Life Insurance confidence levels remains strong despite Euro crisis
In a quarterly survey released today, Ernst & Young reports that life insurance confidence remains surprisingly robust in the fourth quarter, at 93 index points. This means that more than nine out of ten life insurers remain satisfied with business conditions in the fourth quarter of 2011, marginally up from the previous quarter.
Tim Rutherford, Life Insurance spokesperson at Ernst & Young points out that life insurance confidence levels continue to be the strongest in the financial services sector, noticeably ahead of asset managers, where only six out of ten are satisfied with prevailing business conditions, and banks, where five out of ten are.
This is the 34th quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch.
Tim Rutherford comments, ‘Other Financial Services markets are feeling the impact of the continued global uncertainty stemming from the Euro debt crisis more acutely than what life insurers are. Banks did not fully recover from the global financial crisis when they were knocked by the Euro crisis. This kept funding very tight for bankers, while asset managers felt an immediate impact in terms of weakening inflow trends and tighter margins.’
He adds, ‘ South African life insurers have largely shrugged off the impact of the Euro crisis thus far. Even weak economic growth figures have not impeded growth in premium income, which has remained surprisingly strong through 2011. Even investment income, which typically shrinks in times of uncertainty, has remained remarkably steady.’
In addition, he mentions that life insurers had relatively mild benefit payments in the fourth quarter. As a result, the quarter was one in which the asset base grew, and this was true for 2011 as a whole. ‘Life insurers had a strong 2011, and as a result, their confidence levels are well ahead of long-term average levels. This is not true for the banks or asset managers, whose confidence levels are both considerably below long-term average levels.’
He adds ‘2011 was a year in which life insurers increased their agent force noticeably, following a rather different picture in 2010, when distribution channels were kept held constant. Stronger premium growth trends have undoubtedly provided the need for a larger agent force, and this was evident throughout all four quarters of 2011.’
‘ On the other hand, the headcount has been more erratic in nature, with the fourth quarter experiencing a strong reduction in headcount. We think this is related to the need for continuous efficiency improvements, which was a strong theme mentioned by the large insurers during their interim results presentations in the third quarter. This focus on improving efficiencies is undoubtedly continuing, and insurers indicated that they expect to cut back on employee numbers into 2012.’
Other survey findings include:
- Strong rises in new business income, although this was partially offset by much stronger lapses and terminations in the fourth quarter.
- Sturdy profitability of risk-based products, following a weak 2010.
- Moderate growth in surrenders, and
- Sharply rising administration expenses through 2011, albeit weaker in 4Q.
Rutherford points out that the improvement in the surrenders trend-line is due to a considerable focus by the industry collectively to manage surrenders. ‘The value of holding policies on one’s books after these policies have matured is considerable, and is far more cost effective than writing new business. The progress that has been made in slowing the rate of surrenders can thus not be underestimated.’
Rutherford also points to the first quarter of 2012 as being critical. The expectations of the survey respondents indicates that the first quarter is not likely to be as strong as the fourth quarter of 2011, but should nevertheless continue to provide very positive numbers. Premium growth is likely to slow, but to remain comfortably positive nevertheless, and investment income should also provide a positive boost for the industry.
He ends by commenting on the general global outlook: ‘Currently, we are seeing a number of weaker economic growth forecasts emerging. Whilst weak GDP growth has not hindered premium growth up till now, the combination of slower premiums, coupled with potential investment income knocks, could change the scenario for life insurers. The banks and asset managers are already feeling that impact. However, if a speedy resolution to the Euro crisis can be found, and should it pan out in the first few months of 2012, life insurers’ prospects will no doubt remain favourable.’
About the Ernst & Young Financial Services Index
The Ernst & Young Financial Services Index Survey measures the performance of the banking; investment management and life assurance sectors on a quarterly and consistent basis and releases the information timeously. The survey is designed to assist in analysing trends in the life insurance sector over the short run. Results reveal current and expected changes in banks' income, expenses, profitability, credit standards and investment.
This is the 34th survey of life insurers conducted in South Africa. The Bureau for Economic Research (BER) at Stellenbosch University conducts the research and analysis.