Recurring-premium savings business growth shows revival
• Lack of social-security safety net means that people have to provide for themselves
One of the pleasures of reviewing the life insurance statistics used to be the chance to interact with Peter Dempsey. This consummate diplomat, who used to run Old Mutual’s broker distribution, has hung up his shingle in Plettenberg Bay. His last job was as deputy CEO of the Association for Savings and Investments SA (Asisa), the lobbying group for life offices and asset managers.
Whether there is some kind of Buggins’-turn arrangement is uncertain, but the new spokesman on the life stats is Hennie de Villiers, the No 2 in the core Sanlam life business. He is a different kettle of fish from Dempsey, more plain spoken and less subtle in his ambition. It is surprising given the way Ian Kirk drives his people at Sanlam that De Villiers has time to sleep, let alone for something as ceremonial as an Asisa committee.
Nevermind SA’s love affair with the Outsurance pointsmen, its love affair with life insurance has been even longer. The country’s best teams of door-to-door salespeople have built the life industry into a R2.63-trillion giant. This is still materially bigger than the R2-trillion unit trust industry. As Asisa represents both industries the figures are probably correct.
With no social-security safety net except for the very poor it has been necessary to make private provision.
The country has been a hotbed of innovative products as it has had very lax regulation.
According to True South, the actuaries who compiled the report, R1.69-trillion is invested in equities or unit trusts. One might wonder why anyone would pay the double charge of paying for a unit trust wrapped in a life product, but it often makes sense to use unit trusts in a retirement annuity (RA) or a (post-retirement) living annuity. Not always — in my Sanlam RA, I invest through a much cheaper direct portfolio, the preferable way to get exposure.
A highlight was that there was 38% growth in recurringpremium savings business. Despite the growth of unit trusts, these endowment policies have had a revival. It is just that little bit harder to cash in endowments, which encourages disciplined monthly saving for a fixed term, usually five or 10 years. In fact there has been a substantial increase in the number of recurring savings policies, from 561,000 to 776,000. Much of this however, consists of quite small tax-free savings accounts: the maximum is R33,000 a year. These accounts are a really good deal and I would urge anyone to put their spare cash into them. Though they are not taxdeductible, there is no tax on interest and dividends, nor is there capital gains tax.
De Villiers says many other kinds of life products were not as successful. In RAs recurringpremium sales fell 11% to R255bn and single-premium RA business fell 8% to R33bn. It does not help that once RA money has been committed it cannot be touched until the client reaches 55, and even then only one-third as a lump sum with the rest going towards a pension. The exception is when the full proceeds fall below the R247,500 de minimis threshold, in which case it can be taken as a lump sum. People who took advantage of this rule did not buy life or living annuities with their capital. Arguably people with a small pool of savings most need the protection a regular annuity provides, but the law has changed, for better or worse. As it is, with all those with less than R250,000 out of the annuity market, there was a significant fall in the take-up of investmentlinked life annuities (Illas) of 18% to R55bn and compulsory annuities to R14bn.
Financial advisers need to take their responsibilities more seriously. Are Illas, in which the client takes full market risk, really suitable for 80% of clients? They are certainly preferable to fixed annuities, which give no protection against inflation, but what about inflation-linked annuities or even profit annuities? The latter make a lot of money for the life offices but they are a good compromise between income stability and market growth.
I have never been an unalloyed fan of life products, which are often opaque. The old-fashioned distribution system is extremely expensive, though clients only found this out after regulations forced proper disclosure. But there are definitely times when life insurance is critical, for example for young families with the bulk of their home loan still to be paid off.
It is good to see that competition is driving clients to different insurers. During the year 23 insurers had increases in individual premiums but 11 had decreases. It was more of a blood bath on the group (employee-benefits) side as 18 experienced a slump in income. There were benefit payments of R429bn in 2016, a 4% increase on 2015. These payments, as De Villiers says, were for planned events such as retirement as well as traumatic ones such as death and disability — more than R38bn was paid out for these traumas.
Others were forced by financial circumstances to surrender their policies. There was a 16% increase in the surrender value of individual policies or more than R10bn to R80bn. But don’t worry about the industry’s ability to pay out. Much of industry’s capital is so lazy it sits by the pool all day with its Raybans on. De Villiers says the industry assets are more than four times the legal minimum buffer.
Some share buy-backs must come soon.
So, Magda Wierzycka, a long-time critic of exchange-traded funds, has bought DB X Trackers from Deutsche Bank. I suppose she has now forgotten those comments as DB X is a unique asset. It offers a quick and easy global equity tracker as well as regional funds for Europe, the UK, the US and Japan. There is no need to get exchange-control clearance before buying these funds, which have limited competition.
INVESTMENT-LINKED LIFE ANNUITIES ARE CERTAINLY PREFERABLE TO FIXED ANNUITIES BUT WHAT ABOUT INFLATION-LINKED ANNUITIES?