Apart from having clear and achievable investment goals that accumulate and preserve wealth, protecting assets is a must in any financial plan. One of the biggest assets to protect is our ability to earn income. This week we take a look at the latest stats from ASISA on the long-term insurance industry that show that we can do more to protect these assets.
Consumers commit billions to retirement savings, but neglect risk cover
South African consumers paid R43.5-billion in new premiums to South African life insurance companies during the first half of this year. This represents a 6% increase over the same six-month period last year and an 8% increase over the second half of last year.
Releasing the South African long-term insurance industry sales statistics for the first half of 2012, Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa (ASISA), says new single premium business (lump sum premium payments) of R35.6-billion made up the bulk of the new individual premiums received. This represents a healthy increase of 5% over the same six-month period last year and an 11% increase over the second half of last year.
New individual recurring premiums for the first six months of this year amounted to R7.9-billion, a solid 10% increase over the first half of last year, but a 3% drop when compared to the second half of last year.
Individual business typically consists of endowments, retirement annuity funds, living annuities and compulsory annuities, as well as life, disability, dread disease and income protection policies.
The biggest takers
Dempsey says living annuities alone attracted R13.7-billion in single premiums from January to the end of June this year – the biggest portion of the new single premiums. Traditional guaranteed annuities attracted only R2.5-billion in single premiums, although still 11% and 12% more than in the first and second halves of last year.
“This comes as no surprise since traditional guaranteed annuities are generally seen as less attractive when interest rates are low. However, this is not always true, especially for older pensioners. As an industry we therefore have to do more to educate consumers on the role of living annuities versus guaranteed annuities. If used wisely, sometimes even in combination, both types of annuities can provide pensioners with solid income producing options.”
Dempsey also reports that retirement annuities (RAs) remain popular with consumers saving for their retirement.
RAs attracted new monthly premiums worth R822-million in the first half of 2012 -16% more than in the first half of last year and 3% more than in the second half of last year. New lump sum investments into RAs amounted to R3-billion, representing an increase of 13% compared to the first six months of 2011 and a whopping 29% increase over the second half of last year.
Dempsey says it is encouraging that consumers continue to recognise the benefits of investing in RAs, which are the industry’s disciplined retirement savings vehicles.
He expressed concern, however, about the decline in long-term risk policies, which provide cover for events such as death, disability, and dread diseases.
Taking a risk
New recurring individual risk policy premiums of R3.9-billion for the first half of this year were 9% down on the second half of 2011 and only 5% up on the first half of 2011.
In addition, the number of lapsed risk policies less than 12 months old increased by 27% compared to the first half of 2011, but decreased by 15% when compared to the second half of 2011.
Dempsey says while consumers are clearly taking their retirement savings seriously, the lower uptake of risk policies is of grave concern. He says tough economic conditions and a high cost of living are probably to blame.
“Increasingly consumers can simply not afford life cover and then still provide for their retirement. Something has to give and many consumers are probably opting to go without life, disability and dread disease cover.”
In 2010 independent research conducted for ASISA showed that the average South African income earner was underinsured by R600 000 in the event of death and by R900 000 in the event of disability. In total, South Africans were underinsured by R18.4-trillion.
According to Dempsey there is a real risk that the insurance gap has grown since ASISA commissioned the research in 2010. The 2012 Life and Disability Insurance Gap Study is currently underway.
During the first half of this year, the life industry paid out more than R130.6-billion in benefits to policyholders, beneficiaries, and pension fund members as a result of death and disability claims, maturity pay-outs and pension, annuity and other payments. This is 31% more than in the first half of last year and 7% more than in the second half of last year.
Dempsey points out that these benefit payments highlight the real value add of the life industry. “Without the financial protection offered by life and disability cover, for example, many families would be left destitute.”
Surrenders and lapses
The value of surrendered investment policies increased by 6% from R19.7-billion at the end of the second half of last year to R20.8-billion at the end of the first half of this year.
A policy is surrendered when the policyholder stops paying premiums and withdraws the fund value before maturity.
According to Dempsey, the statistics for surrendered policies need to be seen in the context of the total value of in force policies – estimated to be a large portion of the life industry’s R1.56-trillion assets.
The total number of lapsed policies (risk, credit life and savings policies) in existence for 12 months or less decreased by 14% in the first half of this year.
A lapse occurs when the policyholder stops paying premiums before the fund value exceeds the unrecovered costs meaning that the paid-up (or surrender) value is zero. The average monthly premium of policies lapsed was R93.83.
Health of the industry
South African life insurers held assets of R1.56-trillion at the end of June 2012, an increase of 7% from the R1.47-trillion held at the end of 2011.
Dempsey says the industry’s assets continue to exceed liabilities by more than double the legal reserve buffer required. “The life industry remains strong and healthy and well positioned to honour future benefit payments to policyholders.”
This article is comment only. Please consult a financial planner for all investment, wealth and asset protection needs.