Forget the banks, insurers are more vulnerable to Covid-19

By Londiwe Buthelezi

It's a grudge purchase, often the first expense to fall away when households' budgets are strained. But South African insurers have shown different degrees of vulnerability to the challenges posed by Covid-19.

Those heavily dependent on face-to-face sales, like Old Mutual, would surely want to see an accelerated march to lockdown Level 1.

Given the recent trading updates and insurers' experiences in April and May, the question is: who seems to be on the right path to maintain value for shareholders and whose vulnerabilities have been most exposed?

Everyone is suffering, in one way or another

Warwick Bam, head of research at Avior Capital Markets, says all insurers and pension administrators are taking some beating right now from retirement contribution holidays, insurance premium relief and additional cover they've advanced to support their customers for the next few months. But some will inevitably be more prejudiced.

"Intermediaries dependent on face-to-face interactions have been unable to sell policies in April and May," says Bam, pointing out that Old Mutual is one player more reliant than others on face-to-face interactions at branches and worksites to sell.

Old Mutual told investors recently that it's been difficult to sell, and that some existing customers asked for premium holidays and, in extreme instances, lapsed their policies.

But it's not only insurers dependent on face-toface sales who suffered. During a call with investors, outgoing Sanlam CEO Ian Kirk said the insurer also struggled to sell.

In April and May, the insurer, which is the biggest in Africa, saw new business volumes tank between 50% and 70% compared to the same time last year, Kirk says. He foresees productivity will only return to normal when SA moves to lockdown Level 1.

Could Covid-19 have raised awareness on the importance of insurance?

However, Sanlam says it has been pleasantly surprised that its businesses – including Sanlam Sky, which serves low-income earners – has not shown the kind of strain it expected when it comes to lapses in April and May. Customers opting for premium holidays are likely to have stalled the lapse rate for now. But Kirk thinks there's another factor at play.

"Obviously, there's pressure on consumers. But when you go through something like this, people say 'jeepers, I've got to keep my life cover going. I've got to keep my funeral plan in place'. It's almost like there's awareness on health and safety stuff," says Kirk.

Momentum Metropolitan Holdings also says its lapse rates remained stable for life insurance products in April, but more people have asked for relief like premium holidays. The group is keeping its eye on the lapses in the medium term when levels of unemployment start to increase.

It looks like some insurers have seen this increased awareness as an opportunity. For instance, Discovery has enhanced a number of its products by adding a Covid-19 benefit. The insurance group, which is trying to grow its new bank, even launched Vitality Health Check for seniors, making itself ever more relevant to panicked insurance customers. Discovery did not respond to questions on whether these enhancements have improved its persistency ratio or attracted new customers.

But Bam thinks this is a well-thought move. "By tailoring products to Covid-19 risks, persistency is likely to improve as insurers can further justify the benefit of retaining cover when affordability declines," he said.

When it comes to Covid-19-related claims, big life insurers aren't too concerned. They haven't yet recorded any material increase in death claims and many say they expect a modest increase in the coming months.

However, SA hasn't reached its Covid-19 peak yet. Friday marked the 100th day since the first known Covid-19 patient arrived back in the country from a trip to Italy, and by Saturday 1 423 deaths had been recorded.

But even when claims start rising, insurers have deep pockets to finance these, and have reinsurers to fund the rest.

Bam says the bigger listed guys in particular have strong balance sheets which "can withstand almost any eventuality in the current Covid-19 scenario". Sanlam has already set up a "pandemic reserve" of R760 million. 

But job losses threaten to setback the whole industry 

While things like funeral cover could be on top of consumers' minds now, employment levels will determine if insurance will remain a line item in households' budgets. 

South Africa's largest pension funds administrator Alexander Forbes is already preparing itself for the worst as its success depends largely on having more people formally employed and saving for retirement. Alexander Forbes offers both retirement and group life insurance that people subscribe to in their workplaces. 

Like Kirk, Alexander Forbes CEO Dawie de Villiers says people are asking for advice more than ever as they try to navigate their retirement and investment options under Covid-19. However, while the importance of financial advice has been elevated, De Villiers says the rising number of employers announcing retrenchments is causing a headache for the industry.

"We haven't seen any retrenchments come through, but we believe that there will be retrenchments. We also agree with the analysts' numbers about the unemployment rate going maybe up to 35% from the current 29%, and that will affect our bottom line as less people belong to schemes," De Villiers says.

This article originally appeared on Fin24

Photo: iStock