Life Insurance confidence remains robust

In a quarterly survey, the results of which were released today, Ernst & Young reports that life insurance confidence remains robust in the second quarter, at 90 index points. This means that nine out of ten life insurers remained satisfied with business conditions in the second quarter of 2011.

Tim Rutherford, Life Insurance spokesperson at Ernst & Young confirms that life insurance confidence levels remain the strongest in the financial services sector, and is noticeably ahead of banking, where only six out of ten banks were satisfied with prevailing business conditions.

This is the 32^nd quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch.

Life Insurance confidence remains robust

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Tim Rutherford continues, ‘Strong life insurance confidence is driven by strong operational fundamentals. Premium income is being fuelled by strong new business volumes. Investment income is also growing at reasonably strong levels by historical levels. As a result, income growth is at its strongest pace in over two years. ’ To a large extent, risk business is the primary driver behind the strong inflows, and growth in this segment is also at a two year high.

‘Also favouring the life insurance industry was benefit payments, which continue to rise at relatively modest levels. As a result, the life insurance sector is in the favourable situation where their asset base is growing.’

Other survey findings include:
· The second quarter saw continued inflows growth outpacing that of outflows.
· Life insurers continued building their agent numbers, after cutting back continuously in 2010.
· Employee numbers are more or less static, with life insurers focused on extracting efficiencies, as cost pressures continue building.

Comments Rutherford, ‘Life insurers weathered the storm of the global financial crisis more successfully than what banks managed and even better than the asset managers did. Local life insurers did not have exposure to credit-default assets. However, they were hurt by the subsequent fall in equity markets, which was a global-wide phenomenon. In the case of local equity markets, however, this proved to be relatively short-lived, and by the end of 2009, stock market capitalisation had recovered markedly. This shielded the life sector to some extent, from subdued premium earnings in 2009 and into 2010.’

‘With the current strong premium growth, life insurers are essentially benefiting from a very favourable environment. This in turn has driven profits to very strong levels in the second quarter, and way above recent profit expectations. This is confirmed by various trading updates from the large life insurers, which confirm positive sentiments.’

Rutherford points out though, that there is one area of concern, namely rising lapse rates. ‘Lapses have received considerable attention over the last few years, and through 2010, major progress was made in stemming outflows arising from this source. But the last two quarters have seen a reverse of the gains made in the previous calendar year. The second quarter saw a particularly sharp spike, and this proves the point that life insurers continuously need to keep an eye on lapse trends.

Rutherford concludes, ‘Overall, life insurers remain optimistic about growth prospects in 2011. Whilst equity markets are notoriously difficult to predict, and associated investment income earnings move strongly in tandem with equities, the respondents expect investment income prospects to remain strong, albeit weaker. Global commodity prices remain strong, and South Africa’s equities benefit strongly from that movement. Added to that, risk premiums are showing signs of sustained volume growth, coupled with rising margins, which is strongly supportive of overall attractive market conditions.’