Life insurance confidence falls for second quarter consecutively although life companies satisfied with business conditions
In a quarterly survey (pdf, 1.1mb) released today, EY reports that life insurance confidence fell for the second consecutive quarter in the third quarter of 2013, and is now also below 2012 levels . Confidence levels fell from 83 index points in the second quarter of 2013 to 67 currently from a high of 95 in quarter 1 of 2013. This means that life insurers are no longer the most confident in financial services.
This is the 41st quarterly survey measuring relative confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch.
Life Insurance confidence has fallen considerably in the last two quarters
The survey, which covers a broad range of financial services companies, found that financial services confidence fell again in the third quarter, led by retail banks, which remain the least confident across the financial services sector. Asset management confidence remains strong, led by a robust stock market, and despite global emerging market uncertainty.’
Malcolm Rapson, EY’s Africa Insurance Sector Leader points out that the lower confidence is in line with a gloomier economic outlook and slowing premium growth. “Although premium growth remains positive, it is slower than previous quarters. Ultimately, slower GDP growth will impact premiums, and may ultimately slow earnings, as operational revenue growth slows.”
He adds, “Life insurers are not unique in this regard. Bank confidence has also been declining since the first quarter of 2013, and retail banks in particular face the same strong headwinds that life insurers face. South Africa’s GDP growth for the first half of 2013 averaged 2% below its longer term average levels. In this environment, with zero employment growth, it is to be expected that revenue flows will ultimately be pressured.”
The survey also found that investment income growth remains positive as well. This is in line with a strong JSE return this past year, and despite global emerging market turmoil, which resulted in considerable currency depreciation across a number of countries, including South Africa. Rapson comments that “the rapidly depreciating currency ironically played a role in supporting investment income, as currency weakness supported stronger equities, as local investors resorted to Rand hedge stocks.”
Rapson adds that life insurers expect the same trends to continue into the fourth quarter of 2013. “Premium income growth is likely to remain positive but subdued by recent standards, with investment income likely to grow somewhat more moderately. As a result, bottom line profits growth may start to slow in the last quarter of 2013.”
Other survey findings include:
- Consistent improvements in lapses and improving policy surrender trends, supporting improved profitability.
- A much stronger bias towards and increasing profitability of risk-based products, with investment related premiums virtually flat.
- Life insurers continue to shrink their headcount, both in terms of administrative support and agents marketing policies.
- Slower administrative cost growth than the previous four quarters, in line with the lower employee numbers.
Rapson believes that the improving lapse and surrender trends are a result of a strong focus over many years to address these indicators and is a good outcome for the industry and policyholders. “A number of life companies have commented over a long period of time about their intention to focus on writing better quality business (to reduce lapses), and to simultaneously slow policy surrenders. These efforts often take a while before the benefits are felt, and we have seen for a few quarters that lapse rates remain moderate, whilst surrenders growth has slowed.”
With regards the shift to greater risk-based business, Rapson points out that this is also part of a longer term re-focusing of insurers. “There is a much larger spread of competing product suppliers that life insurers are up against in the investment space. By comparison, traditional risk-based premiums are one product line that only life companies have the expertise to provide. Life insurers have intensified their efforts in this space, and are benefitting from strong growth in what is a profitable niche segment.”
He concludes, “Despite the weaker confidence, nearly seven of every ten life companies remain satisfied with business conditions. Inflows are growing at a more moderate pace than they were in the first half of 2013, but growth remains positive. With a continued strong focus on rationalising costs, the expectation is that profits growth will similarly remain positive, albeit slower. Given the subdued economic growth prospects that South Africa faces, this is a comfortable position for the sector overall.”
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 41st 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 third quarter survey results, please consult the reports that are posted on EY's website at the following address: www.ey.com/za
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization and may refer to one or more of the member firms of EY Global Limited, each of which is a separate legal entity. EY Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
This news release has been issued by EYGM Limited, a member of the global EY organization that also does not provide any services to clients.
Following on from EY’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.