Life Insurance confidence remains strong, supported by a strong JSE

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In a quarterly survey (pdf, 198kb)  released today, Ernst & Young reports that life insurance confidence remained very strong, rising from 92 index points in the last quarter of 2012 to 95 in the first quarter of 2013. This makes life insurers the most confident sector within financial services.

Tim Rutherford, Life Insurance spokesperson at Ernst & Young points out that life insurers have undoubtedly benefitted from strong equity markets, which have supported investment income and gains. “The recent reporting season provided solid evidence that earnings benefitted from noticeable investment income gains in 2012, especially in the last quarter of 2012. Investment income weakened somewhat into the first quarter of the current year, in line with weaker and falling GDP growth trends.”

This is the 39th quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch.

Life Insurance confidence levels remained strong in Q1 2013

 Life index report graph

The survey, which covers a broad range of financial services companies, found that financial services confidence was mixed in the first quarter of 2013, with large asset management and retail banking sentiment falling from the last quarter of 2012. Life insurer, small asset manager and investment banker confidence, in contrast, all rose. 

In addition to investment earnings though, survey findings also reveal that premium income growth remains solid, supported by new business volumes, and contracting lapse rates.  Life insurers had a relatively benign lapse rate experience through 2012, and the first quarter of 2013 was the first quarter in two years that contracting lapse trends were reported.

Rutherford comments on the ongoing focus that life offices have placed on improving lapse rates; “There is a continual need to ensure that new business premiums are profitable. To enable this, it is critical that new policies do not lapse, as this can result in considerable expense with no tangible benefit. Life offices all commented on the importance of this focus area through the recent 2012 reporting season. They expect this to benefit them via lower lapse rates going forwards. Certainly, lapse rate trends are expected to remain well below new business premiums into the second quarter of 2013.”

On the topic of premium growth, Rutherford points out, “The prominence of African earnings are becoming increasingly important. Undoubtedly, some of the premium growth is coming from new opportunities in Africa, in line with the banking sector’s long established presence across the continent. All the life offices spoke about their intention to grow their African operations, as they seek new growth prospects, and enjoy the benefits of already established offices across the continent.”

Other survey findings include:

  • Continued strong surrender levels, which are pressuring already high outflows.
  • Risk business profitability continues to rise, providing a boost to bottom-line profits.
  • Life insurers have been focused on improving efficiencies, and this is borne out by an improving administration cost to premium ratio.
  • The value of new business is also rising, and this is reflected in recently reported rising new business margins.

Rutherford comments on the continued high surrenders; “High surrender rates are pressuring overall outflows, and the gap between inflows and outflows growth means that a lot of benefit could be derived from slower surrender rates. Whilst prior to 2012 surrenders were less of a concern for the industry, we notice that since the middle of 2012, these have started rising sharply.  There is just as much, if not more, benefit to keeping surrender rates low as what there are to keeping lapse rates low, and all life insurers have frequently spoken of campaigns to manage surrender levels lower, so it is quite surprising to see these high levels reported in the survey results.”

Rutherford concludes; “The strong optimism of the life insurance sector is driven by solid operational growth, coupled with continued albeit weaker investment income growth. The rising premium growth has remained largely robust, despite weaker economic growth through 2012, and into 2013. Like the rest of corporate South Africa, life insurers are finding new growth streams across Africa, and are rapidly tapping into these. In addition, they are strongly focused on improving efficiencies, thereby supporting bottom-line profits growth.”

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 39th survey of life insurers conducted in South Africa.  The Bureau for Economic Research (BER) at Stellenbosch University conducts the research and analysis. For a more detailed discussion of the first quarter survey results, please consult the reports that are posted on Ernst & Young's website at the following address: www.ey.com/za

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 banking sector over the short run. Results reveal current and expected changes in banks' income, expenses, profitability, credit standards and investment.

This is the 45th survey of banks conducted in South Africa.  The Bureau for Economic Research (BER) at Stellenbosch University conducts the research and analysis. For a more detailed discussion of the first quarter survey results, please consult the reports that are posted on Ernst & Young's website at the following address: www.ey.com/za

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. This news release has been issued by EYGM Limited, a member of the global Ernst & Young organization that also does not provide any services to clients.

Following on from Ernst & Young’s successful integration in 2008 of 87 countries into one area from across Europe, Middle East, India and Africa (EMEIA), the firm has launched its Africa Business Center™ (ABC), which aims to enhance the effective and efficient links between its geographic reach and areas of expertise. The firm enjoys representation in 33 countries across Africa.

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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