South Africa’s concerning insurance trend

South Africa’s high lapse rate for risk policies is an indication of the country’s struggling economy and the strain it puts on consumers.

This is according to Association for Savings and Investment South Africa (ASISA) Life and Risk Board Committee member Gareth Friedlander.

ASISA released long-term insurance statistics for the first six months of 2023 today, which revealed that, despite significant payouts in H1 2023, life insurers remain well-capitalised and in a solid position to honour the long-term contractual promises made to customers.

It also showed that close to 5 million new recurring premium risk policies – life policies, funeral policies, credit life policies, disability policies, severe illness policies and income protection policies – were sold between January and June 2023. 

However, at the same time, 4.3 million risk policies were lapsed. A lapse occurs when the policyholder stops paying premiums for a risk policy with no accumulated fund value.

Friedlander said the lapse rate is concerning since 4.3 million policyholders and their beneficiaries are now living either without risk cover or with reduced cover.

He said a high lapse rate reflects the country’s economic situation and the severe financial strain many consumers face on the back of rising interest rates.

In the first half of this year, the repo rate increased twice by 0.5%, taking it to a 14-year high of 8.25% and placing an additional burden on consumers servicing debt like home loans and car repayments. 

In addition, several fuel price increases contributed towards a rise in living costs in South Africa, where 32.9% of the population is unemployed, according to the Quarterly Labour Force Survey for the first quarter of 2023.

Friedlander said surrenders of recurring savings policies – endowments and retirement annuities – exceeded the sales of these policies in the first half of 2023. 

While 284,647 policies were sold, 313,318 were surrendered. A surrender of a policy occurs when the policyholder stops paying premiums and withdraws the fund value before maturity.

He said this is unsurprising since consumers are more likely to surrender their savings policies during tough times to cope with financial hardship.

At the end of June 2023, there were 34.2 million recurring premium risk policies in force and 203,578 single premium risk policies. 

Recurring premium savings policies amounted to 5.3 million as of 30 June 2023, and there were 2.4 million single premium savings policies.

This data aligns with the findings of Sanlam’s Sanlam Financial Confidence Index, an annual index which assesses the financial confidence levels of the country’s adult population. 

Sanlam’s study surveyed over 1,500 respondents, representing the adult South African population with a monthly income of R1,000 or more.

The survey focused on financial confidence and found that only 35% of South Africans trust their financial abilities.

It also revealed that only 42% of South Africans surveyed have insurance cover for estate duty in the event of their death.

Additionally, only 17% did not feel unhappy about their current financial state. Feelings of stress, hopelessness, and discomfort in various financial contexts were also common among respondents.

“These findings collectively emphasise the need for comprehensive financial education, guidance, and support systems across South Africa,” the survey said.

“As the country navigates an evolving economic landscape, empowering individuals with the skills and knowledge to make informed financial decisions becomes paramount.”