Five million sales versus 4.3 million lapses does not a good story make
How should you rate an industry that writes five million new policies in the first six months of a year but records 4.3 million lapses in the same period? This question was indirectly posed by one of the presenters to the recent 2023 FIA Advice Summit, who suggested that somewhere along the line, the life insurance industry was missing the boat on client relationships. There are countless definitions for the ‘missing the boat’ idiom with Dictionary.com offering a compact explainer as “failing to take advantage of an opportunity”.
Great reporting; questionable outcomes
The Association for Savings and Investment South Africa (ASISA) has an exemplary track record of publishing up-to-date figures for the various industries it represents. In the case the country’s life insurance sector, the association publishes half-yearly updates on benefits and claims paid alongside an assessment of the sector’s long-term financial sustainability. For the six months ended 30 June 2023, the country’s life insurers paid benefits and claims totalling ZAR287.1 billion. PS, these pay-outs are made following tragic life events caused by death or disability, or life stage changes brought about by retirement, or the maturing of an endowment.
According to Gareth Friedlander, a member of the ASISA Life and Risk Board Committee, the life insurance industry remained well-capitalised, holding assets of ZAR3.93 trillion at the end of June 2023 to offset liabilities totalling R3.6 trillion. The ZAR364 billion in free assets is more than double the reserve buffer set out under the regulator’s Solvency Capital Requirements (SCR). ASISA noted that reserves are a critical indicator of the health of the long-term insurance industry, providing policyholders with the peace of mind that claims and policy benefits can be paid even in times of extreme market turmoil, or when the number of claims surges.
“Life insurers displayed significant resilience over the past three years in an unprecedented operating environment marked by the effects of a global pandemic, a struggling domestic economy and consumers under severe financial pressure,” said Friedlander, in a statement accompanying ASISA’s life industry update. For some additional good news, he revealed that the total assets held by the industry had grown by over 26.5% in the three-years since June 2020 despite the pressure-cooker financial market and pandemic backdrop. One wonders whether the industry enjoyed net benefits from the high inflation and interest rate environment given how bond values are negatively correlated with rate hikes.
Is this an economic problem, or overselling?
ASISA confirmed, or should we say contributed to, the opening line of this article by reporting that close to 5 million new recurring premium risk policies were sold between January and June 2023. These policies include the mainstream life insurance offering of death, disability and severe illness benefits alongside income protection policies, and the comparatively lower premium credit life and funeral policies. Unfortunately, 4.3 million policies were lapsed. “A lapse occurs when the policyholder stops paying premiums for a risk policy with no accumulated fund value,” wites ASISA. In plain English, if you or one of your family members is paying a monthly premium towards a funeral policy, and stops making those payments, the cover ceases.
Friedlander suggested that the country’s dire economic situation and the severe financial strain faced by many consumers on the back of rising interest rates were to blame for the high lapse experience. And there are countless statistics that back his assertion, including that the South African Reserve Bank (SARB) has recently hiked the Repo rate to the highest level in 14-years, at 8.25%. In fact, since November 2021, South Africans have endured no fewer than 10 interest rate hikes totalling 4.75%. This means the monthly repayment on a 20-year, R1 million home loan has gone up from ZAR7 753,00 to ZAR10 837,00, adding a staggering ZAR3 084,00 to the cost side of this monthly household budget. PS, it does not help that 32.9% of the population is unemployed, per the Quarterly Labour Force Survey (QLFS) for the first quarter of 2023.
However, the real measure of the consumer crisis comes courtesy the surrenders of recurring savings policies data, where the damage to the consumers’ financial wellbeing is arguably worse. Friedlander revealed that the surrender of endowments and retirement annuities had exceeded the sales of these policies over the period under review at 313 318 policies surrendered versus 284 647 policies sold. It is possible for a struggling policyholder to stop paying premiums, or even make an early withdrawal of funds, though the fee penalties for doing so can be stiff! “This experience is unsurprising since consumers are more likely to surrender their savings policies during tough times to cope with financial hardship,” he said.
Lapses and surrenders are inherently bad
Industry stakeholders are concerned by the level of lapses and surrenders because such decisions increase the risk that a consumer or household suffers a tragic life event without the financial protection that a life insurance policy offers. According to ASISA, “without the buffer provided by risk cover, a tragic life event like death or disability can plunge a household already struggling financially into complete ruin”. Similarly, an early surrender of an endowment or retirement annuity can leave a huge gap in the lump sum that an individual planned to have available at various crucial life stages, including retirement.
In the aforementioned presentation to the FIA Summit, titled ‘the power of storytelling’, Graham Easton, Divisional Executive Research and Insights at Liberty Group, hinted that more needed to be done to onboard and retain policyholders sustainably. Reading between the lines, this writer reckons the requirement is that more should be done to ensure that new policyholders can afford the policies they are sold, and understand the consequences of missing or ceasing payments. “One of our core principles is to actively manage [clients]; the more we get IT and technology to do the heavy lifting, the more we free up our people to make human connections,” Easton said.
The need to encourage policyholders to commit to product duration, be that to a future maturity or retirement date or until the unexpected happens, is recognised by insurance executives, as is the value in the risk products their brands offer. “The COVID pandemic highlighted the importance of having risk cover in place,” Friedlander said. “Many life insurers paid a record number of claims, and while these pay-outs cannot replace loved ones, they can prevent further trauma caused by the financial impact of the loss of a breadwinner”.
Plugging the gap through human connection
The latest half-year numbers can be further assessed in light of the 2022 ASISA Life and Disability Insurance Gap Study… This study concluded that the average South African income earner had a life insurance shortfall of at least ZAR1 million, and a disability cover gap of around ZAR1.4 million at the end of 2021. Overall, it shows that South Africa’s 14.3 million income earners had life and disability insurance to cover only 45% of their households’ total insurance needs; these households will be forced to cut living expenses should the earner die or become disabled, assuming no other source of income is found.
In a final plea to the country’s insureds, Friedlander encouraged policyholders who are struggling to make ends meet to discuss options with their financial advisers rather than simply letting go of their risk cover. “A financial adviser can help you by taking a holistic view of your financial situation and find sustainable solutions that are not driven by emotions,” Friedlander said. Easton, meanwhile, encouraged financial advisers and planners to use storytelling to create human connections, and build meaningful trust relationships with their clients over time.
“At all times you should strive to be authentic, enthusiastic and vulnerable … you must create lasting connections by listening to and empowering your clients,” he concluded. “And remember, financial advice loses its value if you cannot demonstrate results”.
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