The value of insurance
There are thousands of definitions of the word insurance. We spent a few minutes trawling the web until we found a simple one-liner we felt lent itself nicely to both the short and long-term industries. Insurance is the promise of compensation for specific potential future losses in exchange for a periodic payment. In the short-term universe these specific losses typically include motor vehicles and household contents. For the life industry these “losses” include death and disability – whether caused by trauma or dread disease. As we considered the above definition we got to wondering how similar the worlds of short and long-term insurance were.
Whether you’re writing short-term or life business you have to complete an accurate assessment of risk at policy inception. Both short and long-term insurers make extensive use of risk pooling strategies to calculate appropriate premiums for their policyholders. And both industries make use of similar distribution methodologies – representative body structures (the South African Insurance Association (SAIA) for short-term insurers and the Association of Savings and Investments SA (ASISA) for the life companies) – and complaints resolutions processes.
Treated similarly by the buying public
These similarities extend to the perceptions of the consumers of short-term and life products – as illustrated by the alarming levels of underinsurance reported across South Africa. In 2008 the then Life Offices’ Association (LOA) commissioned an independent study into the life insurance “gap” in South Africa. They estimated South African families were grossly underinsured by an estimated R10-trillion at the time… And the statistic is unlikely to have improved through the recent recession.
The situation in the short-term insurance space is equally worrying. According to SAIA approximately 65 percent of South African motorists are uninsured. At these levels both insurer and motorist are suffering. While the profitability of the motor books at most of the country’s short-term insurance companies falls, individual motorists are paying more than they should for comprehensive insurance cover...
Appreciating the value of insurance
You only realise you’re underinsured in moments of crisis. We’re sure if you reflect on your personal circumstances going back 10 years you’ll probably find numerous examples of insurance policies saving your skin. Although our insurer probably hates us we recall claiming the full value of a GSX 750-R super bike after just one monthly insurance premium...
Life insurance companies have taken to publishing details of their payouts to assist the public in appreciating the value of their covers. Neelan Porthen, Liberty Head of Risk Products, says, ‘Every well-established insurance company keeps a detailed record of the number and amount of claims that it honours in a year.” He reckons financial advisers can use the statistics to highlight to consumers the value of cover when compared monthly insurance premiums. “These figures show that an insurance premium could be the best investment you ever make.”
In 2009, Liberty’s payouts surpassed the R2.2 billion mark; with over R1.3 billion paid out in death claims to the beneficiaries of policyholders. A further R456 million was settled on dread disease and disability claims to policyholders that lost their income-earning ability through disability or illness, enabling them to continue to live their lives in the manner they had worked hard for.
What should you do?
Liberty says financial advisers have the huge responsibility of helping clients prepare for unforeseen, often tragic, events. If you haven’t already done so then you should get on the line to your financial adviser and go through the process of balancing your investment and risk portfolios appropriately. A thorough financial needs analysis should identify shortfalls in your financial plan, and guide you on the road to investing enough for retirement, providing for yourself and your family in the event of a death or disability event, and covering yourself for the inconvenience of hospitalisation (medical insurance) and theft or vehicle accident (short-term personal lines insurance) too.
Editor’s thoughts: Knowing what to do and doing what you should are two entirely different matters. We all know we should spend time with our financial advisers and make sure we’re “protected” against as many unforeseen events as possible. But few of us do this. The situation is even worse when you’re too close to the industry. As a financial adviser have you made adequate provisions for your own risk and investment requirements? Add your comment below, or send it to gareth@fanews.co.za
