Life companies to do away with projected maturity values

In a significant move towards better managing customer expectations, the life insurance industry has decided to remove projected maturity values from quotations and policy documents by early next year.

Gerhard Joubert, CEO of the Life Offices' Association (LOA), says the aim of projecting maturity values was to demonstrate to consumers the value of long term savings and the power of compound interest and to provide a tool for financial planning.

He explains that maturity values have always been projected at a higher and a lower rate of investment return to illustrate potential variation in future policy values.

The rates used are related to the expected inflation rate typically, the higher the inflation rate, the higher the anticipated investment returns and vice versa. Currently projected values are illustrated at 10% and 4% in terms of the LOA Code on Policy Quotations. The LOA has been self-regulating the use of projections since 1983 to ensure that consumers are not presented with unrealistic projections.

Joubert says projections are, however, not intended to be accurate forecasts of maturity values.

"Unfortunately this was not always clear to policyholders and some even mistook projected values as guarantees. This often led to disappointment."

He says the LOA has been debating the merit of including projections in policy quotations.

"Most intermediaries now have access to very sophisticated computer programmes used for financial needs analysis and planning. Since the main purpose of providing projected values was to facilitate financial planning, the life industry has decided that the projection of values should therefore rather form part of the financial needs analysis process and no longer directly relate to a specific product." 
 
Joubert says advice given by intermediaries, including the provision of illustrations and forecasts, is regulated by the Financial Advisory and Intermediary Services (FAIS) Act. The FAIS General Code of Conduct makes provision for the protection of consumers against unsubstantiated benefit illustrations. The Code states, for example, that where an illustration is provided by an intermediary, it must be supported by clearly stated assumptions, especially around performance, returns, costs and charges.

The LOA Board therefore made the recommendation that member companies remove projections from the quotation process and policy documents by early next year.

Comparing products

Joubert says projected values as provided in quotations have never been suitable for comparing the product offerings from different companies. The key areas to focus on when comparing different products should rather be:

* The product charges.

* Capabilities of the asset manager.

* The likely future investment performance (as measured against a suitable benchmark).

* Features like flexibility, choice and guarantees.

* The financial soundness of the provider.

He says the most useful way of comparing the charges levied by different life companies is the Reduction in Yield (RIY). 

The RIY is provided in quotations by all members of the LOA for pure savings products. The RIY shows the total effect of insurance company charges on the investment return of a policy in one figure. The lower the RIY, the cheaper the policy charges.

Impact on intermediaries

Joubert says because intermediaries have relied on using projected maturity values to provide consumers with scenarios for meeting a specific financial goal, the LOA has consulted extensively with intermediary bodies over the past 18 months.

He says most intermediary bodies have indicated their support for the LOA decision.

Once the existing system of projected values has been phased out, intermediaries will be able to use their financial needs analysis systems to create illustrations for clients that are not directly related to the product, but form part of the advice process. 

Intermediaries will also be provided with a standard compound interest projection table (based on a R100 monthly investment) to help them demonstrate to their clients the benefits of savings and the effects of compound interest.

Managing expectations

The LOA Board has endorsed a recommendation that life companies communicate with their policyholders at least once a year with the aim of managing the expectations of existing policyholders.

In addition the LOA is also in the process of reviewing other provisions of the LOA's Code on Policy Quotations with the aim of simplifying mechanisms aimed at aiding transparency and disclosure.