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Can your life insurer pay up 40-years from now?

23 May 2022 Gareth Stokes

South Africa’s largest life insurers passed their 2021 ‘health check’ with flying colours, having met escalating obligations to policyholders and maintaining the required capital and liquidity positions despite the challenges posed by the COVID-19 pandemic and accompanying financial market volatility.

This news courtesy PwC South Africa’s latest analysis of major life insurer financial statements, published as Sustaining Impact: Reflecting on past resilience and future challenges of life insurers in South Africa

Checking the pulse of the life industry

The report, which put the core life businesses of Discovery, Liberty, Momentum Metropolitan Holdings (MMH), Old Mutual and Sanlam under the microscope, will no doubt find eager readers among the country’s financial planning community. After all, one wants to be confident of an insurer’s resilience and sustainability before putting a client into a policy that may be called upon to perform decades into the future. The key to insurer sustainability is to generate earnings and bring in new business, consistently. PwC reported the five insurers’ combined IFRS earnings at ZAR28.661 billion for the year to 31 December 2021, almost 30% ahead of the pre-pandemic number in 2019. 

Unfortunately, the strong re-bound in 2021 is not enough to uplift the 10-year trend. PwC said that the Combined IFRS earnings had done little more than grow in line with inflation since 2011, while the value of new business (VNB) margin was trending softer. The industry achieved VNB margins of between 2.7% and 3.1% over the period 2011 to 2015 compared to 2.4% in 2018 and 2019 and a mere 1.9% last year. Margins had fallen to just 1.49% in 2020. “In 2021, the five insurers wrote new business worth ZAR6.9 billion, which total is significantly more than the ZAR4.7 billion in 2020, but still way below the results for 2018 and 2019,” they wrote. 

SA is not growth friendly

The country’s life and non-life insurers will struggle to generate meaningful earnings growth as South Africa battles the twin evils of inflation and rising interest rates alongside the obvious constraint of lower than 2% economic growth. “Given higher inflation, weaker external demand and an unreliable power supply, often mentioned as SA’s largest growth inhibitor, we now forecast a real GDP growth rate of 2.0% this year with continued downside risk,” said Alsue du Preez, PwC Africa Insurance Leader, in a media release accompanying the report launch. “The weaker economic outlook provides even greater concern about the speed of the country’s jobs recovery”. To read between the lines: no jobs equals less new life business. 

Renasha Govender, PwC Actuarial, Risk and Quants Partner, said that insurers would have to find new customers and address unmet, new and evolving needs to have any chance of returning to a sustainable growth trend. “In the past insurers have been able to generate value from their investment strategies [but] regulatory costs and constraints have meant that innovation with regard to products, integrated services and partnerships [are now key] for continued financial success within the industry,” she said. FAnews scrolled through the report, which runs to 25-pages, to find the low down on each of the five insures surveyed. Herewith a quick summary, arranged alphabetically so that you can quickly find your favourite (with thanks to PwC). 

The five-of-a-kind survey

Discovery Life achieved relatively stable volumes of new business over the past four years, as measured by the present value of new business premium (PVNBP). Overall, growth in 2021 relative to 2019 was moderate at 3%, though the VNB written in 2021 was 25% lower than that written in 2019, at just ZAR1.9 billion. This is a result of downward pressure on margins in the group’s SA Life and Invest businesses and its UK Life and Health businesses, largely due to the adjusting of assumptions to allow for its COVID-19-related claims experience. 

Liberty Life had a difficult year in 2020, adding lower than expected value from writing new business. The insurer had a partial recovery in 2021 with new business of R229 million. This number is only at 56% of the 2019 VNB, though volumes were 9% higher  measured on a PVNBP basis. Of greater concern is that the VNB margin for 2021 came in at 0.5% versus 1% in 2019. According to PwC, the need to improve margins reflected in management’s commentary on the results… Liberty’s management said the focus remained on improving revenue generated from sales, and ensuring that sales volumes were balanced with costs incurred. 

