Resurgent RAs in favour once again
Latest figures from the life industry seem to indicate that the retirement annuity is back in vogue. New premium inflows have increased in each of the last two half-year reporting periods. The latest results confirm a boost to the industry which has st
The result was an agreement between the Life Offices' Association and National Treasury (the Statement of Intent) to financially compensate consumers who had been excessively punished for early terminations and surrenders on RAs and endowments.
Life Offices' Association CEO, Gerhard Joubert says "The fact that we have seen a positive growth pattern for two consecutive reporting periods is very encouraging. We are cautiously optimistic that the life industry has finally managed to restore consumer confidence in the RA fund as a tax effective and disciplined savings vehicle for their retirement."
Millions flow into RA funds
The latest long-term insurance industry numbers confirm that sales in new recurring premium RA funds are on the rise. Insurers reported R747.1 million in sales in this category of RA, up 36% on the same period last year. Single premium RA fund sales were up 21% and brought in R3.1 billion. Contributions by existing RA members increased significantly too. Their recurring RA premiums increased by R5.8 billion in the period under review.
This renewed confidence can in part be attributed to the Statement of Intent mentioned earlier. Joubert believes "Consumers are [today] far more likely to use a RA fund to save for their retirement knowing that their retirement savings will not be hit as hard as in the past should they no longer be able to pay their premiums." Today, RAs and endowments that are made paid-up or where premiums are reduced have to receive at least 70% of the fund value, and surrendered endowments at least 60%.
One of the problems with RAs is many consumers make the purchase for the tax benefit they receive. It will be interesting to see how RA sales fare if and when governments national social security system is implemented. Changes to the levels and amounts of tax incentive for saving will certainly impact significantly on this long-term insurance category.
Surrenders significantly higher than last year
We are all familiar with the terms lapse and surrender. A lapse occurs when a policyholder ceases premium contributions before the fund value exceeds the un-recovered costs on the policy in question. The result is a paid-up value of zero. Surrender refers to the voluntary cessation of premium contributions by the policyholder who withdraws the reduced fund value prior to the policy running its full course.
The surrender value of policies was 18% higher in the first six months of 2007 when compared with the first half of last year. Joubert believes the higher surrender value is not necessarily a sign of more policy surrenders, but rather induced by higher fund values as a result of continued equity market strength.
Statistics also revealed that policy lapses in the first year of the policy life were up 11% year on year. A large percentage of these lapses occur in the credit life area. The industry obviously prefers a situation where lapses and surrenders are in decline. Of course, surrenders are preferred in that life companies have an opportunity to recover most of the fees the product would have earned if it ran to maturity.
Confidence restored
Even though lapses and surrenders are on the rise, it appears consumer confidence in the industry is at the best levels for some time. The Life Offices' Association's media release confirms that the life industry made "value enhancements to more than half a million RA fund and endowment policies during the six months to the end of May this year."
The next investigation which will be eagerly awaited by consumers is the public enquiry into credit life products which will take place during October.
Editor's thoughts:
Events in the life industry in the next few months include an investigation into credit life policies and the abolishment of projected maturity values on policy statements and quotations. Are there any other important issues the long-term industry should address in the next 12 months? Send your comments to [email protected]
