Life insurers' confidence soars

7/21/2010 12:40:03 PM

SURE KAMHUNGA

Financial Services Editor

CONFIDENCE levels in the life insurance sector rose significantly in the second quarter despite weak investor sentiment and volatile equity markets, Ernst & Young said in a survey released yesterday.

This contrasts sharply with the mood among investment bankers and asset managers who told Ernst & Young they had yet to start benefiting from the “green shoots” of economic recovery.

At least nine out of 10 life insurers surveyed said they were satisfied with business trends, a major improvement from the five out of 10 who made similar comments during the corresponding period last year.

Another survey by PricewaterhouseCoopers recently also found that insurers were optimistic about business trends, and were predicting further growth.

Insurers have emerged largely unscathed from the financial crisis, and have instead focused on growing market share while cutting costs to survive the downturn.

“Life insurance confidence rose sharply, from 77 index points in the previous quarter to its current level of 91. This means that nine out of 10 life insurers were satisfied with business conditions in the second quarter of 2010. This is up sharply from the position of one year ago, when only five out of 10 life insurers felt satisfied,” said Ernst & Young.

Ernst & Young's life insurance sector spokesman, Tim Rutherford, yesterday attributed high confidence in the life insurance sector mainly to strong profit growth.

“Life insurers reported strong profit growth during the quarter, and this has undoubtedly driven the strong sentiment. These higher profits came despite contracting investment income, which was already severely depleted in the midst of the global financial crisis.”

Mr Rutherford said an area where life insurers appeared to have made significant progress was in reducing the rate of policy lapses and in keeping the rate of policy surrenders contained.

“The slower lapse rate has surely boosted the level of inflow growth, while flat surrender levels helped contribute to slower growth in outflows. In fact, life insurers have made their best progress yet in addressing lapse rates, since the survey’s inception seven years ago.

“And there appears to have been a focus too on simultaneously addressing surrender leakages, in tandem with the lapse reduction exercise. This is an ongoing challenge for the life insurance sector, and the signs appear promising that their renewed efforts to address these leakages are paying rewards,” Mr Rutherford said.

The survey found that life insurers expected outflows to continue to decline during the third quarter of the year, although not significantly so.

During the period under review, profits after tax edged up as easing outflows more than made up for the drop in inflows.

“In addition, the value of new business grew in absolute terms for the life insurance industry.

“Respondents foresee these favourable circumstances more or less continuing into (the third quarter) despite considerably slower inflows,” the survey found.

kamhungas@bdfm.co.za