South Africa’s daunting protection gap

Though classified as a developing
economy, South Africa boasts one of the highest life insurance
penetration in the world – 12.97 percent of GDP in 2006, according
to reinsurer Swiss Re. This ranks the country second in the world,
behind only the UK on 13.11 percent, Despite this, a study
commissioned by industry body the Life Offices Association (LOA)
has revealed a yawning protection gap.

In the study undertaken by actuarial consultancy True South,
actuaries Francois Hugo and Paul Zondagh found the total insurance
gap ranges from between ZAR5.64 trillion ($745 billion) and
ZAR10.33 trillion. They explained the variation between the two
extremes depends on the extent househo0lds would want to maintain
their standards of living after the death or disabling of an income
earner.

In the life insurance sector Hugo and Zondagh noted total cover in
force was ZAR3.535 trillion or ZAR239,000 per average earner. This
compares with an optimum requirement of ZAR7.859 trillion
(ZAR531,000 per earner) and a minimum of ZAR6.108 trillion
(ZAR413,000 per earner).

In the disability sector in force cover is ZAR6.323 trillion or
ZAR427,000 per average earner. This compares with an optimum
requirement of ZAR12.326 trillion (ZAR833,000 per earner) and a
minimum of ZAR9.551 trillion (ZAR645,000 per earner).

Hugo and Zondagh estimate total premiums required to close the life
cover gap would range from ZAR15.1 billion per annum to achieve
minimum cover and ZAR25.3 billion to achieve optimum cover. The
cost of closing the disability cover gap would range between
ZAR4.68 billion and ZAR9 billion. The cost of closing both gaps
would be equal to between 2.2 percent and 3.9 percent of total
annual household expenditure.

The premium income trend is at least heading in the right
direction. According to the LOA South African life insurers
received a record ZAR103.6 billion in individual premium income in
2007, up 12.7 percent compared with 2006.

New individual premiums increased 13.9 percent to ZAR57.2 billion.
The industry’s total premium and investment income grew 12 percent
in 2006 to ZAR226 billion while payments to beneficiaries,
policyholders and pension fund members increased by 16.6 percent to
ZAR165.4 billion.

Regrettably tougher economic conditions began taking their toll in
the form of increasing lapse rates during the latter part of 2007.
According to the LOA lapse rates in the second half of 2007 were 14
percent higher compared with the first half of the year and 31
percent higher compared with the second half of 2006.