Insurance industry ducks for cover
Last year saw the short-term insurance industry’s profit plunging by 47% compared to 2019, while that of the long-term insurance industry fell by 11%.
06 October 2021 | Business
The increase in policy terminations and lapses was driven by affordability constraints and the general slowdown in economic activity due to Covid-19 restriction measures. - Namfisa
Income and profits of the two industries were slashed to levels last seen in 2011 and 2013, the latest annual report of the Namibia Financial Institutions Supervisory Authority (Namfisa) shows.
The long-term insurance industry recorded a profit before taxation of about N$1.22 billion in 2020, nearly half of the figure reported in 2018 and the lowest since before 2011.
The short-term insurance industry made a profit of about N$283.8 million, down 47% from 2019 and the lowest since 2013.
Mainly two culprits were responsible for the nose-dive, according to Namfisa: a drop in gross written premiums and investment income during the period under review.
About N$2.35 billion in investment income flowed into the coffers of the long-term insurance industry in 2020, nearly N$2.3 billion or 49% less compared to 2019. This is the lowest investment income reported by the industry since 2011, when it was around N$1.4 billion.
“At the root of this decline was the economic contraction that emanated from the effects of Covid-19, especially in the first quarter of the reporting year, which mainly had a negative impact on the equity market. Since the industry’s investments are principally held in equities, a significant shock in that market has a drastic negative impact on investment income,” Namfisa said.
The watchdog added: “Indeed, the industry’s investment income has been fluctuating over the past five reporting years, principally due to unstable national economic growth.”
Namibia’s real gross domestic product (GDP) grew by -8.5% in 2020, according to the Namibia Statistics Agency (NSA), the biggest contraction in the history of the country. Since 2016, Namibia’s economy on average has grown by nearly -1.9% in real terms.
The short-term insurance industry last year recorded investment income of nearly N$260.9 million, about N$182.4 million or 41% down from 2019 and the lowest since 2016.
“The decline in investment income emanated from lower returns generated from interest-bearing investment instruments following the weaker performance of the financial market, coupled with the effects of Covid-19,” Namfisa said.
Namfisa describes the performance of the domestic equity market as “ominous”, saying it continued to decline along with the Local Index of the Namibian Stock Exchange (NSX), which had declined by 20.6% year-on-year (y/y) as at 31 March 2021.
Internationally, the Covid-19 pandemic in March 2020 triggered the worst global financial markets crash in a generation. Massive stimulus packages had to come to the rescue.
The long-term insurance industry wrote gross premiums totalling nearly N$9.5 billion in 2020, a drop of about N$2.2 billion or nearly 19% y/y. This is the lowest gross premiums written since 2017.
“This reduction is attributed to lack of appetite and unaffordability by potential policyholders in the wake of Covid-19,” according to Namfisa.
Also contributing to the decline were significant increases in policy terminations and lapses, particularly in the fund and credit life classes, the authority said.
“The increase in policy terminations and lapses was driven by affordability constraints and the general slowdown in economic activity due to Covid-19 restriction measures.”
Namfisa said the number of total policies decreased by 15.5% compared to 2019 and totalled 1 550 256 at the end of last year.
“As in the preceding year, a significant increase in policy lapses and terminations was the primary contributor to the lower total. Although there were fewer policy lapses than in 2019, the number was still relatively high,” Namfisa said.
The short-term insurance industry wrote gross premiums totalling nearly N$3.5 billion in 2020, about N$187.8 million or 5% down from 2019.
According to Namfisa: “The decrease was due to the low appetite for new business underwritten, which was in turn attributable to the rise of Covid-19 infections and the restriction on movement.”
The industry observed a 5.6% decline in the number of policies issued during the year under review, namely to 589 170.
“A decline in new business was chiefly responsible for the reduced number of active policies since insufficient business was written to offset the number of policy lapses and terminations during the review period,” Namfisa said.
Despite Namibia experiencing negative economic growth due to Covid-19 regulations and restrictions, the long-term insurance industry remained robust and resilient in 2020, Namfisa emphasised.
The industry observed growth in assets due to strong recovery in the financial markets towards the end of the year. Total assets increased by 2.5% y/y to N$61.7 billion.
The total liabilities of the industry increased by 2.5% y/y to N$52.2 billion.
“Growth in policyholder liabilities was the principal contributor to this increase and resulted from improvements in new business in some classes of insurance (risk and life) during the period under review. Policyholder liabilities constituted about 95% of the industry’s total value of liabilities, which meant that a movement in the value of this category significantly determined the trajectory in the value of the total,” Namfisa said.
The short-term insurance industry remained resilient too, the regulatory authority said.
The industry’s total assets declined by 5% y/y to N$6.5 billion.
“The main contributor to this position was the decline in technical assets mainly resulted from a huge settlement of premium debtors as well recovery of reinsurance share of outstanding claims that had accumulated over the period of time by one insurer,” Namfisa said.
The industry’s total liabilities reduced by 10.6% y/y to N$4.2 billion. This position was due to significant reductions in reinsurance creditors and gross outstanding claims at the end of 2020, according to Namfisa.
Gross benefits paid by the long-term insurance industry decreased by 14.6% y/y to about N$7.5 billion. Namfisa attributed the decline in total claims “to favourable claims experienced by the industry during the period under review”.
The short-term insurance industry’s total net claims increased by 10.3% or nearly N$125 million y/y to N$1.3 billion. “The increase was largely influenced by claims that were unfavourable to the industry,” according to Namfisa.
According to the watchdog, short-term insurers didn’t specifically isolate Covid-19-related claims last year. As such, Namfisa couldn’t indicate how much of the around N$1.34 billion worth of net claims incurred in 2020 was Covid-related.
However, the change in provision for claims outstanding or incurred but not reported totalled about N$68 million last year, compared to about N$1.15 million in 2019.
The short-term insurance industry reported a net loss ratio of 60% in 2020 compared to 50% the previous year. This is the highest ratio since the 62% of 2013. A net loss ratio is the percentage of income paid to claimants, plus other claim-related expenses that the industry realises as claim expenses.
The financial soundness of long-term insurers is measured by calculating the ratio of the value of excess assets to the capital adequacy requirement (CAR). Although the acceptable cover ratio equal to one time is acceptable, a cover ratio of 1.5 times is preferred by the industry, Namfisa said.
“Most of the insurers’ cover was in the range of 10+ times, indicating an adequate solvency position,” the regulator said.
The industry’s liquidity levels during the period under review were all observed to be above the recommended norm of 1 time. However, when compared with 2019, liquidity levels had reduced by 40% to 6.3 times.
The short-term insurance industry’s solvency ratio declined by 12.8% y/y to register at 35.6% by the end of 2020. According to Namfisa, a solvency ratio of 35.6% is sufficient to withstand potential shocks that may occur in the market.
The industry’s liquidity remained above the required minimum prudential level during the reporting year, being recorded at 6.6 times, which is lower than the level of 7.3 times recorded for the end of 2019.