Although the life insurance industry has seen a steady increase in assets over the past three years, cash-strapped consumers are surrendering their policies to free up cash flow.
The Association for Savings and Investment South Africa (Asisa) revealed this week that beneficiaries and policyholders received R287 billion in claims and benefits from South African life insurers in the first half of 2023.
These payments would typically have been payouts on either death and disability policies or annuity policies.
Gareth Friedlander, a member of Asisa’s life and risk board committee, says the life insurance industry’s liabilities stood at R3,6-trillion at the end of June.
This left the industry with R364bn of free assets, more than double the reserve buffer required by the Solvency Capital Requirement.
Healthy reserves are an important indicator of the health of the long-term insurance industry, as they provide policyholders with the assurance that their claims and benefits will be paid even in times of extreme market turbulence and/or unusually high claims.
Lapsed or surrendered policies
The bad news is that 4.3 million risk policies (life, funeral, credit life, disability, critical illness and income protection) lapsed in the first six months of this year. A policy lapses when the policyholder stops paying premiums on a term life policy with no accumulated fund value.
Friedlander says the lapse rate is worrying because it means that 4.3 million policyholders and their beneficiaries are now living with either no or reduced protection. However, he acknowledges that the high lapse rate is a reflection of the country’s economic situation and the severe financial strain many consumers are facing as a result of rising interest rates.
In the first half of this year, the repo rate rose twice by 0.5 per cent, taking it to a 14-year high of 8.25 per cent and placing an additional burden on consumers servicing debts such as home loans and car repayments.
In addition, several fuel price hikes have added to the cost of living in South Africa, where 32.9% of the population is unemployed, according to the Quarterly Labour Force Survey for the first quarter of this year.
Friedlander also notes that surrenders of recurring savings policies (endowments and annuities) exceeded sales of these policies in the first half of 2023. While 284,647 policies were sold, 313,318 were surrendered.
A policy is surrendered when the policyholder stops paying premiums and withdraws the fund value before the policy matures.
This is unsurprising as consumers are more likely to surrender their savings policies during difficult times in order to cope with financial hardship.
