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Life Industry
Friday, December 1, 2006
More outflows

The latest Ernst & Young Life Insurance quarterly index shows that life insurers faced significantly higher lapse rate levels in the third quarter of 2006, combined with growing surrenders.

The research and analysis of the study was done in conjunction with the Bureau for Economic Research (BER) at Stellenbosch University. 
Says Mike Kane, Lead Insurance partner at Ernst & Young: “Despite the sharp rise in both lapse rates and surrenders, confidence in the life industry remains firm.
“Growth in outflows exceeded that of inflows once again. In the 13 quarters the Index has been running, there was only one quarter where the rate of growth of inflows exceeded that of outflows. This represents a key challenge for the industry.”
Life assurers continue to face competition in the savings market from a host of other competitors, most notably, the collective investment (unit trust) market.
In addition, the recent negative spate of press coverage relating to low payout levels, and the subsequent National Treasury intervention to address these payouts, has also played a role in keeping the demand for life products somewhat subdued.
The survey goes on to find that investment income remains buoyant, following three years of strong equity and capital markets, which have served to boost the bottom-line of the industry.
Comments Mr Kane, “With some bumper years of investment returns, the life industry has been sheltered from its low-growing life book. Sooner or later though, the industry will feel the pinch. Rising lapse rates and surrenders are also not contributing to a positive growth trend for the industry.

“We suspect that some of the worsening lapse rate trends may be attributable to gaining traction in new lower-income emerging market segments. Typically, these consumers default on life policies where their income becomes strained. Whilst the industry has made some progress in trying to identify upfront where a household may default on paying their monthly subscription, not all companies have been equally adept at understanding and avoiding high lapse probability households.”
The pace of outflows growth has really risen considerably in the last two quarters. For one thing, life offices have had to employ more employees to cope with the additional administrative requirements. Secondly, sales remuneration and marketing expenses have risen in tandem with the higher inflows.
Observes Mr Kane, “Without the benefit of strong investment returns to shield them from consumer pressures, the industry would undoubtedly have had a tougher time than experienced in the last 18 months. Hopefully, some of the initiatives the life offices have implemented to reduce surrenders and lapse rates will start yielding results, and thereby participate to strengthening of inflows.”

Copyright © Insurance Times and Investments® Vol:19.6 1st December, 2006
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