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Will your life assurer live longer than you do?
Some companies do a better investment job than others - and won't die on you, writes LEIGH ROBERTS
Certain life assurance companies are undoubtedly better at looking after your savings than others. Indeed, there is a wide divergence in the investment returns of the 15 main players in the local industry.
What is comforting is that the bulk of the nation's savings are earning a return higher than the inflation rate. The industry average over the period was 13.9% against inflation of around 9%. Dave King, chairman of credit rating company Duff & Phelps, has researched the industry in order to rate each company. King points out that the gross return of a company shows its investment skill, but that the net of costs return is more relevant to policyholders. "Large companies like Old Mutual and Sanlam benefit from the economy of scale in their operating costs." The table indicates to policyholders how their company shapes up, but King says two factors should be borne in mind. First, accounting and actuarial principles are not standard within the industry, and this distorts published statistics. Secondly, published investment returns can be skewed by other factors. For example, rapid premium growth is accompanied by "new business strain", which pushes up operating costs in the short term. On the other hand, if a life assurer heavily invests in its own holding company's shares, this can over-inflate investment returns. Policyholders should also note that a company's net return figure reflects the average performance of all its assets: the returns on individual asset portfolios, such as smoothed bonus and equity, may differ vastly. The last column in the table shows each company's capital adequacy ratio - an actuarially determined indicator of financial strength. The higher the ratio, the greater the safety margin between the company's free asset reserves and its liabilities to policyholders. Once again, there is wide divergence among the companies, with Liberty Life reflecting a ratio of 44% and Standard General only 5.4%. Duff & Phelps' research into the industry bears out that age-old fear among policyholders - that a life company's shareholders are rewarded with higher returns at the expense of policyholders. "No matter which life company you look at, shareholders always come out on top. Some companies have done better by their shareholders than others, especially in the case of Liberty Life," says King. Over the past four years, shareholders' earnings for the industry as a whole have increased by a whopping 41% a year. "No policyholder has come even close to making this type of return on their investment," notes King. At present, Old Mutual and Sanlam are the only life assurers which are not listed companies. Both life assurers, however, have expressed their intention to demutualise within the next two years. King's advice to future policyholders is to choose their life company with care. "The question you need to ask is whether the company is going to be around to pay your claims in 20 years' time." The future will bring a much tougher environment to an industry which has enjoyed a long run of high growth. "Life companies are entering a more competitive phase and the industry fundamentals are set to be far more challenging than they've been in the past 20 years." As to which company will outperform the rest, King says it depends on their investment prowess and underlying strategic position, as well as their ability to exert tighter control on operating costs, which have spiralled in recent years. Policyholders will have to rely on company evaluations done by credit rating companies to help them choose a life company that will be around for the long term and is well positioned to consistently generate real investment returns. The need for independent ratings is particularly acute in the local life assurance industry, says King, as present disclosure requirements fall far short of international standards. "There's no other industry in South Africa that has such poor disclosure practices, particularly on costs." The average policyholder does not know the investment performance on his policy until years down the line - and then it is too late as he may have to suffer the consequences of earning a return well below the inflation rate. Disclosure of costs on insurance-based products is under debate within the industry. Strides have been made recently to improve disclosure, but further significant moves will depend on who wins the battle - government or the Life Offices Association. The industry controlling body is one of the most powerful lobby groups in the land. Tough disclosure requirements recently passed in the UK and Australia resulted in fewer policies being sold as customers realised the full extent of commission being paid to intermediaries. Company agents have become a dying breed and growth rates in the life companies have taken a severe knock.
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The accompanying table shows the range. The top performer, Old Mutual, produced a 14.7% net return, while the worst performance came from Rentmeester with a negative net return of 7.5%.