Life Insurance Analysis 2021

SA’s life insurance industry set to emerge stronger from the COVID-19 pandemic – PwC Life Insurance Analysis 2021 report

In 2020, SA’s major life insurers were negatively impacted by an unprecedented financial operating environment arising from the COVID-19 pandemic. Despite the challenging  macroeconomic uncertainty, the major insurers remained resilient and delivered credible financial results.

The strength and resilience of capital management strategies and balance sheets were evident in the reported results of the insurers. Solvency capital ratios (SCR) remained within targeted ranges with cautious approaches towards dividend declarations, albeit mostly within the dividend cover ranges.

These are some of the highlights from a new report issued by PwC today - “Humanity and innovation: The new tomorrow for insurers” -  which analyses the major life insurers’ results for 31 December 2020.

PwC’s analysis of SA’s major life insurers presents the combined results of Discovery Holdings Limited, Liberty Holdings Limited, Momentum Metropolitan Holdings Limited, Old Mutual Limited and Sanlam Limited. The financial performance of the major insurers in 2020 clearly reflects the challenges and uncertainties that the industry faced.

Alsue du Preez, Insurance Leader for PwC Africa, says:

“The life insurance industry plays a critical role in providing financial stability to individuals, families and employees in the advent of loss of income that may result from the death of a family member, their own disability, illness or retirement. Their financial wellbeing is influenced by several factors such as illness and death, financial market conditions, employment and income levels which impact policyholders’ ability to pay their premiums, as well as new sales.

“While some of these risks can materialise independently, the COVID-19 pandemic demonstrated what can happen when adverse experiences occur in all these areas. Life insurers are both bearers and expert managers of these risks, and their results for 2020 demonstrate how they have performed during an unprecedented and extremely challenging year.”

The report focuses on the embedded values of the life insurers, as well as their financial performance measured by their IFRS earnings.

In the first half of 2020, the industry reacted to the COVID-19 pandemic by modifying its assumptions about mortality (claims) and lapses in the short-to-medium term, due to the disease and the impact of the lockdowns on consumers, respectively.

Embedded value

The COVID-19 pandemic and the current economic climate resulted in the top five insurers losing R8bn of value in 2020, compared with R32bn created in 2019. The combined group embedded value/equity value (EV) of the insurers fell 9% over 2020.

The decline in EV was driven largely by the assumption changes made to allow for the expected adverse claims and persistency experience (COVID-19 reserves), as well as the poor investment experience and changes to interest rates over the year. It is also notable that the value created from selling new business in 2020 was only 63% of that achieved in 2019 as a result of the lockdowns.

IFRS earnings

The insurers posted a total comprehensive loss of R870m compared to total comprehensive profit of R22.1bn reported in 2019. This reflects the higher levels of mortality claims and the challenging macroeconomic environment of 2020.

In response to the impact of COVID-19, the companies raised significant reserves. By far the biggest contributor to the R15bn increase in reserves relates to expected mortality claims over the near term. Insurers also impaired non-financial assets (investments in associates, goodwill and other intangible assets) to the value of R17.1bn.

Planning for the future

Recovery to pre-COVID-19 profitability levels has been communicated by the insurers to be in the next 18 to 24 months. Accelerating digital investment such as direct-to-customer engagements, automated advice, digital underwriting and cloud and cybersecurity coverage capabilities is seen as a key driver of growth to achieve this recovery. Insurers acknowledge that customers expect better digital experiences.

Du Preez concludes:

“This is similar to the findings of PwC’s Annual Global CEO Survey 2021 in which 62% of the insurance CEOs noted that they planned to significantly increase  investment in digital transformation in the short term. Other areas of increasing investment by insurers are cybersecurity and data privacy (40%), initiatives to realise cost efficiencies (33%), leadership and talent development (31%), and sustainability and ESG initiatives (21%).

“The COVID-19 pandemic has forced insurers to leave the status quo behind. More change has occurred in the industry in the past year than in the previous several years combined and its pace is accelerating. The industry is clearly focused on how to come back stronger after the crisis while carefully monitoring the development of mortality claims experience in the near term.”

The report sets out several key priorities which we believe will help to strengthen the industry and make it more resilient in the post COVID-19 crisis world.