Dewald van den Berg, PwC Insurance Technical Partner
In 2020, SA’s major life insurers were negatively impacted by an unprecedented financial and 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 report recently issued by PwC – “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. 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.
The COVID-19 pandemic and the current economic climate resulted in the 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. Ignoring capital movements, the embedded value (EV) earnings were -2.2% or -R8.3bn. This contrasts with the EV growth observed in prior years, in particular in the 2018 and 2019 years where there was a return on EV of 9.3% and 7.8% in aggregate, respectively. The decline in EV in the current period 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.
Operating assumption changes accounted for a R16bn decline in embedded values, whilst the net investment returns and economic assumption changes caused
a decrease of R12bn. 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. The value of new business written in 2020 was 37% lower than that written in 2019 (2020: R4.7bn; 2019: R7.4bn).
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. COVID-19 was the major contributor to the decline in combined IFRS earning in 2020 from prior years. This was mainly due to: an increase in claims payments and the establishment of additional reserves for future COVID-19-related mortality claims; general insurance impacts that include contingent business interruption claims and offset by benefits from general insurance personal lines underwriting result; premium payment relief and intermediary support programmes; and elevated impairment provision levels.
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. In addition to COVID-19 reserves directly impacting the IFRS earnings of insurers significantly, there were other notable contributing factors to the decline in IFRS earnings.
These contributing factors were: devaluation of investment property portfolios to the extent they relate to shareholder assets that do not back policyholder liabilities; decrease and write-off of property rental debtors due to rental concessions; significant credit market volatility and increases in expected credit losses under IFRS 9 on loans and advances books; the lack of any positive mark-to-market adjustments on investments; offset to an extent by positive foreign exchange differences recognised in other comprehensive income.
The insurers have forecast a third wave of the pandemic as the virus mutates and we head into the winter months. The insurers believe they hold adequate reserves for the expected level of mortality claims. However, they have warned that this is dependent on an effective vaccination roll-out. Should this not be successful, then future waves cannot be ruled out and additional reserves will need to be set up.
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. 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 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.
Transforming risk into trust through corporate purpose, including ESG strategies: The last year has seen a rally towards environmental, social and governance (ESG) products and ESG integration globally. This trend is likely to further accelerate over the coming years as for among other reasons there are expected regulatory developments in Europe, with some momentum being seen in South Africa.
Realigning cost structures and sharpening productivity:
Efficiency and productivity are once again front and centre of the strategic debate. Productivity is a continuing challenge that insurers need to resolve, and not just a temporary issue caused by the current circumstances. Functions such as distribution, customer service, underwriting and IT are ripe for transformation.
Supercharging digital transformation to create a digital enterprise: Across the industry, operations continue to be beset by overstaffing, over-reliance on manual workflows, fragmented technology and difficulties in making the most of available data.
Carving out new revenue streams: To capture new markets, insurers need to design products that reflect today’s evolving needs such as usage-based insurance, employment loss protection for gig workers, pandemic business interruption coverage and cybersecurity for remote working.
Preparing the workforce for the new world: Reskilling requires careful assessment of desired skills and competencies to be targeted, investment in a learning environment, assessment of the impact of change and a systematic way to measure the return on upskilling investment.
Strengthening capital efficiency: Capital management focused on the impact of lower interest rates, greater hedging costs, heightened market volatility and defaults, and increasing tax rates.
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.