I-Net Bridge
Life insurance confidence remained strong in the first quarter of 2008, despite slowing business fundamentals, the latest Ernst & Young Insurance financial services index shows.
This strong confidence was measured despite sharply slower investment income growth, and rising growth in policy surrenders, Ernst & Young says.
This is the 19th quarterly survey conducted to measure confidence in the life insurance industry. Life insurance confidence is now the strongest of all financial services sectors, ahead of the banking industry (78 points), and investment management confidence (77 index points).
"The other sectors of the financial services sector are reporting significantly weaker confidence on the back of declining economic fundamentals.
"Although life insurers remain so confident in their outlook, we noticed that in the banking and investment management sectors, a few quarters of negative fundamentals typically precedes declining confidence," says Tim Rutherford, insurance industry spokesperson at Ernst & Young.
While premium income growth held up well in the first quarter, investment income turned sharply downwards in the first quarter of 2008. This had a direct impact on bottom line profitability.
"The last few years have been good for the life insurance market largely through rising equity markets, which have resulted in strong and growing levels of investment income.
"But global market turmoil, coupled with our own less favourable economic prospects locally, has brought an end to boom investment income earnings. In fact, investment income earnings turned negative in the quarter, implying contracting investment income earnings," says Rutherford.
Other findings illustrate that slightly slower premium income growth was accompanied by slowing new business premium growth.
"Whilst there was not a significant drop in premium income growth in the latest quarter, if we look at the levels of growth recorded in early 2007, and compare that with current growth levels, there is definitely a slowdown in the pace at which the industry is attracting premiums.
"For a while now, life insurers have seen investors switching their investments out of contractual savings into collective investments.
"That placed some pressure on premium growth, but the industry worked hard to offset these losses. 2007 was a particularly good year for premiums, but it now appears that general economic pressures on consumers are leading to premiums being squeezed once again.
"We also notice that lapse rates are declining, which should be a boost for life insurers. However, what we are seeing is that policyholders are surrendering policies to a greater extent than they were in the past.
"The reason for this is the agreement between National Treasury and the life insurance industry, (implemented in 2007). This makes it more worthwhile for policyholders to surrender a policy, rather than let it lapse, as they get a payment in exiting the policy, which was not necessarily the case in the past.
"If anything, declining lapses, coupled with rising surrenders leads to greater outflows for life insurers. This definitely affects the cost of doing business, and is not therefore a positive for the sector," Rutherford adds.
The survey also found that profits came under pressure in the first quarter of 2008, with growth in outflows considerably in excess of inflows.
"We notice that the first quarter of 2007 also saw a strong slump in profits growth, so there could be seasonal factors playing a role in such a sharp downturn in profit growth. But unlike the first quarter of 2007, there is a considerable fall-off in investment income growth, which looks likely to hold into the next few quarters, and thereby squeeze profits growth," Rutherford says.
"Although life insurance industry confidence remains strong, the underlying economic fundamentals and life insurance index indicators suggest that life insurers prospects may not be in sync with their confidence levels. We expect, as is the case with the banking and investment management sectors, that declining economic fundamentals will lead to lower confidence in the quarters ahead.
The life insurance sector lagged its other financial services peers in confidence levels for quite a while in 2004 to 2006, and we may simply be seeing an extension of this trend," he concludes.
No comments:
Post a Comment