Stronger equity markets boost Life Insurance confidence
21 January 2010 | Surveys, Reports and Ratings | General | Ernst & Young
Life Insurance confidence continued to rise from its weakest levels – recorded at the end of 2008, after investor sentiment and stronger equity markets in the 4th quarter of 2009 helped push their financial fundamentals upwards.
In a quarterly survey, the results of which were released today, Ernst & Young reports that life insurance confidence rose from 58 index points in the previous quarter to its current level of 71. This means that close on three quarters of life insurers were satisfied with business conditions in the fourth quarter of 2009.
This is the 26th quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch.
Life Insurance Confidence
(Click on image to enlarge)Comments Tim Rutherford, Ernst and Young’s Life Insurance sector spokesperson, ‘ Life insurance confidence has improved throughout 2009, despite a weak economy and struggling consumer expenditure. The latter half of 2009 was driven largely by revived equity markets, which have certainly aided life insurers’ income levels.’
He continues, ‘ The first half of 2009 saw sharply reduced investment income for the industry. This led to profit contractions, and in some cases even losses. However, this was to some extent offset by relatively buoyant premium income flows.
The second half of 2009 saw a reversal of this trend, where revived investment income trends offset slowing premium income growth.
‘In fact’, says Rutherford, ‘premium income contracted in the fourth quarter of 2009, indicating that the slow economic growth is starting to hurt the life insurance sector’s ability to attract new funds.’
Survey findings indicate that there were:
· sharp contractions in investment product inflows;
· further weakness in risk contract profitability;
· contractions in new business premium growth;
· an improvement in the lapse and termination rate; and
· sustained low surrenders.
The combination of improvements in investment income offset the impact of the contracting premium income trends and deteriorating risk contract profitability, resulting in life insurers experiencing an improvement in the net profit losses in the fourth quarter.
‘Even so’, continues Rutherford, ‘ net profits continue to decline, and have been doing so for five successive quarters, with the expectation that profits will still continue contracting into the new year, despite the renewed investment income growth.’
‘It may just be’, he says, ‘that slower premium growth may be the chief concern for life offices in the new-year, rather than the investment income squeeze they faced in 2009.’
To a large extent, operational expenses have proved to be sticky in the life insurance industry. Although sales remuneration has contracted sharply – in line with slowing premium inflows, administration; marketing and employee expenses have remained relatively high, and have not slowed down in tandem with slowing revenue.
Comments Rutherford again, ‘typically, a few successive quarters of revenue slowdown is required before changes to the operational cost-base are made. In the case of asset managers and banks, slowing revenue typically resulted in a slowdown in costs six months later. The same impact on the cost base has not been observed in the life insurance sector just yet, where there are two major sources of revenue, namely premium revenue and investment revenue. Slower investment income has often been offset by continued rising premium income. This has provided some level of shelter to the life insurance sector.’
The survey also found that for the first time since the survey’s inception in 2003, benefit payouts contracted, albeit only marginally. Says Tim Rutherford, ‘ This helped offset the contraction in inflows during the quarter. Benefit payouts have been declining throughout 2009. To some extent, this could be reflective of slower premium flows, but there could be economic factors at play too, with consumer resistance to cashing out policies in these uncertain times.’
Rutherford concludes ‘Although life insurers are not yet growing profits, their bottom-line profits appear healthier than they have for a while. Slowing premiums and reduced risk contract profitability appear to be the main challenges for life insurers. In addition high lapses, terminations and surrenders are also less of a concern than they have been through 2009, although these typically prove difficult to remedy and sustain.
