Recent press reports tend to give much attention to the activities of direct insurers who claim by cutting out the broker you can save up to 25% of the premium.
What are the real facts when buying insurance through a broker versus buying it direct from an insurer?
In South Africa about 80% of all short-term insurance is purchased through insurance brokers whether this be domestic insurance, commercial insurance to cover the assets of business entities or corporate insurance to cover the risks of large corporate entities.
Even though it has always been possible for consumers to buy insurance directly from insurance companies in South African yet it is true that consumers have preferred to purchase insurance through brokers. Whilst South Africa has seen the emergence of new high profile direct insurers such as Outsurance and Dial Direct, who aggressively advertise to the South African consumer market that it is significantly cheaper to do business through them, this has had very little effect on the percentage of business that is done through brokers.
Is it necessarily cheaper to buy from a direct insurer?
There is ample evidence that insurance brokers are often able to put together a superior insurance solution to the needs of a particular consumer at a cheaper premium than an off the shelf product sold by direct insurers.
Senior management of direct insurers have admitted that they do not always have the cheapest product - yet the consumer is confronted on a daily basis by a barrage of advertising indicating that they would be significantly better off, from a cost point of view, by buying from direct insurers.
How do product offerings compare?
The product offerings of direct insurers are mostly off the shelf standard products whereas brokers are able to develop a tailor made solution for their clients.
In many respects the off the shelf product will be inferior to the tailor made product provided by insurance brokers as products offered by direct insurers are often quite inflexible in their design. Direct insurers can offer you only their own product; whether this is suitable or not for clients needs, while brokers have the market from which to select the most suitable cover and cost-effective price.
It would be true to say that most lay persons would have very little understanding of insurance jargon, particularly when it refers to exclusions, special conditions and the like. A consumer is, therefore, at a disadvantage when buying direct as there is no one to interpret his or her specific needs and point out the options that are available and the consequences of selecting specific options.
Lack of Advice
One of the main functions of an insurance broker as defined by legislation is to fully understand the needs and circumstances of a particular client and to offer the most appropriate solution to their needs. An insurance intermediary is obliged to ensure that the client is put in a position to make a fully informed decision.
When dealing direct with insurers this necessary function is excluded and the consumer is left to his or her own devices in assessing the quality of the product they are buying.
Few consumers are in a position to make an informed decision when they forsake the advice of competent and licensed intermediaries.
When do you need your intermediary most?
A short-term insurance product, by its very nature, lends itself to the potential of regular interaction between the client and the insurer. If one considers the high crime rate and high accident rate on our roads, many South African are faced with claiming on their short-term insurance policy on a fairly regular basis.
A consumer that is faced with dealing directly with an insurer in the event of a claim is always at a serious disadvantage. Consumers have very little understanding of how insurance claims are assessed, what the limitations may be on the insurance cover that they enjoy and are, therefore, often left with a feeling of helplessness because they do not get what they expect.
A consumer that deals through an insurance intermediary has the advantage of dealing with someone who has a strong relationship with the insurer and who fully understands how claims need to be handled to ensure an efficient settlement of the claim. In addition, the broker seeks to retain and enhance relationships with clients so will make every effort with insurers to ensure that valid claims are fairly met. Indeed, many brokers have claims settling authority and deal with clients claims themselves.
Therefore, the time that the consumer needs an intermediary most is when a claim arises. If the client had used an intermediary in the first instance he or she would be fully informed as to what cover they enjoy and what conditions and exclusions may exist.
Insurance intermediaries who have lost clients to direct insurers often comment that, after their first claim with the direct insurers, the client will return because of the bad experience of dealing directly with an insurer.
Conclusion
We all know that insurance is a grudge purchase, but that it is ultimately about peace of mind and knowing that when something unforeseen happens, you will not suffer financial loss. Thus, brokers seek to provide insurance cover that results in the fewest possible uninsured losses.
So what is peace of mind worth? Is it worth sacrificing certainty in exchange for something that is cheaper or are you better off in ensuring that the peace of mind that you seek is achieved through appropriate understanding of your needs, proper solutions to your needs through the process of good advice and it might not be any more expensive.
The old adage that buying cheaper can be very expensive is particularly true in the short-term insurance environment. So do not be misled by the lure of cheaper premiums by cutting out the middleman. This can cost you dearly!!
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