Cash-strapped South African consumers are ditching their insurance policies

By Neesa Moodley

8 Oct 2023

Policyholders are surrendering or lapsing policies to get their hands on funds.

Although the life assurance industry has been able to steadily build up assets over the past three years, financially strapped consumers are cutting off their insurance policies in a bid to free up cash flow.

The Association for Savings and Investment South Africa (Asisa) revealed this week that beneficiaries and policyholders received R287-billion in claims and benefits from South African life insurers in the first half of 2023.

These payments would typically have been payouts for either death or disability policies, or retirement policies.

Gareth Friedlander, a member of Asisa’s life and risk board committee, says at the end of June the life insurance industry’s liabilities amounted to R3.6-trillion.

This left the industry with free assets of R364-billion, which is more than double the reserve buffer required by the Solvency Capital Requirement.

Healthy reserves are a critical indicator of the health of the long-term insurance industry, providing policyholders with the peace of mind that their claims and policy benefits can be paid even in times of extreme market turmoil and/or unusually high claims.

Policies lapsed or surrendered

The bad news is that as many as 4.3 million risk policies (life policies, funeral policies, credit life policies, disability policies, severe illness policies and income protection policies) lapsed in the first six months of this year. A policy lapses when the policyholder stops paying premiums for a risk policy with no accumulated fund value.

Friedlander says the lapse rate is concerning because it means that 4.3 million policyholders and their beneficiaries are now living either without risk cover or with reduced cover. However, he acknowledges that the high lapse rate is a reflection of the country’s economic situation and the severe financial strain faced by many consumers on the back of rising interest rates.

In the first half of this year, the repo rate increased twice by 0.5%, taking it to a 14-year high of 8.25% and placing an additional burden on consumers servicing debt such as home loans and car repayments.

In addition, several fuel price increases contributed towards a rise in living costs in South Africa, where 32.9% of the population are unemployed, according to the Quarterly Labour Force Survey for the first quarter of this year.

Friedlander also notes that surrenders of recurring savings policies (endowments and retirement annuities) exceeded the sales of these policies in the first half of 2023. Whereas 284,647 policies were sold, 313,318 were surrendered.

A surrender of a policy occurs when the policyholder stops paying their premiums and withdraws the fund value before the policy matures.

He says this is unsurprising, since consumers are more likely to surrender their savings policies during tough times to cope with financial hardship. DM

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Policies lapsed or surrendered