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A half-trillion reasons to love insurance

17 March 2021 Gareth Stokes

South Africa’s long term insurance sector paid out R522.7 billion to policyholders and beneficiaries in claims and other benefits last year. The country’s life insurers lived up to the ‘value of insurance’ mantra by offering emergency premium relief to policyholders in addition to meeting death, disability, severe illness and income protection claims as they came due.

The latest statistics from the Association for Savings and Investment (ASISA) reflect an industry in good health. “The total paid out in respect of death, disability, severe illness and income protection claims plus retirement benefits exceeded half-a-trillion rand in 2020,” said Hennie de Villiers, deputy chair of the ASISA Life and Risk Board Committee. He was presenting at the association’s Q1 2021 media update. By comparison, the country’s entire Social Development budget for 2021/22 is set at R335 billion. 

Balancing the insurance books

De Villiers reported that total assets and liabilities across the sector had increased over 2020. The good news is that the capital buffer, or the excess of assets over liabilities, easily met the industry’s regulated solvency capital requirement (SCR). The ratio of free assets to SCR reduced marginally from 2.14 in 2019 to 2.11 currently. “The industry holds more than twice the capital they are required to hold; this is testimony to our resilience and our ability to withstand adverse market conditions,” he said. The long term industry has weathered the first part of the Covid-19 storm and emerged in a strong position to meet its ongoing commitments to policyholders. 

Few consumer are aware of the valuable role that insurers play in the country’s finances. Our life insurers directly held government bonds worth R314.3 billion at the end of 2020 and corporate bonds, including SOE debt, worth R217.7 billion. Insurers also invest in viable infrastructure projects including renewable energy, student accommodation, urban regeneration, agriculture and roads. A sustainable life insurance sector is crucial due to the long-tail nature of the risks on cover. It is not uncommon for policyholders or their beneficiaries to seek compensation from an insurer three, four or even more decades after the policy is taken out. Consumers who rely on the industry for savings via endowments and retirement annuities also need peace of mind that their life insurer will be around to honour the maturity value of these investments at retirement. 

A sobering death claim experience

The presentation’s focus shifted to the impact of lockdown and pandemic on life insurers, starting with an assessment of death claims. ASISA reported 434216 death claims in 2020 compared to just 317442 in the prior year. More than half of these claims were made against funeral policies with the remainder against life policies, credit life policies and other policies that provide life cover. It was not clear to what extent the increase in death claims related to pandemic; but it is worth noting the South African Medical Research Council (SAMRC) estimate of 146626 excess deaths between 3 May 2020 and 6 March this year. 

It was incredibly difficult for life insurers to write new business during 2020 and ASISA reported a significant contraction in new business in the risk policy space. According to De Villiers, 8.9 million new individual recurring premium risk policies were bought in the 12 months to the end of December 2020 compared to 9.6 million in 2019. This decline was attributed to the dual shocks of lockdown, which cut many intermediaries off from their market, and the financial strain experienced by consumers. “Insurance advice and sales happen face-to-face and intermediaries were often unable to reach clients and potential clients, especially during the hard lockdown,” said De Villiers. 

There was a third contributor to declining sales numbers. Life insurers collectively set aside R1 billion in premium relief to assist approximately 458000 policyholders last year. Customers benefited from premium reductions on life policies and could opt to pause their retirement funding contributions, among other concessions. Even so, the financial hardship experienced by consumers reflected in a spike in policy lapses. ASISA noted that 10.2 million risk policies were lapsed in 2020 compared to 8.8 million in 2019. Every risk policy lapsed means that South Africa’s sizeable insurance gap widens further, leaving more families financially vulnerable should their breadwinner die or become disabled. 

Fewer surrenders than expected

“Surrenders on savings products, both for recurring and single premiums, reduced in 2020,” said De Villiers. A total of 663597 recurring premium savings policies were surrendered in 2020, surprisingly fewer than 713361 savings policies that were surrendered in the previous year. A surrender occurs when the policyholder stops paying premiums and withdraws the fund value before maturity. Life insurers are painfully aware of the impact that widespread ‘cashing in’ of savings products could have on their solvency ratios and would have been quite encouraged by the savings surrender experience under pandemic conditions. “While the surrender of a savings policy should always be a last resort, the reality is that these savings were available to policyholders when they needed the money the most,” he said. 

The true value of having life insurance cover is only apparent at times of crisis. ASISA encourages policyholders who might not be able to afford their premiums to contact their financial adviser or insurer to discuss potential solutions. “When approached, life insurers do consider ways in which to assist policyholders who may be struggling financially on a case by case basis,” concluded De Villiers. 

Writer’s thoughts:
An industry overview such as that presented by ASISA seldom does justice to the various stakeholders who are plying their trade in the proverbial trenches. The new business and lapse statistics shared in today’s newsletter suggest, for example, that many financial advisers missed sales targets last year. Have you assessed the financial impact of Covid-19 on your 2020 advice revenue? And have insurers been as quick to assist financial advisers as they have their policyholders? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

 

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