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Weak economy bites insurers

Weak economy bites insurers

JOHANNESBURG – Ernst & Young’s insurance index had remained weak in the fourth quarter due to slack economic conditions and weak investment income, the auditing firm said on Monday.

Faith in the insurance industry continues to be fragile, as it has been in the banking system, keeping profits subdued.
Last week Ernst & Young said banking confidence had sagged in the fourth quarter as investment banking felt the pressure of retreating commodity prices. Its banking index showed that confidence fell to 50 points in the fourth quarter from 61 in the third.
On Monday the Ernst & Young insurance confidence index – prepared by the Bureau for Economic Research in Stellenbosch – showed that life insurance confidence had moved from 51 to 53 index points.
Tim Rutherford, a lead insurance director at Ernst & Young, said that insurance confidence remained close to its lowest levels in the five-year history of the index.
‘While the basic operations of the core business are in good shape, it is really investment income and earnings which are hurting the life insurance market,’ Rutherford said.
‘This is not confined to our local market, either: across the globe, life insurers are struggling to earn positive profits, when they depend quite strongly on equity markets for a sizeable portion of their income.’
The share prices of the two biggest life insurers in South Africa, Sanlam and Old Mutual, also depict a dreary state of affairs. Since June, Old Mutual’s share price has lost 50,7 per cent, while Sanlam has sagged 14 per cent.
Analysts have said this was because many investors sold their insurance stocks as they became concerned about poor investment income.
Squeezed consumer disposable income had hurt revenue streams across many sectors of the economy, notably retailing and personal banking.
But life insurers had not faced a significant fall-off in their new business premiums.
‘While new business premiums have held up steadily, there has been a spike in both lapses and surrenders,’said Rutherford.
‘The ability of new policy holders to actually pay monthly premiums is what counts, and that is where the industry is feeling some pinch … Rising surrenders are symptomatic of squeezed consumers cashing in policies prematurely.’ – Business Report

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