stops paying premiums and withdraws the fund value before maturity. The value of surrendered policies increased by 16% from R37.5bn in 2011 to R43.5bn in 2012.
Dempsey points out that the increase in value does not necessarily mean that more people surrendered their policies in 2012 than in 2011. “Considering that the JSE All Share Index delivered a return of 26.7% in 2012, the increase in the surrender value is mostly due to higher investment returns,” he explains.
This means that on average policyholders received higher surrender values in 2012 due to stock market movements than they would have in 2011. “If you bought a policy worth R10 000 in 2011 and it went up because of the market run, it would be worth R12 000 in 2012, hence the surrender value would go up by 20%,” Dempsey says.
A lapse occurs when the policyholder stops paying premiums before the fund value exceeds the unrecovered costs meaning that the paid-up or surrender value is zero. In the case of pure risk policies, a lapse causes no financial loss for policyholders, as there was no policy value, but they do lose out on life or disability cover.
In 2012 the number of lapsed policies increased by 4% from 4.5 million policies in 2011 to 4.6 million policies in 2012. The average monthly premium of policies lapsed was R118.56.
Benefit payment up
In 2012, the life industry paid out more than R263.2bn in benefits to policyholders, beneficiaries, and pension fund members as a result of death and disability claims, maturity pay-outs and pension, annuity and other payments. This is 21% more than in 2011, when total benefit payments amounted to R216.7 billion.
Dempsey says a healthy increase in benefit payments is good news for policyholders because many South African families would have been destitute without them. Again, this underscores the benefits the industry is able to offer.
A well-capitalised industry
Since the 1990s, the life industry has had significant excess capital and there is no indication that this is about to change. Since the global financial crisis there has been intense focus on the stability of firms – banks in particular – as stable institutions are good for the economy. If there is any risk that government will have to step in and bail out a company there is a potential drain on the fiscus, and there is no indication from government that any bail-out of insurance companies is necessary, says Dempsey. In fact, assets outnumber liabilities by more than triple the legal reserve buffer required.
“The Registrar of insurance sets out capital guidelines in terms of how much capital the industry is to hold to pay out policyholders in future. The Financial Services Board is currently working on aligning the Registrar’s requirements with Solvency II, but that would be to bring us in line with international standards,” he says.
Reporting on the figures
Until 2010, sales statistics for the long-term insurance industry were based on data received from life companies that were previously members of the Life Offices’ Association (LOA). When non-traditional life licence holders began submitting their long-term insurance figures ASISA started reporting on these. But this is the first year in which it’s been possible to compare figures year on year. It will be interesting to see the figures that emerge for 2013.
Editor’s thoughts: Although surrenders and lapses are perhaps inevitable, given financial pressure on consumers, it is worrying to note that the lapse rate is picking up again, after showing a steady decline for three half-yearly periods up to end 2010. How has this affected intermediaries and how can lapse and re-entry risk be managed? Comment below or email [email protected].
