STEPHEN CRANSTON: Life industry has kept many afloat during Covid
If you doubt that life offices play an important role in SA’s social security landscape, just look at the latest life insurance industry statistics.
Claims and benefits paid out were R523bn, almost R200bn more than the entire spectrum of social grants. Of course, customers would have needed to afford to keep up their R200 to R500 a month premiums to enjoy those benefits. But it means that they do not depend on the state, while many people in affluent northern European countries still depend on the state for help in a crisis.
No fewer than 458,000 people in SA turned to their life offices for assistance during Covid instead of begging from the state. The industry provided R1bn in relief.
Industry figures the Association for Savings and Investment SA (Asisa) issued this week show the key role life offices played as mortality rose in 2020 because of Covid. Death claims rose almost 120,000 to 434,000. And life offices took the knock of extra claims while remaining well capitalised. In fact, the asset/liability ratio fell only marginally from 2.14/1 to 2.11/1.
It would have been a good time to buy a risk policy. There was undoubtedly a lag between the pricing of life policies and the rise in deaths. But largely because of affordability, the number of new risk or protection policies sold fell from 9.6-million lives to 8.9-million. And to augment cash flows in the short-term, the number of lapsed risk policies rose 16% to 10.2-million.
With savings policies, the number of recurring premium policies sold fell by 230,000 to 543,000. Single premium policy sales rose marginally to 166,000 as affluent investors diversified into products which aren’t available on the unit trust licence such as structured products, which at least guarantee no loss over five years. Surrenders of savings policies fell, indicating that existing investors in life products understand the penalties they will suffer in the first five years. With low interest rates, new structured products cannot provide the same guarantees and upside as the ones they hold now. There are 40.4-million recurring premium life policies in force, excluding most funeral policies which are separately regulated as assistance business. There are 2.8-million single premium policies but in total the in-force policy count fell by 2.2-million to 43.2-million.
The unit trust sector is reluctant to provide client numbers, much less a breakdown between single (lump sum) and recurring (debit or stop order) business. I suspect its client count is much closer to the 2.8-million single figure than to the 40-million plus recurring life clients.
In absolute terms unit trusts and life now have a similar asset size. In spite of Covid there was a R213bn net inflow into unit trusts. Life offices don’t like talking about net flow, but they almost certainly experienced higher outflows than inflows. Unit trust flows were nonetheless, at R44bn in December, half the level of the June 2020 quarter. It doesn’t make sense to wrap an income or money market fund in a five-year endowment, so unit trusts are realistically the only route to invest in these assets. And these dominated the flows in 2020, with R93bn going to income and bond funds and R90bn into money market funds. Even multi-asset (asset allocation) funds, which drew R56bn in 2019, attracted a tiny net R3bn in 2020.
Asisa at its media conference always gives an interesting view of the structure of the industry then and now. In December 2015, multi-asset funds made up 51% of the domestic market. This has fallen to 46%. High equity, the core product for retirement capital, has fallen from 24% to 22%. But a much bigger loser has been the low-equity sector, which has a cap of 40% equity. This has fallen from 14% to 9% as fixed income performed substantially better for most of the past five years. So it is no surprise than many clients switched down the risk curve to multi-asset income funds, which have a 10% cap on equities. They have grown from 7% to 11% of domestic assets. I am not sure it was wise to switch out of growth assets such as equity and property, which are vital to ensure a comfortable retirement.
It is always sad to see the inexorable decline of equity funds, from 21% to 17% of the industry. Unit trusts were designed for the man in the street to access the JSE. This client base was abandoned long ago as unit-trust management companies and their intermediaries find it much easier to focus on the lump sums provided by the affluent. But at least equity and high equity funds still have a large 39% of the market representing the long-term investors.
• Cranston is a Financial Mail associate editor.
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