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Are your clients tripping up over this insurance gap?

10 November 2022 Gareth Stokes

South Africa’s life and disability insurance shortfall remains virtually unchanged from three years ago, with the 2022 Life and Disability Insurance Gap Study confirming a staggering ZAR34.3 trillion ‘gap’ measured across all earners. The study, released by the Association for Savings and Investments South Africa (ASISA), and researched by True South Actuaries and Consultants (True South), revealed that the average local income earner had a life insurance shortfall of at least ZAR1 million and a disability cover gap of around ZAR1.4 million at the end of December 2021.

Alarming underinsurance across age, education and incomes

Hennie de Villiers, deputy chair of the ASISA Life and Risk Board Committee explained the motivation for the study, now in its sixth iteration, as being to measure the extent of underinsurance in the domestic life and disability insurance market. “The way the study is conducted is to determine the amount of cover that people should have to maintain their lifestyle following a death or disability event and comparing that figure to the amount of coverage they actually have,” he said. This year’s study can be compared to prior years and offers segmented insights under headings like age, education, geographic location and income. 

At first glance, one could be excused for celebrating the 0.2% per annum increase in the total insurance gap over the past three years as a sign that the level of insurance coverage is stabilising. But De Villiers was quick to correct the perception, observing that “the main reason for the marginal widening of the gap was the decline in the number of earners; before the pandemic, we had 15.6 million income earners compared to 14.3 million when the study was done”. Adjusting for job losses pointed to a 3% per annum widening in the gap. To plug this gap, local financial adviser and planners would have to sell death and disability policies with a combined sum insured of ZAR62.3 trillion, compared to ZAR28 trillion presently. Following these introductory observations, De Villiers handed over to WS Nel, Actuarial Research Lead at True South, to share some of the study’s methods and findings. 

Some lessons on insurance gap computations…

To begin, Nel defined an earner as a South African citizen between the ages of 18 and 65, who was earning an active, regular income from either labour or business activities. “If an earner’s income was to cease due to a death or permanent disability event, that earner’s family could face devastating financial consequences,” he said. True South referenced the latest Statistics South Africa living conditions survey to assess the country’s earner population and get a sense of household incomes and expenditures. Nel commented that the approximately 1.3 million job losses between 2019 and December 2021 had a disproportionate impact on the younger and less educated, with one-in-seven earners under the age of 30 losing their main source of income, and one-in-three earners with only some primary schooling. 

The 2022 Life and Disability Insurance Gap Study split the earner population into five segments of equal numeric size, based on average income. In the following paragraphs this newsletter will unpack the report methodology by focussing on the richest 20% of earners, described as those earning more than ZAR24 000,00 per month. “On average, someone in the richest 20% segment was 42-years old, and earned roughly ZAR700 000,00 in 2021,” Nel said, before sharing his ‘how to compute an insurance gap in two parts’ lesson with the assembled media. 

The first part of the equation is to calculate the average earner’s insurance need, and the second is to offset this need against the actual cover that the average earner has in place. “Simply put, the insurance need is the amount of insurance cover required [or sum insured] to meet the family’s needs following a death or disability event, assuming that the household maintains their current standard of living, and that the need only extends to the deceased or disabled earners retirement age,” Nel said. The insurance need is calculated from three components, though the second and third require some explanation. 

Earnings x replacement ratio x capitalisation factor…

First, you determine the gross earnings per year, which for the richest 20% works out at around ZAR700 000,00 per annum. Second, you work out the so-called replacement requirement, which for this segment came to approximately 54% of gross income. And third, you input a capitalisation factor, or 13.6 years for the average earner in the richest 20%. “To work out the replacement requirement requires integrating three features,” added Nel, including the post-event taxation impact on income; the portion of a household’s expenses that remain after the death of the earner; and the fact that a portion of earnings allocated for the purposes of saving towards wealth creation does not have to be replaced. PS, the capitalisation factor is the number of years for which a household remains dependant on the earner’s income following death or disability. 

Using the above computation, the study concluded that the average earner in the richest 20% needed a life insurance sum insured of around ZAR5.3 million. True South then estimated life insurance product ownership and level of cover held by the average earner by applying learning algorithms to data provided by ASISA members. “On average, an earner in the richest 20% had about ZAR3.2 million worth of life cover in place,” said Nel. “Meaning we can calculate the life insurance gap for earners in this segment as being ZAR5.3 million less ZAR3.2 million, or ZAR2.1 million each”. This equates to a ZAR6 trillion gap across the segment’s 2.9 million earners. The total life insurance gap across all 14.3 million earners came in at ZAR14.4 trillion. A similar exercise for disability cover, revealed a ZAR10.6 trillion shortfall for the richest 20%, and ZAR19.9 trillion total. 

Financial advisers, get busy filling the gap!

The concern over the insurance gap should be viewed in context of the Actuarial Society of South Africa’s death and disability event modelling. They estimate that more than 142 000 income earners will die in 2022, with around 47 000 income earners becoming disabled, equating to around 500 affected families each day. “We understand that there are economic pressures; but the key message [from these statistics] is the importance of life cover, and the importance of proper financial planning to have as much life cover as possible in place,” concluded De Villiers. True South included three possible responses to the gap as part of the study. 

Earners can either purchase additional insurance prior to their death or disablement or leave the household to find ways to reduce expenses or increase incomes following the loss event. Your role as financial adviser and planner is to point out to your clients that a sensible adjustment to their death and disability covers today can significantly reduce the strain their loved ones will experience should the worst happen. Of course, the financial commitment could be significant, with those in the richest 20% likely to pay another 2.7% of their income to death cover, and 2.1% to disability cover, totalling around R2 900 per month in premiums. The financial impact of closing the life and disability insurance gap is more severe in all but the bottom of the five income segments. 

Writer’s thoughts:
FAnews readers will not be surprised by the ZAR34.3 trillion hole in SA’s death and disability provisioning. This number, when viewed alongside the country’s dismal retirement savings outcomes, depicts a nation that is more focused on month-to-month financial survival than planning for its long-term financial future. Would you agree? And how would you go about discussing the 2022 Life and Disability Insurance Gap Study findings with your clients? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

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