Londiwe Buthelezi
Life insurance business confidence levels remained the strongest in the financial services sector in the second quarter, achieving 90 index points, an index released by Ernest & Young showed yesterday.
Stronger consumer sentiment was favourable to life insurance, leaving nine out of 10 life insurers satisfied with their business conditions in the second quarter.
The research, conducted by Stellenbosch University’s Bureau for Economic Research (BER), showed that confidence was boosted by soaring inflows, which were aided by better investment and premium income.
Ernst & Young life insurance spokesman Tim Rutherford said: “Strong life insurance confidence is driven by strong operational fundamentals. Premium income is being fuelled by strong new business volumes. Investment income is also growing. As a result, income growth is at its strongest pace in over two years.”
Retail banking confidence rebounded sharply to 50 points from 20 in the first quarter.
“Banks were hit harder by the financial crisis as the crisis was much focused on banks, that’s why their confidence fell. Also, life insurance companies were already managing their expenses when we encountered crisis while, on the other hand, banks weren’t,” Rutherford said.
BER deputy director George Kershoff said high debt levels and weak credit demand had resulted in lower profitability for the retail banking sector.
“They eagerly want to lend but they can’t find people who satisfy their requirements so they have to deal with both decreased income and increased expenses,” he said.
Banks expected the sharp rises in income growth, contained cost increases and improved profitability seen in the second quarter to boost interest income in the third quarter.
In the investment bank space, two thirds of businesses were satisfied with business conditions, raising confidence levels to 67 points from 55 in the first quarter and 25 points in last year’s comparable period.
The investor community remained nervous about the asset management business, both locally and internationally. Kershoff said the new Greek debt crisis played a critical role in shaping investor sentiment. Thus the confidence in the asset management business fell from a very strong 85 index points to 77 points.
The confidence of large managers declined to 73 points from 86 in the last quarter.
Life insurers expected even higher inflows this quarter as they expected a rise in premium income and moderate conditions in investment income.
“Global commodity prices remain strong, and South Africa’s equities benefit strongly from that movement. Added to that, risk premiums are showing signs of sustained volume growth, coupled with rising margins, which is strongly supportive of overall attractive market conditions,” Rutherford said.
The only concern in this sector was the continued rise in lapsed policies, which saw a significant surge this year.
“The last two quarters have seen a reverse of the gains made in the previous calendar year. The second quarter saw a particularly sharp spike, and this proves the point that life insurers continuously need to keep an eye on lapse trends,” Rutherford said.
PSG Konsult analyst Dimitri Mitropapas said the insurance industry had seen cheaper entrants and more businesses had become proactive when dealing with their customer.
Jean Pierre Verster, an analyst at 36One Asset Management, said life insurance went through a rough patch in 2008/09 when the equity market was lower and people cancelled their policies. This had recently improved and life insurers had seen their new business volumes pick up, he said.
“They used that opportunity but as far as the third quarter is concerned, I think it might not look as positive as the equity market has dropped again,” he said.