A survey of life insurers in South Africa shows that confidence in the sector has dropped by 12.9 % from 93 index points in Q1 2012 to 81 in the second quarter.
This fall follows strong confidence levels in 2011 and into Q1 2012, when the confidence of life insurers remained at or above the 90 mark.
In spite of this drop, Tim Rutherford, a life insurance spokesperson at Ernst & Young, said life insurance confidence levels continue to be the strongest in the financial services sector.
Rutherford noted that Q2 2012 was a volatile one for financial services companies across the globe.
Eurozone crisis impact
“The lack of resolution to the Eurozone crisis continues to wreak havoc on global equity and bond markets, and this has a direct impact on investment income earnings for life insurers. South African life companies were not immune from the consequential impact, and as a result investment income earnings slowed through the quarter.”
Rutherford said: “Life insurers have generally experienced strong uplift from a combination of strong investment income (stemming from rising equity markets), and reasonably strong premium income growth since the beginning of 2011. This changed in the second quarter, with both income streams slowing noticeably, whilst at the same time, outflows rose considerably.”
He added that premium income “slowed to a trickle” during Q2 2012 and coupled with this, life companies also faced very sharp rises in benefit payments.
This slowdown in premium growth came about despite solid new business growth, said the survey.
Rutherford said: “Surrenders were sharply up, and that would have hurt overall premiums, which appears to be the experience for many life offices. Lapses on the other hand, appear to remain under control, rising only minimally through the quarter.”
Other findings from the survey findings included:
- An expectation that slowing investment income will prove to be a temporary phenomena, with a strong rebound expected in Q3 2012
- Continued improvements in efficiencies, largely driven by ongoing declines in employee numbers
- A large difference in inflows and outflows, with the total asset book shrinking as a result of a sharp rise in outflows, coupled with significantly slower inflows
Commenting on the state of the life insurance industry in South Africa during Q2 2012, Rutherford said conditions have “undoubtedly toughened”.
However, he said more recently, global economic circumstances appear far more favourable, which at the very least, should provide support for investment income streams.
“Initiatives under way to streamline operations are also likely to positively benefit profits into the second half of 2012. However, life insurers have no control of GDP and employment growth, which remain critical for future premium growth. But the outlook for premiums appears weak, in line with slow GDP growth expectations,” noted Rutherford.
This is the 36th survey of life insurers conducted in South Africa. It was conducted by the Bureau for Economic Research in Stellenbosch.