Economy assisted by life insurance industry

“South African life insurers injected R412.2 billion into the economy last year (2015) through benefit payments to policyholders and beneficiaries. This is four percent more than in 2014, when total benefit payments amounted to R395.5 billion,” revealed the Association for Savings and Investment South Africa (ASISA).

According to Peter Dempsey, deputy CEO of ASISA, these life insurance pay outs would have come at a time when people had planned or unplanned financial need due to the loss of a breadwinner, disability or retirement.

“Whatever the reason for the benefit payments made to consumers, the reality is that there was a risk or savings policy that provided a financial back-up to these South Africans when they most needed it. As an added benefit, the R412.2 billion paid out in 2015 also provided our sluggish economy with much needed liquidity,” stated Dempsey.

However, Dempsey highlighted that it was not surprising that given the tough economic environment in 2015, many policyholders surrendered their savings policies in order to have access to extra money.

Risk policies decline

In 2015 there was a four percent decline in the number of risk policies bought compared to in 2014, from 5 million to 4.8 million. At the same time there was a R24 trillion risk insurance short fall. The insurance gap is the difference between existing life and disability cover and the actual insurance need of South African earners and is measured by ASISA every three years.

Of the benefits paid out in 2015, R45.7 billion was paid out for claims relating to death or disability. “Life and disability cover provide financial protection to families that could face financial ruin without it. Yet consumers continue to neglect an important aspect of their risk protection planning by not making provision for the financial impact of life changing events such as death and disability,” stated Dempsey.

Premium inflows increase

2015 saw a 13% increase in total new premium income collected, up to R138.9 billion compared to the R122.6 billion collected in 2014. The single premium business grew by 14%, which the recurring premiums business increased by 8%.

According to Dempsey, while single premium investments continue to contribute to the bulk of new premium income, “it is very likely that the introduction of tax free savings and investment accounts had bolstered recurring premium savings business.”

The recurring premiums savings business experienced a 22% increase to R4.8 billion in 2015.

Policy surrenders and lapses increase

Of concern to Dempsey is the 18% increase in the surrender value of individual savings policies. “A policy is surrendered when the policyholder stops paying premiums and withdraws the fund value before maturity,” explained ASISA.

According to Dempsey, it is possible that the increase in surrender value could be partly attributed to higher investment returns. However, it is probable that a higher number of policyholders surrendered due to financial needs.

“Surrendering a savings policy is rarely in the long-term interest of the policyholder, because it is almost impossible to make up at a later stage the compound growth lost,” highlighted Dempsey.

The number of lapsed policies for 2015 increased by two percent within the first year of being written. A policy lapses when the policyholder stops paying the premiums.

“While the lapsing of a risk policy does not result in the destruction of a policy value, it does remove the financial risk protection buffer leaving the policyholder and beneficiaries financially vulnerable in case of a life changing event like death or disability. The immediate benefit of saving the premium comes at the cost of an asset in the future, namely the policy pay-out,” explained Dempsey.

Long term insurance industry in good standing

The latest long term insurance industry statistics released by ASISA revealed that the industry is in good financial health, according to Dempsey. Furthermore, it revealed that the industry is well positioned to honour policy claims.

“The financial stability of the country’s long-term insurance industry is of critical importance, considering that the provision of risk cover to consumers is its core business. The life industry is also recognised as the custodian of a significant portion of the country’s long-term savings pool,” highlighted Dempsey.

At the end of 2015, the life insurance industry had assets of R2.58 trillion in value. This is more than six percent higher than the R2.43 trillion it held in 2014. “This means that in 2015 long-term insurance industry assets exceeded liabilities by more than four times the legal reserve buffer required,” notes ASISA.