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Life Industry
Sunday, January 1, 1989
Growing fast

Despite the stock market crash in October 1987 and the doubling of life assurance tax in the March 1988 budget, the industry continued to show the most remarkable growth of any in the country.
According to Life Offices’ Association (LOA) figures, on June 30 1988 total premium income stood at R15,5 billion, total investment income R5 billion, and total assets exceeded R73 billion. While it is true that white South Africans are now more aware of the financial necessity of saving for the future, we cannot underestimate the remarkable selling achievements of advertisers and intermediaries alike.
The altruism that assurance is sold, not bought, has never been so well demonstrated during a year in which inflation remained high, the tax burden inequitably severe, while the threat of sanctions affected the performance of the economy.
Computer systems
There has been a surprising dearth of new products. There was a spate of new developments in the early 1980s with the Universal Life and Dread Disease policies. But since then there have been no new products. This may be because, although that the increase in tax for the Universal Life type product is simple in concept, it is very complicated in terms of administration. It requires a large amount of computer power, as well as qualified personnel to anticipate computer necessities.
Two companies have taken a positive step in this direction: Crusader Life with its CAPSIL computer system; and, IGI which has just spent R7,5m on a new system.
Medical insurance
An area that has developed is the incursion into the medical field. The industry has very little underwriting experience in this field. There are a lot of legislative barriers too. But, true to their tradition, life assurers are highly innovative, sensitive to consumer demands and have rightly recognised that the consumer needs a more adequate form of medical cover.
One leader in the field, Crusader, offers a variety of health related products. These include: Major Medical Expenses; Hospital Benefit Plan; and, Dread Disease.
Says Bob Rowand, joint MD of Crusader, “In 1989 we plan to go beyond the hospital plan. We are hoping to offer total health care protection.”
Last year saw many life companies offering add-ons over and above the standard four dread diseases being: heart attack; cancer; coronary artery surgery; and, stroke. The add-ons range from paraplegia, blindness, and even injury in the event of urban terrorism.
Another area to which life companies are looking is casualty evacuation. Standard General Insurance launched its CASAVAC programme in August 1988. This is aimed at providing assistance during the “golden hour”, covering the cost of transportation from the site of an accident to the nearest appropriate hospital.
It was initially thought the assurance industry was encroaching on the medical societies. But this is not the case, as Mr Rowand says, “The payment that is made is unrelated to medical expenses and may be used to compensate for loss of valuable income.
“People are not looking for a substitute for medical aid, but are looking for supplements to cover the hidden factors that cause cost increases.”
One of the biggest threats facing the industry today is AIDS (Acquired Immune Deficiency Syndrome). In South Africa alone, the number of full blown AIDS cases has risen from 2 in 1982 to 150 as at October26 1988, with a mortality rate of 60%. In the United Kingdom, AIDS cases have increased from 3 in 1982 to 1 862 as at November 9 1988, of which 1 002 have already died from the disease.
The disease is rapidly becoming an epidemic. It must be remembered that the figures only indicate reported cases; many must go undetected. Clearly then the assurance industry has to look towards some form of protection against this “killer” disease. After much thought and discussion, the 36 members of the Life Offices’ Association have come to an agreement - either to exclude AIDS or to test potential clients for the disease over a certain sum assured. The agreement is not a hard and fast rule; each company is still able to take its own stance.
Moral and ethical considerations have fallen by the wayside as it is now the duty of each company to protect its policyholders’ investments.
The biggest problem is that of underwriting, as there are very little statistics available. The disease is such a high risk. As Douglas Keir, GM of Swiss Re says, “How do you underwrite promiscuity?”
On a more positive note, due to the structure of the universal life product, the industry is fairly well guarded. Says Mr Keir, “Assurance in South Africa is better protected than any other country by the very nature of the product.” This is because, within the structure of the universal policy, the life cover can be changed by the company.
Interestingly, South Africa is one of the only countries that is looking towards AIDS exclusion from life cover.
Informal sector
There has been the most amazing amount of entrepreneurial growth in the informal sector both in central business districts and in the townships. Until recently, the informal sector was an untapped market, but big business is now paying more attention to this sector.
African Life and Metropolitan Life are amongst a few assurance companies addressing the needs of this sector. Schemes include educational programmes, sponsorship of sport events, and housing developments.
Housing is inadequate to say the least. African Life has attempted to address this with its “matchbox to mansion” idea, which is the upgrading of an existing house to a double storey.
Says Bill Jack, MD of African Life, “Business is paying more attention to what people in the market want and is becoming more customer oriented.”
The first and most significant event that took place last year was in March 1988. The budget, which increased taxation for life companies, also had a detrimental effect on provident funds. The first negative feature was the abolition of the pre-tax deductibility of employees’ contributions to provident funds. The second negative aspect was that provident funds form part of “taxed business”, and were therefore heavily affected by the recent hike in tax for life offices.
September 1988 saw the introduction of “Bridgebuilder” by Old Mutual. This is a special savings package that is aimed at addressing the needs of the black worker,
By the very nature of the policy, it is viewed as a savings scheme rather than a pension fund. Due to this the prescribed asset requirements are only 33% compared to 53% for pension business. This is one thing black trade unions welcome because it means less investments have to go into government and semi-government institutions.
Another step in the direction of addressing the needs of the employee is the establishment of a committee of experts recommended by the Meiring Committee to investigate pension benefits. The committee represents employer and employee bodies, and was finally accepted by the government after 19 months. Called the Mouton Committee, it comprises 20 members, five of which represent trade unions.
“The incredible increase in the direct taxation on life offices will discourage long term savings and penalise the conscientious saver,” says Martin Sweet, senior legal advisor for Charter Life.
In last year’s budget the government introduced “an incredible increase in tax of 75% in one foul swoop.”
This came from an increase in the percentage of deemed taxable income from 40% to 70%.
Says Mr Sweet, “This 75% hike in life office tax is discriminatory and unclear. The tax is highly selective, and violates the principle of neutrality.” As regards estate duty in terms of its governing Act, one section which allowed for a R50 000 deduction of the estate if one owned a life policy, has been repealed.
This acted as an incentive for many to take out life assurance to qualify for the deduction.
This has now been replaced by a single fixed deduction of R1m. In excess of R1m is taxable at a flat rate of 15%. In addition there is the possibility of government taxing pensions and retirement annuities.
Mr Sweet concludes that, “Tax reform has given way to what amounts to extortion, with government increasing taxes under a cloak of reform.”
Although the life assurance industry has a “fat cat” image, it is one of the most important financial institutions in the country. Government is attempting to cool the domestic expenditure in the face of the increasing rate of inflation. It is therefore essential to secure one’s future by utilising some of the many products on offer by the industry.

Copyright © Insurance Times and Investments® Vol:2.1 1st January, 1989
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