Job cuts spark insurance policy cash withdrawals

Jobseekers queue to submit their applications. FILE PHOTO | NMG

Summary

• Top insurers confirmed a sharp rise in withdrawals and surrenders, majorly on life assurance and pension products — a trend linked to the coronavirus pandemic which has hurt many livelihoods through jobs losses and pay cuts.
• Many policy holders are struggling to sustain payment of premiums while others are opting to use their contributions as collateral for loans as part of a race for survival.

Insurance firms have reported a sharp rise in policy cancellations and withdrawals by customers squeezed by the economic fallout from Covid-19, raising fears that many insurers could soon face liquidity challenges.

Top insurers confirmed a sharp rise in withdrawals and surrenders, majorly on life assurance and pension products — a trend linked to the coronavirus pandemic which has hurt many livelihoods through jobs losses and pay cuts.

Many policy holders are struggling to sustain payment of premiums while others are opting to use their contributions as collateral for loans as part of a race for survival.

“Those who have lost jobs are requesting to access what they had already saved since the law allows them to access up to 75 percent,” UAP Old Mutual lead for corporate life business Evans Manduku.

“What many insurance firms are doing now is to divest from where they had invested money, such as in Treasury bonds, to meet obligations of increased withdrawal requests for pensions and surrenders from life products.”

The mass withdrawals have raised fears of liquidity challenges for the insurance which last year recorded a 14 percent jump in the total value of surrenders and withdrawals to Sh9.24 billion from Sh8.11 billion the previous year—long before the coronavirus pandemic.

Most of the insurance products are popular with salaried people, meaning that the Covid-19-related disruptions are likely to translate to more pain for insurers this year amid the mass job losses witnessed since March when Kenya reported its first case of coronavirus infection. As a result of the Covid-19-induced economic downturn, an estimated 1.72 million workers lost jobs in three months to June alone, according to the Kenya National Bureau of Statistics (KNBS)—coinciding with a record 5.7 percent contraction of the economy in the second quarter.

The contraction was linked to measures imposed to curb the spread of the coronavirus, including a country-wide dusk-to-dawn curfew, restrictions on travel in and out of the capital Nairobi and closure of learning institutions, hotels and restaurants.

Jubilee Holdings Limited (JHL), the largest insurer in the region, said the number of people taking loans against their policies had risen, helping to hedge against the painful decision of terminating policies.

“The number of people who are taking loans on their policies in the last three months is up by about 50 percent,” said JHL chairman Nizar Juma.

“Cancellation of life policies started going up by 20 to 30 percent. Our team is now making 15,000 to 20,000 calls per month to our policy holders to urge them not to pull out.”

Early surrenders do not give value for money since the products are structured to allow insurers to recover expenses incurred to sell these products early. Many life products have a maturity period starting from five years and many insurance firms usually recoup onboarding costs within the first few years.

This means that those exiting early are deducted such costs and also leave their future exposed at a time the economic situation is depressed.

Many life insurers are counting on the short-term credit — known as bridge loans — to help policyholders navigate through the financial crisis without having to pull out.

The Insurance Regulatory Authority (IRA) reckons in its latest report that job cuts and salary reductions look set to hurt pension and life assurance products, leading to reduced premiums.

“The pandemic has resulted either in redundancies and salary reductions which has a negative impact on pension and life assurance businesses,” said IRA commissioner Godfrey Kitpum.

The cancellations pose a threat to the stability of some insurers in form of lost premiums and squeezed liquidity, with the IRA noting that 20 insurance companies or 35 percent of 56 licensed businesses are in breach of capital adequacy requirements.

Mr Juma told the Business Daily that Jubilee has seen several terminations on pension and retirement products, with corporate clients accounting for about 10 percent of the cases.

“We have had five of our big clients suspending their corporate pension fund policies because of layoffs,” said Mr Juma.

The number of surrenders and withdrawals is outpacing that of new onboarding for many insurers, hurting prospects of growing insurance penetration. Latest Association of Kenya Insurers (AKI) data shows that insurance penetration — the ratio of gross insurance premiums to GDP — declined to 2.34 percent last year against the world average of 7.2 percent.

“At the moment, the individual life products have been impacted greatly (in terms of signing up new clients),” said Mr Manduku of UAP Old Mutual.