Life Insurance confidence falls on lower premium growth
In a quarterly survey released today, EY reports that life insurance confidence fell noticeably in the second quarter of 2014. Confidence was down 15 points from first quarter readings, coming in at a level of 64 index points. This places life insurance confidence levels in line with other financial services segments, its lowest level since the global financial crisis in 2009.
This is the 44th quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch.
The survey, which covers a broad range of financial services companies, found that on top of the lower life insurance confidence readings, weaker asset management and investment banking confidence also contributed to pushing the financial services index down again.
Malcolm Rapson, EY Africa Insurance Sector Leader points out that the weaker confidence is in line with slow economic growth which has in turn impacted the rate of growth of premiums. He says, “Until the second quarter, life insurers appeared immune to the weak economic conditions that had already impacted retail banking confidence. Whilst the affluent market segment offset slower premium growth in other segments, the lengthy strikes and slowing employment numbers have ultimately made for much more difficult market conditions in the life insurance market as a whole.”
However, he points out, “Life insurers stand to gain from stronger equity markets, as a considerable portion of their earnings stems from investment returns. The JSE has outpaced underlying economic growth, reaching new record highs frequently through the course of the quarter.”
Indeed, survey results show that whilst premium growth was flat in the second quarter, stronger investment returns benefitted from the rising equity prices. This was the first quarter in the last three that saw rising investment income flows. Rapson comments, “Investment returns makes up a sizeable portion of total revenue, so to some extent, stronger investment returns would have made up for the slower premium growth. Even so, the absolute fall-off in premiums was significant, and had not been anticipated by the respondents. Respondents however anticipate favourable premium growth for the third quarter of 2014.”
The survey also found that despite the flat premiums, net profit growth was considerably stronger in the second quarter, supported by stronger risk product profitability.
Rapson points out that surrenders tapered sharply downwards, after a rise in the first quarter. Insurers continue to focus on maintaining policies and keeping client funds, as this is most beneficial to policyholders and the insurer. In addition, lapses remain at manageable levels, with the industry very focused on ensuring that quality premiums are written. All of this is very supportive for longer term bottom-line profit growth.
The survey also highlights a strong rise in costs in the second quarter, despite a strong focus on efficiency improvements. Life insurers have been focused around efficiency improvements for the last few years, and as a result, back office employee numbers have been falling. On the other hand, there is a strong focus to build the client facing intermediary network, as a result of which, we saw a substantial rise of in-house agents again in the second quarter.
Rapson comments that sales remuneration costs spiked considerably in the second quarter, despite slower premium growth. “There is not necessarily a direct relationship between premium growth and sales remuneration in any one quarter. This was the case in the second quarter, with flat premiums, but sharply rising sales remuneration costs. This is likely to even out over the medium term, but added to the immediate pressures in the life insurance sector during the quarter.”
Rapson concludes, “Despite profits remaining robust in the second quarter, slow economic growth will be a challenge for life insurers in the longer term. Whilst many insurers are looking into Africa and other emerging markets for growth opportunities, the pressure to compete more effectively in a slowly growing home market is likely to intensify in the short to medium term. We have already seen this very clearly in the banking sector and that same pressure is likely to be felt by life insurers.”
