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Media Release
Life Offices’ Association (LOA)
4 October 2007
RA funds back in vogue
Following several years of sluggish sales, the life industry has reported a significant increase
in retirement annuity (RA) fund sales for the first half of this year.
Gerhard Joubert, CEO of the Life Offices’ Association (LOA), says the 2007 half-yearly
statistics for the long-term insurance industry released this week show that sales in new
recurring premium RA funds increased by a whopping 36% to R747.1-million in the first
half of this year compared to the same period last year. Compared to the second half of last
year an equally impressive increase of 31% was recorded.
The same trend is true for new single premium RA fund policies, where a 21% increase
brought total sales to R3.1-billion, compared to the second half of last year.
“The fact that we have seen a positive growth pattern for two consecutive reporting periods
is very encouraging. We are cautiously optimistic that the life industry has finally managed to
restore consumer confidence in the RA fund as a tax effective and disciplined savings vehicle
for their retirement.”
Joubert believes that the implementation of the Statement of Intent played a significant role
in restoring this confidence.
“Consumers are far more likely to use a RA fund to save for their retirement knowing that
their retirement savings will not be hit as hard as in the past should they no longer be able to
pay their premiums.”
Existing RA fund members also continued to increase their recurring RA fund premiums.
During the first six months of this year recurring RA premiums increased by 12% to R5.8billion, compared to the same period least year, and by 7% compared to the second half of
last year.
Industry growth
Joubert says growth was not only experienced by RA funds. The life industry as a whole
recorded steady growth of 7% during the first half of this year compared to the same period
last year, with total premium and investment income increasing to more than R106-billion.
Individual premiums amounted to R48.3-billion, while group scheme premiums were R32.7billion. A net inflow of R7.7-billion was recorded.
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Living annuities shine
The swing from the compulsory to the investment linked living annuity (ILLA) continued
during the first half of this year. While living annuities attracted just over R5-billion in single
premiums (a growth of 27% compared to the second half of 2006), compulsory annuities
managed a growth of only 2% to R2.6-billion over the same period.
Joubert says this trend is typical during low interest rate periods when investors expect equity
markets to provide greater growth.
“With a compulsory annuity the annuity rate, or monthly pension, is determined by the life
insurer and is dependent on the current interest rate. But with a living annuity, investors can
choose a suitable mix of underlying market linked investments.”
Benefit payments
The life industry settled claims worth R79.7-billion during the first half of this year, a 13%
increase over the first half of last year and a 15% increase over the second half of last year.
“This means that life companies put almost R80-billion back in the hands of beneficiaries,
policyholders and pension fund members as a result of death and disability claims as well as
maturity pay-outs and pension and annuity payments during the first six months of this
year,” says Joubert.
Life companies settled individual claims worth R42.1-billion in the first six months of this
year, while group schemes and pension funds paid out benefit claims worth R37.6-billion.
Surrenders and lapses
The surrender value of policies was lower during the first half of this year than in the second
half of last year (a reduction of 4% was recorded), but surrender values were up by 18%
compared to the first half of last year. A policy is surrendered when the policyholder stops
paying premiums and withdraws the reduced fund value before maturity.
Joubert explains that this does not necessarily mean that more policies surrendered, but
rather that the value of surrendered policies could have increased, largely as a result of a run
in equity markets.
Joubert says the 11% increase in the lapse rate of policies in their first year during the six
months to June compared to the same time last year is of concern. He points out, however,
that credit life policies significantly influence this percentage as they lapse when a debt
installment is not paid or when debt is repaid early.
A lapse occurs when the policyholder stops paying premiums before the fund value exceeds
the unrecovered costs meaning that the paid-up (or surrender) value is zero. In the case of
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risk policies, however, a lapse has no impact on the policyholder as there was no policy
value.
Regaining consumer confidence
Joubert says steps taken this year to regain consumer confidence include:
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Ends
Value enhancements to more than half a million RA fund and endowment policies
during the six months to the end of May this year in line with the Statement of
Intent.
Ensuring that RA fund policies and endowments that are made paid-up (premiums
are stopped) or where the premiums or term of the policy are reduced after 1
December 2006 receive at least 70% of the fund value. RA fund members who
decide to retire early will also receive at least 70% of the fund value. And
endowments that are surrendered will receive at least 60% of the fund value.
Appointing a high powered panel of long- and short-term insurance experts to delve
into problem areas in the consumer credit insurance market during public hearings
this month.
Announcing the removal of projected maturity values from quotations and policy
documents by early next year in a significant move towards better managing
customer expectations.
Launching a new web based jargon busting tool aimed at simplifying generic risk
product descriptions and medical terminology used in life and critical illness policies.
Issuing a best practice recommendation to LOA member offices to waive existing
HIV/AIDS exclusions for all lump sum death and disability benefit claims from
April this year.