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Send  Share  RSS  Twitter  22 Jul 2010

INSURANCE: Life Insurance Confidence Rises Again


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Life Insurance confidence continued to rise in the second quarter, despite weaker investor sentiment and equity markets, resulting in sagging investment income. Life insurers reported buoyant profits growth, despite slowing premiums.

In a quarterly survey Ernst and Young reports that life insurance confidence rose sharply, from 77 index points in the previous quarter to its current level of 91. This means that nine out of ten life insurers were satisfied with business conditions in the 2nd quarter of 2010. This is up sharply from the position of one year ago, when only five out of ten life insurers felt satisfied.

Comments Tim Rutherford, Ernst and Young’s Life Insurance sector spokesperson, ‘ Life insurers reported strong profits growth during the quarter, and this has undoubtedly driven the strong sentiment. These higher profits came despite contracting investment income, which was already severely depleted in the midst of the global financial crisis.
In addition, income was also hurt by slower premium growth, which one would expect to result in profit contraction, at the very least. However, he adds, ‘slower growth in operating expenses and sales remuneration helped to offset the slower income flows.

He continues, ‘ One area where life insurers appear to have made significant progress is in reducing lapses, and in slowing the level of policy surrenders. The slower lapse rate has surely boosted the level of inflow growth, while flat surrender levels helped contribute to slower growth in outflows.’

In fact, he adds, ‘life insurers have made their best progress yet in addressing lapse rates, since the survey’s inception seven years ago. And there appears to have been a focus too on simultaneously addressing surrender leakages, in tandem with the lapse reduction exercise. This is an ongoing challenge for the life insurance sector, and the signs appear promising that their renewed efforts to address these leakages are paying rewards.’

In addition, says Rutherford, ‘Usually periods where investment income is either slowing or contracting, results in pressure on profits growth. This did not happen in the current quarter. The degree of investment income decline would typically depend on the underlying investment portfolios, although both equities and bonds came under pressure in the 2nd quarter, as local interest rates continued to fall.

Other survey findings include:
•    A contraction in employee numbers – the first time since the survey’s inception there has been an absolute decline in headcount in both administrative employees and agents.
•    Growing value of new business volumes.
•    A sharp rise in the administration expense / premium income ratio, despite slowing administration and marketing expenses.
•    Growth in investment related contracts remains higher than that of risk-based contracts, despite a steep fall in both categories.

Comments Rutherford, ‘ Life insurers have had a strong focus on their cost base for a while – certainly since latter 2008, and into 2009. But through this period, there was not an industry wide cut in headcount. In fact, headcount kept rising through that period, despite the sharp profit contractions experienced. Often, corporate restructuring takes time to take effect, and we think that the current headcount reduction is really a reflection of past efforts to restructure. The expectation is that headcount within insurance companies will remain flat in the immediate quarter ahead, although the agency headcount is likely to rise once again.’

Rutherford concludes, ‘While life insurers were undoubtedly hurt by the global liquidity crisis, the extent of their pain was not as entrenched as it was for banks, which have yet to meaningfully recover. Bank confidence levels in fact hit a record low level in the second quarter while life insurers’ confidence hit a very strong level. However, it is a bit of an unknown whether the global economy is heading for the so called double-dip recession, in which case renewed investor uncertainty could still pressure life insurers’ income flows and thereby profits in the quarters ahead.

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