The Non-Bank Financial Institutions Regulatory Authority (NBFIRA) has called for the introduction of affordable and tailor-made annuity products in order to influence the growth of the annuities market in Botswana.
An annuity is an insurance product in which someone invests a lump sum or a series of payments and is then paid out regular disbursements at fixed intervals usually during retirement. The call came at the back of the results of a market survey that the regulator conducted in March 2017 to understand the structure and growth patterns of annuities in the country. According to the regulator, there are two categories of annuities, being deferred annuities and immediate annuities. “These could either be fixed, fixed-indexed or variable type,” said NBFIRA.
The survey found that life insurers and some retirement funds in Botswana provide annuities, which are forms of insurance or investment entitling the investor to a series of annual sums. NBFIRA said over the past three years, annuities have been within top three products for life insurance gross written premium (GWP) and have contributed 25-26% of GWP for life insurers.
It stated that the demand for annuities in Botswana is mainly driven by the defined contribution or occupational pension funds.
Also, the survey revealed that the individual voluntary annuities market suffered various constraints that included low disposable income to invest in long-term financial plans such as pension. The other restraint that was found is that there is limited annuities product diversity and marketing by life insurers.
“Due to the relative small population and sample size of Botswana, the life insurers still use and rely on foreign mortality tables,” said NBFIRA.
It said the population was not large enough for life insurers to benefit from economies of scale and profitability, adding that lack of long-term suitable assets to match fixed and guaranteed annuity payouts and hedging the longevity risk was also as another limitation.
The other problem is high unemployment rate and conflicting financial demands of customers for the employed, such as funeral plans. NBFIRA indicated that other substitute investment products such as offshore products and unit trusts offered competition that made the annuity business unprofitable.
There were also low levels of financial literacy especially familiarity with retirement products. However, in terms of total nominal values, fixed annuities experienced a 16% growth rate while indexed annuities had a 15% growth rate between the years 2013 and 2015. Guaranteed annuities recorded a 36.6% growth in the same period.
However, NBFIRA said indexed annuities had the highest share of market in nominal values at 48% whilst fixed annuities were the least popular at 12%.
It said policy should increase the normal retirement age to allow members to save for a longer period of time, as well as introduction of more tax concessions on purchase of voluntary or individual retirement products.
“There should be policy or partnership to accelerate financial literacy and public education on annuity products,” said NBFIRA.
The regulator called for policy to ensure that financial intermediaries have adequate training to provide appropriate marketing and advice. “It is key that prospective clients understand the products they are purchasing,” said NBFIRA.