The eight myths about direct life insurance
When one of the country’s major financial services providers decided to enter the short-term insurance market they had to do some serous thinking about the best possible distribution channel. They concluded that the intermediated route served the company and clients best. But they didn’t leave their critical assessment of financial services product distribution there. As a major player in the life space the group’s Discovery Life division decided to put the “direct is cheaper” claim to the test in the risk space.
Discovery based their study on quotes for R1 million life cover, R1 million lump sum non-accelerated disability cover and R1 million non-accelerated critical illness cover. Quotes were then obtained from different insurers to cover males aged 31-years, 43-years and 51-years, though the critical illness cover was reduced to R500 000 for the latter age group. Insurance providers ‘surveyed’ for the study include the traditional insurers who distribute product through the intermediary force (Discovery Life, Liberty Life, Momentum, Old Mutual and Sanlam) and those following the direct distribution route (1Life Direct, Frank.net, Instant Life and Outsurance Life). And their efforts revealed eight myths about direct life insurance. We will take a brief look at each of these myths, and the contradicting reality, in today’s newsletter.
Myth 1: Direct insurers are cheaper
The first myth is one created by the direct insurers’ marketing machinery, namely that direct insurers can offer ‘cheaper’ product. All the life insurers had to do when entering the direct space was to perpetuate the widely held view entrenched among the general public thanks to years of aggressive short-term direct advertising. In reality the average initial premiums charged by direct life insurers is 9% more expensive than the equivalent cover offered via the intermediated (broker assisted) channel. Discovery acknowledges that the premium ‘gap’ would vary depending on the level of cover purchased.
Myth 2: Financial adviser commission inflates premiums of intermediated product
The second myth grew out of the specific theme of direct short-term insurers’ advertising. They claimed their pricing ‘edge’ was due to “cutting out the middle man” and not paying over commission to the intermediary. Consumers bought this claim ‘hook, line and sinker’ and so it comes as no surprise that the direct life insurers are ‘peddling’ the same lie. The reality, says Discovery Life, is that higher marketing budgets and operational expenses among direct players, including call centre salaries and sales incentives, replace the commissions paid by traditional insurers to intermediaries. A quick look at the Financial Mail Adfocus, published November 2010, confirms that the country’s direct insurers spend heavily on advertising. Six direct insurers feature among South Africa’s Top 100 advertisers!
Myth 3: Consumers will be able to maintain direct insurance premium over the product term
The long term affordability of risk insurance cover has been widely debated. It was found that direct life insurers’ premium patterns are comparable to ‘age-rated’ funding patterns of intermediated insurers, but from a higher base and with less flexibility in terms of funding choices to match clients individual needs. The key difference between intermediated and direct products was the life-long premium guarantee offered by the traditional insurers versus the three to five year guarantee offered by the direct insurers. The insured could be in for a nasty shock when the direct insurer reassesses premium at these intervals.
Myth 4: Direct insurance products offer comprehensive benefits
The fourth myth is perhaps the most alarming finding of the study. “The marketing strategy of direct insurers focuses largely on price competitiveness rather than a complete value proposition,” says Discovery Life deputy CEO, Kenny Rabson. Whether in the comprehensive disability or comprehensive critical illness space the direct insurers fail to incorporate the latest benefit innovations in their product. Discovery found, for example, that “disability products did not cover temporary disability or activities of daily living, and failed to consider the impact of long term disability.”
Myth 5: Consumers do not need financial advisers
A person relying entirely on a telephone sales conversation to take care of his / her complex risk insurance needs could end up sorely disappointed. Discovery believes that a financial needs analysis – an early step in the financial advice process – requires specialised expertise and customised software to complete. A financial adviser is better placed to understand each client’s circumstances and needs.
Myth 6: A call centre agent is capable of giving similar advice to a qualified financial planner
This myth is easily dispelled thanks when you consider the qualifications, ongoing professional development and continuous training financial intermediaries obtain and undergo.
Myth 7: Claims payouts from direct insurers are transparent and certain
“There are concerns about the level of underwriting undertaken by direct insurers at point of sale,” observes Rabson. The tendency is for these companies to perform additional underwriting checks at claims stage, with the result their claims rejection rates climb way in excess of the intermediated life industry experience. Early data suggests the high claims rejection rate among direct life insurers stems from the process of automatically lapsing policies in the event the insured misses two consecutive premium payments. The checks and balances in the intermediated environment are more rigorous and intermediaries are on hand to contact clients in the event a payment is missed.
Myth 8: Intermediaries do not add real value to consumers
This myth is countered in almost each of the preceding myths. The reality is intermediaries perform important tasks for consumers and add significant value. Discovery observes: “Our research findings support the view that in the complex life insurance industry, intermediaries add value to consumers by providing in-depth financial needs analysis, consumer education and support for consumers during the underwriting and claims process.” And when we consider that the direct product (both in the life and short-term space) is often more expensive, going the intermediated route is a no-brainer!
Editor’s thoughts: I’m sure I don’t have to convince FAnews readers of the value they represent to their clients each and every day! And regardless of what motivated Discovery Life to undertake the study we believe their conclusions on the value of the intermediary are spot on! Do you think any of your clients could get a better overall deal from the direct life insurers? Please add your comment below, or send it to gareth@fanews.co.za
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