Life insurer confidence remains strong

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Long-term average confidence is 82 index points, indicating that confidence levels remain slightly weaker than the long term average.

This is the 51st quarterly survey conducted to measure confidence in the life insurance industry, and the research is conducted by the Bureau for Economic Research in Stellenbosch.

Buoyant despite weak economy

Comments Malcolm Rapson, EY’s Africa insurance leader: “Life insurance confidence levels are reasonably buoyant given the weakening economic prospects. Confidence levels across many industries is softer, while in the case of life insurers, it remains more robust.”

In addition, the survey finds that life insurer confidence is stronger than it is across the other financial services segments, despite weaker premium growth and softening investment income.

Moderate earnings reported

Rapson says: “The recent reporting cycle undoubtedly shows how earnings have softened across the life insurance sector. All of the major companies reported very moderate earnings growth of between 5-10%. This is in stark contrast to the previous reporting cycles, where earnings growth was considerably stronger, and driven by favourable investment returns. Weaker investment returns in 1Q2016 were in line with renewed global investor uncertainty, and despite some revival in commodity prices, which saw investor sentiment towards emerging markets become more positive than they have been more recently.”

“It is difficult to understand the drivers behind the strong confidence levels, given the premium growth environment, coupled with shrinking investment income. There was somewhat stronger premium trends in the first quarter, and this could be driving some of the optimism. However, in a one percent GDP growth environment, premium growth is likely to be challenging through the rest of 2016.”

Other survey findings include:

• A sharp increase in lapses, which prior to first quarter of 2016, had been reducing through 2015.

• Continued sharp contractions in investment-related premiums.

• A rise in surrenders, although these remain within manageable levels.

• A visible reduction in the headcount, both administrative and the sales force.

Increase in lapses

The turnaround in the favourable lapse rate trend is a reflection of the weak economic environment.

“Typically we expect to see lapse rates worsen in toughening economic times, similar to how banks face rising credit impairments when faced with a weakening macro environment.” Rapson adds.

Surrenders also up

At the same time, surrenders increased during the quarter. “This could largely be a reaction to the weakening economic factors. Households are finding that they have more immediate cash needs, and are finding themselves less able from an affordability perspective to renew or extend policies,” he says.

Weaker investment premiums

The weaker investment premiums are part of a longer term trend, where the competitive forces provide a wider array of product offerings, allowing for greater consumer choice. Rapson says, “Differentiation is critical to attracting long term investment premiums, and a host of other financial services companies are increasingly competing in this space.”

Reduced headcount

The survey results show that in the last few quarters, life companies have been reducing headcount. This is in line with weaker premium (and more recently investment) income. However, whereas previously, the focus was mostly on reducing administrative employees, there now appears a broader focus on headcount reduction, including the sales force.”

Rapson concludes by saying: “Life insurance confidence is relatively strong given the circumstances. Although it is marginally below long-term average levels, given the general weak sentiment across financial services, this is a strong result.”

“We think this is – at least to some extent – driven by an upbeat outlook for the second quarter. The industry expects premiums to hold up quite well, despite the weak growth environment. Should emerging market (and commodity) sentiment hold, this could result in a favourable turnaround in investment earnings, which would provide some uptick to earnings.”