Life Insurance confidence remains strong, albeit weaker

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In a quarterly survey (pdf, 938.9kb) released today, EY reports that life insurance confidence remained relatively strong in the second quarter, although it did fall somewhat from first quarter levels. Confidence reading fell from 95 index points in the first quarter of 2013 to 83 currently. Life insurers remain the most confident sector across financial services.

The sustained strong confidence was measured, despite visible evidence of a slowing economy, and less buoyant business confidence across South Africa. Tim Rutherford, Insurance sector spokesperson at EY comments that ‘there don’t appear to be any change to life insurers’ business prospects just yet. Unlike the banking sector, where lending growth has slowed and thereby resulted in much weaker confidence, life insurers are still reporting strong premium growth.’

This is the 40th 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 1Q13

Life index Q2 13 graph 

The survey, which covers a broad range of financial services companies, found that financial services confidence fell overall in the second quarter, led by retail banks, who are faced with weak lending prospects and concerns about rising bad debts. Asset management confidence fell more moderately, although investor sentiment remained weak through the period.’ 

Rutherford comments on life insurers’ continued strong confidence; ‘ recent quarterly updates from the life insurance sector indicates that the first quarter of 2013 was generally good. Our latest index results show that these buoyant conditions held into the second quarter of the year. This was led by sustained strong premium growth, coupled with visibly stronger investment income. Together, these two metrics provide for a strongly supportive business environment, despite the much weaker GDP growth numbers and rising labour strife through the quarter.’

The survey further found that bottom line profits continue to grow soundly for the industry, driven not only by the favourable inflows, but also by keeping a firm grip on lapses and surrenders. Rutherford points out that ‘ life insurers have more recently improved the quality of the business written. This plays a key role in driving earnings, as lapses can consume major management time in addressing and correcting. Lapse rates are less of a problem for the South African insurance market than they have been for a while.’

In addition to the benign lapses, surrenders also slowed during the quarter. Says Rutherford, ‘ again, this can be, and has been, a major drain on life insurers’ net client flows, as high surrender levels can easily offset new business written. This is something that all life companies have focused on for a long time, and the latest quarter’s results indicate that those efforts are resulting in slowing surrender levels.’ In addition, the expectation is that further improvements are likely going into the second half of the year.

Other survey findings include:

  • Risk based business is growing considerably faster than investment product business.
  • The strong premium growth came about despite a rationalized agent force.
  • The focus on improving efficiencies across the industry has led to continued shrinking in the headcount – both sales and administration focused roles.
  • Continued improvements in the value of new business written, indicating that margins are rising.

The gap between new risk premiums and investment premiums has widened in the last two years, with new risk based business growing three times faster than what investment based inflows are. Rutherford comments as follows ‘Life insurers have undoubtedly focused their efforts on risk based products, particularly after weaker results in the previous year,. This is strongly supporting the margin gains insurers are making, as evidenced by rising new business values.’

Rutherford concludes ‘despite the strong confidence, economic growth remains weak, and this is likely to pressure growth prospects further down the line. On the other hand, there is still a strong lower-income segment to tap into, where insurance penetration rates remain low. Life companies are all strongly focused on growing the uptake of insurance products in this market, and that may continue to provide the strong growth they have experienced in the first half of 2013.’

About the EY Financial Services Index

The EY 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 40th 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 second quarter survey results, please consult the reports that are posted on EY's website at the following address:

About EY

EY is a global leader in assurance, tax, transaction and advisory services. We make a difference by helping our people, our clients and our wider communities achieve their potential.  EY refers to the global organisation of member firms of EY Global Limited, each of which is a separate legal entity.

EY is a company comprising of 150 directors and has a staff complement of over 2000 in offices throughout the country.  We have made significant progress with its transformation and are the leaders amongst the Big Four with 47.3% of its staff and 25.3% of its ownership being black, 53.6% of its total staff being female and 28.6% female ownership. In addition, we have 41.6% black director representation on our Leadership Board.

We have been proactively responding to the globalisation of our clients by integrating our country practices across Europe, the Middle East, India and Africa. Our Africa integration has exceeded our expectations and we currently enjoy a presence in 25 African countries.