Life insurer confidence remains strong in Q3
Life Insurance confidence slipped in the third quarter, in line with volatile equity markets which resulted in sagging investment income. Life insurers reported slowing profits growth, on the back of increased stock market volatility.
In a quarterly survey, the results of which were released today, Ernst & Young reports that life insurance confidence fell from 91 index points in the previous quarter to its current level of 83. This means that eight out of ten life insurers were satisfied with business conditions in the 3rd quarter of 2010. This is still up sharply from the position of one year ago, when the impact of the global liquidity crisis meant that only five out of ten life insurers were satisfied.
This is the 29th quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch.
Life Insurance Confidence has slowed but remains above pre-crisis levels.
(Click on image to enlarge)Comments Tim Rutherford, Ernst and Young’s Life Insurance sector spokesperson, ‘ Life insurer earnings and hence confidence levels, are strongly correlated with stock markets. The third quarter of 2010 saw more volatility than the first half of 2010 and the second half of 2009. As a result, investment income was weaker, and that directly impacts the bottom-line of life insurers.
Whilst the 2nd quarter had seen the beginning of a slower investment income trend, this did not materially impact their earnings at the time. The third quarter, however, saw a much sharper contraction in investment income, and this has undoubtedly hurt profits growth.
Nevertheless, profits continue to grow, just at slower levels than was the case earlier in 2010. However, cautions Rutherford, any further contractions in investment income could start resulting in bottom-line profit contractions, particularly if premium income slows, as the life insurers have indicated they expect to occur in the fourth quarter.
Despite the slower investment income, overall income levels were stronger in the third quarter, largely as a result of strong premium income. Rutherford comments, ‘Premiums have held up well in 2010, in line with the economic recovery, which returned to positive growth territory in the first quarter. In addition, premium levels are being supported by consistent gains in lapse reductions. Life insurers have made improvements in reducing the rate of policy lapses for four consecutive quarters, indicating that this has been a strong focus area for them. The focus has in turn resulted in a significant reduction in lapses across the industry, which has a beneficial impact on costs going forwards too.’
However, the improving lapse trend-line was not met with a similar improvement in surrenders. Rutherford points out that ‘life insurers have had a duel focus on bringing on board better quality premiums by being more selective up-front. This has resulted in much lower lapse rates.’ A second major area of focus was in keeping policy surrender moneys on the balance sheet. ‘As a result, a concerted pro-active approach across most life insurers ensued, in an effort to keep moneys from policies about to surrender.’
Another survey finding relates to a shift in business mix over the last year. Risk related premium growth has slowed considerably, while investment product premiums have held up well. Says Tim Rutherford, ‘ This could be a delayed response to stronger equity markets in 2009. Investors possibly believed there may be benefit to returning to equity markets via life policy linked investments, and hence the increase in investment product related income. In addition, life insurers are probably being more assertive in marketing investment related policies, after losing market share to asset managers and other product providers over the past few years.’
Rutherford concludes, ‘Despite the weaker investment income levels, profits continue to grow in the life insurance sector, albeit at weaker levels. Continued improvements in lapse rate trends, and relatively buoyant premium levels have helped offset weaker investment income, and rising surrenders. Life insurers have been far more conscious of the headcount recently, which in turn is keeping administration expenses more tightly controlled.
