Weak investment returns keep life insurance confidence subdued.
Ernst & Young Financial Services Index Q3 2008
Ernst & Young recently launched its 3rd quarter 2008 Insurance confidence index which showed a continued declining, due to sustained weak investment income, which in turn kept profits growth subdued (albeit positive) during the quarter. The declining confidence is in line with weaker business confidence across most financial services segments. During the quarter, life insurance confidence fell to 57, from 63 in the previous quarter.
Life insurance confidence remains the weakest of all financial services sectors, trailing the banking industry, (61 points), and investment managers (67 index points). Comments Tim Rutherford, insurance industry spokesperson at Ernst & Young; ‘Confidence among life insurers continues to fall, primarily on the back of weak investment income. Weak equity markets are not helpful for life companies, and across the globe, the sector is feeling the impact of volatile equity markets.’
Life Insurance Confidence Levels
Rutherford continues, ‘Confidence reached the lowest level yet in the five year history of the index, and it is a remarkable turnaround from the situation of last year, and into the first quarter of 2008. However, not all is doom and gloom. Operationally, premium incomes are providing some relief to the industry. Life insurers can take some comfort from their rising premium growth – other financial services segments are not reporting rising core revenue growth just yet.’
Another key finding of the survey relates to rising costs. All segments of financial services are being pressured by cost growth, which is not falling in line with slower revenue flows. Both banks and investment managers have experienced difficulties in getting their cost bases to slow in line with slowing revenues.
Rutherford adds, ‘To a large extent, costs have been incurred by operational needs. Compliance costs have generally increased, as the degree and scope of regulation has intensified in the last few years. Whilst the industry was generally able to absorb these additional costs in a strong economy, it is proving difficult to slow the pace of cost rises in a slower economic growth environment.’
The survey also found that lapses and surrenders continue to rise. Says Rutherford, ‘This is likely a symptom of the economic environment. Lapse rates are high when times are tough, particularly in the low end of the market, where the easiest debit order to bump has little impact on one’s day to day living. Surrenders may also be rising due to consumer squeeze, with a policy surrender used to provide for everyday general living expenses.’
Net profits in the life insurance sector were only marginally positive in the 3rd quarter of 2008, the 3rd consecutive quarter that profits growth has remained subdued. Says Rutherford, ‘Profit growth in life insurance continues to slow, in line with other financial services sectors and more broadly with the general economy. Higher premium income was insufficient to offset the impact of significantly lower investment income growth. We notice that in the interim reporting period to June 2008, the major life insurers collectively reported a 20% decline in headline earnings. This confirms that the trend which had already started in the first half is continuing into the latter half of 2008.
In conclusion, says Rutherford, ‘Life insures have the double whammy of relying on (weaker) investment income for a large portion of their earnings, and it is thus understandable why their confidence levels are lower than that of their other financial services peers.’
About the Ernst & Young Financial Services Index
The Ernst & Young Financial Services Index Survey measures the performance of the banking; investment management and life assurance sectors on a quarterly and consistent basis and releases the information timeously. The survey is designed to assist in analysing trends in the life insurance sector over the short run. Results reveal current and expected changes in inflows, outflows and profitability in the sector.
This is the 21st quarterly survey of life insurers conducted in South Africa. The Bureau for Economic Research (BER) at Stellenbosch University conducts the research and analysis. For a more detailed discussion of the third quarter survey results, please consult the reports that are posted on Ernst & Young's website at the following address: www.ey.com/za
About Ernst & Young
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 130,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www.ey.com. Ernst & Young refers to the global organisation of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited does not provide services to clients.
Ernst & Young South Africa is a company comprising 143 directors and a staff complement of over 2000 in offices throughout the country. Ernst & Young South Africa has made significant progress with its transformation and is the leader amongst the Big Four with 54% of its staff and 29% of its ownership being black, 53% of its total staff being female and 29% female ownership. The South African company is also Top Ten Ranked in the Corporate Research Foundation’s Best Employer 2007 and 2008 surveys as well as the winner of the Foundation’s Best Companies to Work For in South Africa 2006 survey.
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