MMH increased volumes significantly in its Momentum Investments and Metropolitan Life businesses relative to 2019. Overall, PVNBP for MMH was 37% higher in 2021 than 2019, while margins for both businesses improved too. The group’s total VNB of ZAR791 million came in at more than twice that achieved in 2019, and was 74% higher than that achieved in 2020. The performance was mixed across all businesses, however, with the VNB for Momentum Corporate and Momentum Metropolitan Africa slightly negative. The largest existing business unit by embedded value, Momentum Life, only achieving a VNB of ZAR31 million in 2021. 

Old Mutual Life. Old Mutual more than doubled its VNB in 2021 to post ZARR1.3 billion, although it was still 32% lower than the ZAR1.9 billion achieved in 2019. The Mass and Foundation Cluster accounts for most of the fall in VNB over the past few years, although all of the businesses have contributed to the decline. PwC highlighted a further reduction in VNB for the Personal Finance business, driven by lower margins, and a lack of recovery of the Corporate business whose volumes continued to decline, as reasons why Old Mutual had not yet demonstrated a full recovery of VNB post-pandemic. The insurer’s overall VNB margin in 2021 was 1.9%, well below the margins above 3% achieved prior to 2019. 

Sanlam Life recovered well in terms of its sales performance in 2021, with a VNB 44% higher than that achieved in 2020, and 21% higher than in 2019. The Sanlam VNB now accounts for 40% of the industry, at ZAR2.8 billion. The largest amount of growth in VNB over the past two years has come from its Emerging Markets business, where the margin achieved in 2021 has recovered to levels last seen in 2018. Even so, the margins in the South African Retail Mass business have not fully reached their pre-pandemic levels. Overall, Sanlam has demonstrated a strong sales position in recent years, maintaining overall new business margins in line with historic levels, whilst achieving significant growth. 

Facing a tough and uncertain future

Life insurers face some challenges in the coming years, not least of which the impact of high inflation and interest rates on household’s disposable income. PwC noted: the upward pressure on food, fuel and electricity prices will adversely impact all households during 2022 … with households in different expenditure deciles impacted differently. 

“Middle to higher income groups are re-evaluating their discretionary spending patterns and are either buying down or reducing insurance and savings products,” du Preez said. “On the other hand, households in the lower to lower-middle income categories will struggle to sustain their monthly basket of goods purchases … these households will need to consider discretionary monthly expenses, including insurance products”. This comment is bad news for financial advisers, who rely on the mid- to high-income market segment for most of their advice- and product-related earnings. 

Big questions remain for 2022, including whether insurers will be able to hold on to the cost saving initiatives put in place during lockdown and the impact of COVID-19 and so-called long COVID on morbidity and mortality rates, which will have a knock-on effect on life insurer’s claims experiences. “The post-COVID financial recovery is pleasing to see, but the pre-COVID comparison, coupled with the difficult macro-economic backdrop into the medium term, demonstrates the need for life insurers to continue to innovate and invest on multiple fronts,” du Preez concluded. 

Writer’s thoughts: The life insurer results reported in the PwC survey show two sides of a story. One, is an industry recovering from an external shock in the form of pandemic. The other, is an industry struggling to make headway in a tough economic environment. Are you confident that life insurers will be able to improve their value of new business in 2022 and beyond? And what is your experience insofar selling new policies to mid- to high-income clients presently? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

Comments

Added by John Bezuidenhout, 23 May 2022
All I need to know from the life assurers performances announced :

How many policies were churned in itself =1 and from outside = 2
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QUESTION

We have watched with interest as each of the country’s large life insurers report their 2021 life claims statistics, with soaring claims and claims values. That got us thinking: how do the big life insurers compare against one another, from an IFA perspective?

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An insurer is an insurer is an insurer
All are excellent: would not deal with them otherwise
There is one insurance brand that stands out for me
Tied agent: but my brand is the best out there
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