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Life Industry
Tuesday, May 1, 2007
On the rebound

Life industry attracts over R50 billion in new business last year

The long-term insurance industry attracted a whopping R50,2 billion in new individual life business last year, a 14% increase over the R44,2 billion for 2005.
Commenting on the 2006 sales statistics Gerhard Joubert, CEO of the Life Offices’ Association (LOA), says the trend is heartening given the life industry’s efforts to regain consumer confidence by placing a much greater focus on the needs of the client.
Total income for the industry escalated by 23% to R201,9 billion last year compared to the R163,6 billion received in 2005. Total income consists of existing premium income for both individual business and group schemes as well as investment income.
Mr Joubert explains that the R50,2 billion new individual business is made up of recurring and single premiums. Individual business consists of life, disability, dread disease and income protection policies as well as endowments, retirement annuity funds, living annuities and compulsory annuities.
He says, looking at the five year picture, life companies have recorded a steadily increasing flow of new individual recurring premium business, from R7,3 billion in 2002 to R9,5 billion last year.
In addition, new individual single premium business received by life companies last year was the highest in five years. In recent years new single premiums had started to lag, but last year the industry saw new inflows of R40,7 billion. This is the highest inflow recorded since 2002 when new single premium business amounted to R36,7 billion.
While consumers continue to value the RA fund as a tax effective and disciplined savings vehicle for their retirement, inflows are not yet back to the levels last seen in 2004 before the wave of consumer concerns over charges, inflexibility and transparency of washed over the industry.
New RA fund recurring premiums decreased by 12% to R1,1 billion last year from R1,3 billion in 2005. The highest new business levels recorded for RA fund recurring premiums in the past five years was in 2004 at R1,5 billion.
Mr Joubert adds that the half-yearly statistics did, however, present some good news. New RA fund recurring premiums increased by 8% in the second half of last year to R592,7m compared to the first half of last year.
In addition, existing clients continued to increase their recurring RA fund premiums both year-on-year (by 7% to R10,6 billion in the last year from R9,9 billion in 2005) as well as from the one half year to the next (by 5% from R5,2m for the six months ended June 2006 to R5,4m for the half-year ended December 2006).
Good news for policyholders is that the life industry settled individual claims to the value of R80 billion last year. This represents an increase of 10% over the R72,7 billion paid in 2005.
Mr Joubert explains that there has been a steady growth in benefit payments over the past five years, mainly because of increasing investment returns and new generation risk products typically offering higher cover levels.
“As more and more of the life industry’s new generation risk products are sold, more claims with higher values attached to them will be received and settled by life companies.”
He adds that while an increase in surrender and lapse rates is always worrying, last year’s increase in the value of policies surrendered was caused largely by positive circumstances. (A policy is surrendered when the policyholder stops paying premiums and withdraws the reduced fund value before maturity.)
He says the increase in the value of surrendered policies is largely due to a significant increase in investment returns last year, combined with the fact that life insurers started paying higher surrender values in the second half of last year in anticipation of the implementation of the Statement of Intent. This is an undertaking by the industry to limit the reduction in fund value when contractual changes are made by policyholders. The process of implementing the Statement of Intent started on 1st December last year when it was written into regulation and will be completed by the end of May this year.

Lapsed policies and Zimele

Mr Joubert says the increase of 34% in the number of policies lapsed last year was, however, of great concern. In 2005 the number of lapses increased by 22%. A lapse occurs when the policyholder stops paying premiums before the fund value exceeds the unrecovered costs. This means that the paid-up value is actually zero.
He says the fact that mainly low premium policies were lapsed proves that affordability and appropriateness of policies has been an issue. The introduction in February this year of Zimele approved policies should hopefully reduce the number of lapses.  “The way that life companies will score points in terms of the Financial Sector Charter for Zimele compliant policies will also ensure that lapse rates are reduced, as there are major incentives for keeping existing business on the books,” he explains.
He adds, however, that there will always be a strong correlation between growth in new business and growth in lapses. “Since there has been a significant increase in recurring premium inflows from the low-income market, it is not surprising that the lapse rate has also increased.”
The life industry introduced its first products to be offered under the Zimele brand in February this year in the form of funeral products.
In line with the capped pricing structure for funeral products sold under the Zimele stamp of approval, R5 000 cover for a member and a family under the ages of 55 will cost no more than R45 a month.
Now that the full set of Zimele standards has been approved for funeral products, life companies will use this pricing blueprint to start developing other products that are not only affordable, but also appropriate for the LSM 1-5 market. These will include credit life, mortgage protection, life cover as well as disability cover.

Consumer confidence

Mr Joubert says the life industry has taken a number of steps in recent months to regain consumer confidence:
RA Policy values. Life companies started improving policy values for RA fund members and endowment policyholders who can no longer afford their premiums in line with the Statement of Intent from December last year.
War waivers. In January the LOA announced that it had signed a protocol with the South African Defence Force (SANDF) whereby member life companies would waive war exclusion clauses for South African soldiers involved in peace keeping operations. A similar agreement was also been signed with the South African Police Services (SAPS).

Zimele standards. In February, the LOA introduced Zimele, aimed at ensuring that South Africa’s estimated 17,5m low income earners are given access to affordable life insurance products. Zimele represents the standards that life insurance products aimed at the low-income market will have to meet to qualify for scoring in terms of the Financial Sector Charter’s access provisions. The Zimele standards for funeral insurance products were launched first, with other product standards to follow.
HIV/Aids waiver. More recently the LOA has announced that as from 1st April 1 this year, its member life offices will no longer apply existing HIV/Aids exclusions to life and disability policies.
 

Copyright © Insurance Times and Investments® Vol:20.4 1st May, 2007
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