Insuring against contagion
You might think that SA’s life insurance sector would be one of the Covid-19 casualties. You’d be wrong
The life insurance sector, which will need to foot the bill for rising rates of illness and death blamed on Covid-19, is at the sharp end of the pandemic. But unlike large swathes of the tourism sector, for example, it is not on the brink of collapse.
There are free assets of R373bn in the life offices, more than double what is needed under the solvency capital requirements imposed by the Prudential Authority. And recent market ructions won’t leave policyholders stranded.
As Hennie de Villiers, deputy CEO of Sanlam Personal Finance, points out, life insurers protect solvency reserves against market volatility by keeping equity exposure to a minimum.
"The life industry exists to make sure that valid claims and benefits are paid to policyholders and beneficiaries," he says.
Herman Bosman, CEO of Rand Merchant Investment Holdings — the largest shareholder in Outsurance, Momentum Metropolitan and Discovery — says the Spanish flu of 1918 led to greater public appreciation of the value of insurance, "but we need to be careful to keep to the spirit of insurance and manage our reputations".
De Villiers acknowledges that an increase in the lapsing or cancellation of policies is a danger because of the impact of the pandemic on incomes. But it is up to clients to contact their advisers or insurers to make an arrangement, and not wait for the debit order to bounce.
Bosman says there will be many partial lapses in corporate insurance as pension funds are likely to buy cheaper forms of group risk cover as Covid-19 bites.
Abulela Gazi, head of business solutions at Metropolitan, says the company’s products are designed to help clients through extreme events. The Metropolitan funeral plan is designed to allow clients to miss up to four premiums before the policy lapses, and it can be reinstated without any waiting period.
Tabby Tsengiwe, head of communications at Old Mutual, says the group’s financial strength targets are set at a level that enables it to survive a "perfect storm" — presumably including not having a permanent CEO. She assures clients that Old Mutual, which paid out its final 2019 dividend last week, will meet its obligations. The insurer is in a closed period but will give the market a business update soon.
Karin Muller, CEO of Sanlam Individual Life, says the spread of Covid-19 is constantly being assessed and the views of life insurers could change on a monthly or even weekly basis. But she says that for now it is not appropriate to increase premiums for new clients, given the additional financial pressure everyone is facing.
Sanlam has a R1bn pandemic reserve to serve as a buffer, but anything above this will hit the bottom line, though it can still be funded through general reserves.
Liberty has been the most proactive at reviewing its product suite. It has suspended sales of its retrenchment protector and income protector products with short waiting periods such as seven days or a month, and has introduced three-month waiting periods for some high-risk occupations.
Dave Jewell, head of Liberty Retail, says the uncertainty is so great that the suspended products cannot be priced "responsibly". He says all existing policies will be honoured. "But we also have to protect our business to ensure that we continue honouring our commitments."
Jewell says Liberty’s premium rates for new business "are based on our expectations over the full term of the policy" and will not be affected.
He says it is far quicker to change underwriting practices such as waiting periods and new forms of testing than it is to change prices.
Liberty decided to remove the three-month Covid-19 exclusion from new policies once it became clear that the government was taking proactive measures through the lockdown.
Gazi says that given the nature of Covid-19, and the probability that it will be a passing phenomenon, the industry is unlikely to impose a standard exclusion.
Stephen van Niekerk, head of Momentum Life, says that while the company has not taken products off the shelf, it will be more cautious about pricing policies such as income protection with short waiting periods and retrenchment cover.
Muller says Sanlam has not formally withdrawn any products, but without medical testing it cannot offer temporary income protection or sickness cover with short waiting periods.
"Whether we will be able to offer these will depend on our ability to assess the risk, our ability to manage the anti-selection risks — where those expecting to need the cover sign up — and the heightened claimed risk."
All this while having no idea of the final outcome of the pandemic.
Dumo Mbethe, CEO of Momentum Corporate, expects an increase in income disability claims due to the weaker economy, increased financial pressures on workers and bosses and limited alternative employment options.
Liberty says it believes it has a "special duty" to support its community of brokers and advisers, and is sceptical about direct sales — it has closed its direct business Frank.net.
But at the other extreme, Anthony Miller, head of Simply, says there has been little interruption for sales of the insurtech operation’s fully digital product.
In fact, April was the best month yet for retail sales at Simply, which launched in 2015.
Intermediated sales into small and medium businesses have dropped off marginally, with more new business from essential services such as couriers and security guards.
Simply has introduced some loading for higher-risk occupations such as marine diving and aviation and is considering further categorisation.
Riaan van Reenen, CEO of Discovery Life, says about 200 of its policyholders have tested positive for Covid-19, two of whom have died. These deaths were in line with age-adjusted expected mortality.
Discovery has introduced "immediate lockdown cover" for new policies, once it has full access to a client’s medical information.
But Van Reenen says funeral business marketed at workplaces cannot be sold until offices and factories reopen, and policies that involve complex medical underwriting cannot be issued because laboratories are not allowed to accept this work for now.
So, even with the uncertainty, is the life insurance sector attractive for the investor?
The listed businesses all have enough capital to survive the pandemic, and if there are casualties they will be among the smaller unlisted offices, particularly those focused on the employee benefits market.
Money market rates have plummeted, which makes a 10.9% dividend yield for Liberty and 9% for Old Mutual look attractive.
Sanlam still has a blue-chip rating, but at R60 is still well below its 12-month highs of R80. It has built up capital specifically to deal with the present crisis, a claim that few other top 40 shares are likely to be able to make.