Category Archives: life insurance

South Africa ranks 2nd in financial inclusion study

The Brookings Financial and Digital Inclusion Project measures South Africa one place behind Kenya in terms of financial inclusion.

I’m still working my way through the full report, but Kenya’s score is a significant jump above South Africa and the closely contested positions below it. Is Kenya genuinely making such inroads or is this a function of the measures used?

The worst insurance policy in the world

Aviva in France is still dealing with having written the worst insurance policy in the world. From the sounds of things, they weren’t alone in this foible. It’s also hard to say as an outsider what the right or reasonable resolution to their current problem is, but here is the policy that they wrote.

  • Buy a policy
  • Choose what funds you want to invest in
  • Unit prices calculated each Friday
  • Allow policyholders to switch funds on old prices until the next week
  • Hope like hell policyholders don’t switch out of poorly performing funds into well performing funds with perfect information based on backwards, stale prices.

Inconceivable – and since I don’t know more than I read on this blog post, maybe the reality and liability is really quite different.

See the FT on the man who could sink Aiva

Selective lapsation – where it does happen

A few years ago, as South African life insurers were experiencing sharp spikes in lapse rates as a result of the GFC, some analysts and actuaries raised concerns about the impact of selective lapsation on mortality experience.

The principle is sound: Policyholders who know their health is very poor are less likely to lapse than policyholders who have no concerns about their health. Thus, those who lapse are likely to be healthier than those who remain. The mortality (and morbidity and disability) experience of those who remain will be worse than expected based on past experience.

The higher the lapses, the more significant this impact becomes. As an example, let’ say we have the following mix of policyholders by underwriting class (best to worst)

underwriting class Mix of population mortality experience as % of best
1 80% 100%
2 10% 150%
3 5% 200%
4 5% 400%

 

I’ve approximated the experience here based on some past CSI presentations on mortality experience – could definitely be fine-tuned.

This would give rise to experience on average of 125% of “best underwriting class experience”. If 10% of policyholders lapse and we assume these are all “best class” lives, the average experience increases by just 2.8% to 127.8%.  A pretty modest impact even assuming 100% of lapses are very healthy.

In practice, some lapses would be driven by affordability and other issues so it wouldn’t be as dramatic as this. If only half the lapses were selective, the impact drops to 1.4%.

If lapses rise to 25%, then experience might be 8.3% worse, which is only just larger than the compulsory margin. And again, this is likely a worst case scenario. The “50% selective impact” is still only 4.2%.

So where does all the fuss come from? At a recent conference in the US I discovered some products where lapse rates at certain durations are as high as 90%. This relates to points where the premiums jump up dramatically after an extended period of being level and continue to rise from thereon out.

With a 90% lapse rate, assuming the best 90% of policyholders lapse, results in future mortality experience of 175% higher than before or 300% of the best class mortality experience. The impact is still a nearly doubling of experience under the 50% selective scenario.

So yes, selective lapsation can be a genuine risk, but the lapse rates where this becomes a major issue are higher than most insurers will experience under normal scenarios.

Last postscript here is that none of this would have an impact if the insured population were completely homogenous – I’ll have another post on the need to dig into populations and understand how combining heterogeneous populations is dangerous when I discuss the misuse of SA85/90 “combined”.

Progress on tax free savings vehicles, but scathing words for life insurers

Read the latest (14 March 2014) document from National Treasury on tax free savings vehicles for South Africa. I think it’s a fantastic idea – both from a policy perspective with carefully designed incentives to promote long-term savings and from a personal perspective. I’m definitely going to use one for my own savings. However, one paragraph stuck out as a pretty clear message from National Treasury on their views of life insurers – and views on current product offerings rather than any historical sins:

Insurance products

Products must permit flexible contributions and may not bind individuals into any future contribution schedules. Many insurance investment policies would currently not match these criteria. Government is not open to providing a tax incentive for products that have high charges and may have an adverse impact on household welfare at the point at which the household is increasingly vulnerable. In this regard some savings products, for example endowment policies and any similar investments that include excessively high penalties in the case of early termination of the policy, pose a policy challenge from a market conduct perspective and will not be allowed in these accounts.
As discussed, National Treasury will engage with the FSB and industry in determining a reasonable approach to charges and early termination.

 

Wow. I know there are many bad insurance products around and probably some still being sold. I also know of many insurance executives who strive for value for money and are reinventing products and distribution channels to this end.
Seems to me NT isn’t yet on board.

LAC Seminar 2013 live tweeting complete list

A few people have mentioned that they found my “live blogging” or tweeting of the 2013 LAC Seminar in Cape Town and Joburg useful. I used the hastag #LACseminar2013. I’m repeating all of them here in case they’re useful in a slightly more long-lived medium of my blog. I didn’t cover all the sessions – below is all there is and yes, in reverse order for bizarre reasons I’m not going to go into now.

@23floor: Also, envisaged that product specifications, including commission, must be filed with regulator #LACseminar2013 #microinsurance

@23floor: And yes, a range of market conduct, board composition requirements are envisaged for micro insurance #LACseminar2013 #microinsurance

@23floor: Raw (cleaned and anonymize) data *might* be released publically. I would definitely support this. Data should be open #LACseminar2013

@23floor: PA90 understates mortality on average, but more under for males and only a little over for females #LACseminar2013 Continue reading LAC Seminar 2013 live tweeting complete list

The Perfect Storm Part 1 – IFRS reporting under SAM

A client recently mentioned that they were concerned about the implication that the adoption of Solvency Assessment and Management (SAM) would have on insurance accounting under current IFRS4.

The apparent concern was that measurement of policyholder liabilities for IFRS reporting would change to follow SAM automatically.

Let me start out by saying this is categorically not the case. The adoption of SAM should not change IFRS measurement of insurance liabilities. In this post I’ll cover some of the technical details and common misconceptions of IFRS4 to demonstrate why this conclusion is so clear. Continue reading The Perfect Storm Part 1 – IFRS reporting under SAM