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The South African Insurance Industry Survey 2016 | 117

Overview of the industry financial results
Life insurers thrive on stability. Over the years, our survey has plainly shown that when investment
markets steadily increase and bond yields remain largely unchanged, the industry is prosperous.
And 2015 offered that, or at least for the first eleven months. Up until the end of November 2015 the
Johannesburg Stock Exchange (JSE) All Share Index was up 4% from the previous year and the 10-
year bond yield had only changed by 0.6% from the beginning of the year.

But then came the financial turmoil in December sparked by an unexpected appointment of a new
Finance Minister. The JSE gave back some of its earlier gains and generated volatility to come in
the months following, but potentially more importantly for the 2015 financial results of insurers with
reporting dates at the end of December, was that the long-term bond yield increased by 1.3% to
9.9% during the month.

Below is a table showing the 10-year bond yield as at every quarter end during 2015.

Date 2014/12/31 2015/03/31 2015/06/30 2015/09/30 2015/12/31
8.0% 7.9% 8.4% 8.5% 9.9%
10 year
bond yield

Insurers reporting under IFRS use a prospective basis to value non-linked policyholder liabilities
estimating future cash flows and discounting those to present value. The assumed inflation and
discount rates used by insurers are impacted significantly by bond yields, and a relatively small
change in a discount rate on future cash flows stretching over 30-odd years, has a pronounced
effect on current year profit and loss. The impact of such a change is dependent on the mix of
business and the level of negative reserves, which is very different by insurer.

Liberty reported that their policyholder liabilities increased by R237 million as a result of economic
assumption changes but the effect was not easy to spot for many other insurers. This again
highlights the disparity in accounting practices amongst insurers. Some insurers were able to shield
the adverse impact of the discount rate by utilising discretionary margins created in previous periods
or use different valuation methods to fund the valuation strain. The IASB’s proposals for insurance
contract accounting that will become mandatory during reporting periods in 2020 or 2021 (effective
date still to be decided) will bring about much needed transparency and objectivity in accounting for