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Send  Share  RSS  Twitter  17 Jan 2011

INSURANCE: Life Insurance Confidence Drops Below Pre-Crisis Levels


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Life Insurance confidence slipped again in the 4th quarter, despite a strong positive turnaround in investment income. Despite stronger overall income levels, life insurers reported contracting profits, after a largely strong profit performance through most of 2010.

In a quarterly survey, the results of which were released earlier this week, Ernst and Young reports that life insurance confidence fell from 91 index points in the 2nd quarter to 83 in the 3rd quarter, and 78 currently. This means that just less than eight out of ten life insurers were satisfied with business conditions in the 4th quarter of 2010.

Tim Rutherford, Life Insurance spokesperson at Ernst and Young comments that these levels are still stronger than the position of one year ago, when seven out of ten life insurers were satisfied.

This is the 30th quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch.

Life Insurance confidence slows again to just below pre-crisis levels

Tim Rutherford continues, ‘The 4th quarter of 2010 was a bit of an anomaly in that life insurer earnings and hence confidence levels, are strongly correlated with stock markets. The 4th quarter of 2010 saw a strong turnaround in stock exchange earnings, which resulted in strong gains in investment income earnings. However, this did not feed through to the bottom-line earnings of life insurers.

Rutherford points out that declining risk profitability are at least partly to blame for the weaker profits. In contrast to the previous two years, 2010 saw continual declines in risk profitability, and in the fourth quarter of 2010, the profitability actually contracted sharply. He notes that ‘Risk profits have become more important to life insurers, especially because investment product related premiums have increasingly become subject to more and more competitors across various financial services providers.’

He adds, ‘Even through the severe global liquidity crisis, which had its greatest impact in the middle of 2008, risk profitability largely held stable, and in 2009, actually grew quite noticeably. The delayed impact of continually squeezed household income, coupled with declining employment levels have probably resulted in the much reduced growth in risk profitability through 2010.

This trading environment is not dissimilar to that of the banking market. Retail banks have been hard pressed to grow revenue streams and earnings in an environment where household debt-to-disposable income ratios remain high, albeit gradually improving.

Despite the stronger income growth, supported by strong investment income and surging investment premiums, growth in outflows proved to be even higher. In large part this was caused by considerably higher benefit payments, but in addition, costs continue to pressure bottom-line earnings’.

Once again, similar to other financial services sectors, and in line with growing regulatory pressures across the globe, life insurers continue to absorb the costs of mounting regulations. Solvency II is due to be implemented in South Africa within the next two years, and planning to ensure compliance and readiness with this accord is going to be costly. As a result, it has proved difficult for life insurers to reduce their administration ratio, and any improvements have proved to be short-lived.’

‘We expect cost pressures to become even more pertinent into 2011, as life insurers need to maintain and grow their market share, and at the same time, ensure their readiness for Solvency II and the myriad of other global regulatory requirements which they are likely going to need to comply with.’

Rutherford concludes, ‘Provided equity markets remain strong, there should be continued strong upside in investment income growth. This in turn is likely to support higher confidence, particularly if premium and new business volumes remain relatively buoyant, as they have recently (albeit with a change in business mix from business to investment business). Although confidence is weaker, it is not far below its long-term average readings, and provided the weaker profits prove to be temporary in nature, the prospects for life companies remain reasonable, given the current ‘fragile economic recovery.’


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