Life insurance companies taking strain in current economic climate

Published on 30 September 2010

by In-house Writer

In the aftermath of the economic recession consumers are still seen reducing expenditure on perceived non-essential services. Engineering News recently reported that South African short term insurers and life insurance companies, in particular, have been taking strain as a result of the present economic climate.

Quoting KPMG’s financial service director Gerdus Dixon, the publication highlighted higher policy lapse rate during the past 18 months as one of the key challenges facing the insurance industry.

According to Dixon, "it has been particularly difficult for pure risk products, where insurers underwrite mortality and morbidity risks. Clients have been investing less in these products and it is negatively affecting insurers."

Dixon explains that higher policy lapse rates are bad, as the initial administrative costs of policy origination cannot be recouped if a policy is cancelled after only a short period of time, and subsequently has to be absorbed by the insurer. This results in decreased profitability and a shrinking asset base.

In the short term insurance sector, large industrial and unusually high motor insurance claims are further undermining profitability. The former has been frequently attributed to machinery breakdowns and fire damage in the mining sector.

Effective customer retention strategies are therefore a vital focal point, and pricing seems to be a key factor. Retention strategies also need to contend with more volatile investment market conditions, placing life and short term insurers under financial pressure.

Read more life insurance news articles here.

Resource: Engineering News