South Africa’s life insurance industry had been hit hard by Covid-19 right from the start of the first wave in March 2020. After the first two waves, even before the third began, the country’s largest life insurers reported increases of 50% to 60% in claims against fully underwritten individual life policies in early 2021, with insured lives lost exceeding the expected death rate by four times during the height of the second wave in January 2021.

‘The number of claims Old Mutual received in January 2021 was around double the claims in a normal month – and we're not the only insurer that had that experience,’ says Old Mutual Corporate Consultants’ Senior Consultant Suzette Müller.

Covid-19’s impact on the insurance industry

It is inevitable that this would lead to a hike in premiums for life and disability cover, and it formed the topic of the presentation Müller and her colleague, Siphelele Nene, a Senior Associate Consultant, gave at the May 2021 conference of Batseta (the Council of Retirement Funds for South Africa). ‘This month, June 2021, South Africa entered its third wave of Covid-19 infections,’ says Müller, ‘but insurers are already preparing for further waves.’

‘Premiums for group risk benefits provided to employees are priced differently to individual risk policies. The starting point is the same, actuarial mortality tables, but the group risk market is more responsive to the actual experience in recent years, and for large corporates it might even be priced on the specific claims experience of that company. Premiums are also set annually and can change materially from one year to the next. It’s a complex calculation, though, as insurers also have to be cognisant of what future claims might be since the previous year might have been an aberration. This is why predicting further waves is important. I don’t think anyone has an answer to that question right now,’ says Nene.

How can employers and fund trustees prepare for insurance increases?

‘It’s a very sensitive issue,’ says Nene. ‘In every decision a board of trustees or management committees takes, they have to consider how it will affect the members and the fund’s day-to-day operations. At a time like this where there is heightened uncertainty it’s a good idea to obtain a number of quotations for risk benefits to see whether you’re still paying the appropriate amount.’

Müller agrees. ‘It’s not just about shopping around for the lowest rates. Now is the time to understand exactly what cover you have, and to ask if it’s still what your employees need,’ she says. ‘Look at your membership and understand what is appropriate for them. This is particularly important because an increase in risk premiums often means a reduction in the amount allocated to retirement savings. It’s a balancing act that needs careful thought.’

It furthermore is important to consider whether your group health and wellness interventions are adequate to respond to Covid-19 and other serious illnesses to curb the impact of increasing death and disability claims on the business.

How do South Africa’s insurers calculate premiums?

Insurance premiums are calculated according to complex pricing models which take into account both the current claims environment and the outlook going forward. Until a sufficient number of South Africans have been vaccinated against the coronavirus and the spread of Covid-19 is under control, insurers are likely to err on the side of caution and price their premiums higher.

‘On the one hand, insurers have to make sure that their premium income keeps up with the claims they’re paying out but, on the other hand, they strive to keep premiums relatively stable and at a sustainable level, so that clients don’t decide to move elsewhere based on more beneficial rates,’ says Müller.

With that delicate balance in mind, both Müller and Nene emphasise that, in general, South Africa’s life cover insurance providers are not trying to exploit the situation. ‘Insurers are doing what they’ve been paid to do, which is paying claims as they come in,’ says Müller. ‘They’re not repudiating any more or any fewer claims than usual. At the same time, they need to manage their businesses to remain profitable and sustainable.’

Employers and trustees will have to do the same for their members by reviewing the cover they have in place, monitoring the premium rates for cover and ensuring that they are getting the appropriate cover at the right price while leaving a large enough percentage of employees’ contributions for their retirement savings.