Life Insurance confidence remains stable
Johannesburg, 10 April 2014
Life Insurance confidence remains stable
In a quarterly survey released today, EY reports that life insurance confidence remained stable and relatively strong in the first quarter of 2014. Confidence was one point lower than fourth quarter readings, coming in at 79 index points. Life insurance confidence is in line with asset management confidence levels.
This is the 43rd quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch.
Life Insurance confidence was stable in 1Q14
The survey, which covers a broad range of financial services companies, found that overall financial services confidence was somewhat lower in the first quarter of the year, with weaker asset management and investment banking confidence pushing the financial services index down.
Malcolm Rapson, EY Africa Insurance Sector Leader points out that the “stable confidence comes despite weak economic growth and the general emerging market commotion that was so evident in the first quarter.”
He says, “thus far, life insurers have responded well to the generally subdued economic environment. The recent results reporting season indicates that the affluent segment of the market is keeping overall premium growth in double digit territory. The mass market, by contrast, experienced weaker growth in 2013, and was impacted by industrial strife, slow employment growth and weak disposable income growth.”
Rapson further adds, “We noticed that retailers who target lower income markets faced challenging headwinds in the second half of 2013. Life insurers were no different, and those life companies with stronger exposure to higher income segments did particularly well.”
Survey results also showed though that whilst premium growth is still rising strongly, investment income, on the other hand is contracting. This was the second consecutive quarter that investment income shrunk. Rapson comments, “Investment income makes up a sizeable portion of income, and whilst in 2013, life insurers reported stronger investment income than 2012 levels, the trend indicates that growth in this income stream slowed in the last quarter of 2013. This slowdown appears to have accelerated into the first quarter of 2014.”
Rapson continues, “Profit growth was moderately slower in the first quarter of this year, but remain positive nevertheless. The slower investment income impacted bottom line profits. Profit growth slowed to its lowest pace in two years. This occurred despite risk product lines showing strong profitability improvements.
Whilst life insurers have been keeping a careful eye on cost containment, they nevertheless face certain unavoidable costs they will have to incur. For example, SAM implementation becomes fully effective in 2016, and the industry continues to make the necessary investments in systems enhancements to ensure they are able to comply with this and other pending regulatory requirements.”
With regards lapse and surrender trends, the survey results indicate that the former were flat in the first quarter, whilst surrenders growth slowed somewhat. Rapson points out that, “typically lapse rates rise when interest rates start rising. Thus far, the industry has not seen a spike in lapses, but that may change, as consumer incomes become more pressured as debt servicing costs increase.”
On the surrenders side, he adds, “These remain quite high by 2012 and 2013 standards, despite the easing trend observed in the first quarter. Insurers continue to focus on maintaining policies and client funds, as this is very cost effective for them.”
The survey also canvasses insurers on their employee numbers, and in quarter one of 2014, there was no growth in headcount after declining employee numbers during 2013. However, first quarter agent numbers rose at their strongest pace seen in the last few years, following two years where the trend was in the opposite direction.
In conclusion, the index illustrates that business conditions for life insurers remain favourable, with confidence sitting above long-term average levels. Whilst investment income may be pressured in the first half of 2014, premiums continue to rise at rates above inflation. However, rising interest rates, coupled with weak economic growth prospects do need to be considered, as this will ultimately pressure life insurance earnings, even if the impact is not felt immediately.
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 43rd survey of life insurers conducted in South Africa. The Bureau for Economic Research (BER) at Stellenbosch University conducts the research and analysis.
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