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Send  Share  RSS  Twitter  29 Oct 2012

INSURANCE: Life Insurance Confidence Falls Again in Third Quarter

 





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In a quarterly survey released recently Ernst and Young reports that life insurance confidence dropped to 75 in the third quarter of 2012, from 81 index points in the second quarter. This was the second consecutive drop in confidence levels, after a strong 2011, when confidence of life insurers was typically above the 90 mark.

Tim Rutherford, Life Insurance spokesperson at Ernst and Young points out that banks have now become the most confident of all financial services companies, overtaking life insurers. Even so he comments that just less than eight out of ten life insurers are still satisfied with business conditions. This is slightly below long term average confidence levels.

This is the 37th quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch.

Tim Rutherford comments on the contrast between banking and life insurance confidence, and believes that life insurance confidence is very strongly related to South African economic fundamentals. ‘Life insurers had very strong confidence levels through 2010 and 2011. This has slowed in 2012, in line with weaker GDP prospects. In addition, the labour unrest which was characteristic of the third quarter will undoubtedly have knock-on effects. There are strong indications that retrenchments will result, and as these occur, so premium growth will likely be pressured.'

The survey further indicates that sharply higher outflows were evident in both the second and third quarters, and are considerably above 2011 levels. Coupled with these higher outflows, inflows growth has been slower through 2012, in line with weaker economic prospects.

Higher outflows were driven by a combination of:
-significantly higher benefit payments for the last two quarters, following a benign 2011;
- A sharp rise in surrenders, after more favourable trends in the first half of 2012;
- Strong administration and marketing expense growth, despite lower headcounts; and
- Higher sales remuneration growth, despite trimming agency forces.

A breakdown of inflows shows that premium income growth ticked up in the third quarter, (following a very weak second quarter), but remains below 2011 levels. Investment income growth, by contrast, has held up relatively well, and survey respondents expect this to hold for the remainder of the calendar year.

Rutherford comments, ‘Premium income growth has been slower in 2012, in line with reduced GDP growth expectations. This is particularly noticeable in the case of new business premiums, which slowed in the third quarter. Investment income, on the other hand remained buoyant.’ The results also show how life insurers struggled with lapses and contract terminations in the third quarter, after a very favourable first half in 2012.

Furthermore, the survey shows that life insurers had a strong third quarter rise in profits, despite the above mentioned sharp outflows growth. Rutherford notes that this is a continuation of a very strong first half, as recent financial reporting for the first half indicates. For the major companies, there was strong growth in headline earnings, supported by both solid premium and investment income growth. This in turn supported strong returns for the sector, with ROEV’s higher for all life companies.

In conclusion, despite declining confidence levels for two consecutive quarters, life insurers grew bottom line profits in the third quarter, supported by growth in both premium and investment income streams. One major concern for the sector lies in managing costs, given the substantial growth in overall administration expenses, coupled with escalating sales costs. Life insurers collectively reduced their headcount in the third quarter, and expect this to continue through the rest of the year, as they focus their efforts on costs.

 
 
 
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