Survey reveals South Africans recognise the need for disability cover

Brad Toerien CEO of FMI.

Assessing the efficiency of the South African insurance market in its provision of disability cover by True South Actuaries and Consultants – an update to the 2013 study.

Key findings:

• There has been an increase in sales of temporary disability cover. Recent available data stands at 1.4%, compared to 0.8% in 2008.
• The disability insurance gap is still large, reecting that just between 12% and 27% of needs are covered.
• While a mind shift is slowly taking place, the South African market is still massively exposed to ?nancial impact from permanent and temporary disability events. Only 40% of the total need for permanent disability was covered in 2013.
• Life cover still dominates the market with 61% of sales - disability cover comprises 29% of sales.
• There is still an over-reliance on lump sum cover as opposed to income bene?ts which only accounted for 18% of new disability sales.
• Stand-alone cover accounted for more than half of total disability sales for the ?rst time in 2013. However, the quality of this cover still indicates too much accelerated and lump sum cover.

Durban:

Following an independent survey conducted by True South Actuaries & Consultants in 2013, FMI
(www.fmi.co.za) commissioned a follow-up survey to highlight the differences seen over the past 2 years. The study looked extensively at the South African disability insurance gap, with new data taken from 2012 and 2013, to highlight the change from the previous report which looked at data from 2007 to 2011. The 2013 True South ASISA Insurance Gap Study quanti?ed the total need for permanent disability insurance at R24.4 trillion. With only R9.7 trillion of cover actually in place, this leaves a disability gap of around R14.7 trillion. Although overall a wider gap than the previous study, there has been a positive increase in South Africans taking out temporary disability cover.

“The first survey showed a massive gap in temporary income protection cover however, this latest survey shows the gap slowly starting to narrow, which is positive. Driving the need for this cover is core to what we do at FMI. In celebrating our 20th year in business , we continue to hold firm our belief that all financial planning should start with temporary income protection. For the past two decades we’ve worked with advisers discussing why a lump sum is a poor fit for replacing a future income need as we believe a combination of income replacements and lump sum cover is best for long-term disability. And increasingly this seems to have become the accepted view in the market. We updated the survey so we could see if the changing perceptions are reflected in overall new business levels and are confident that the next survey will continue to show an even greater increase,” says Brad Toerien CEO of FMI.

As one of South Africa’s most respected actuarial consultancies in the Financial Services sector, True South were asked by FMI to update the original study conducted in 2013 to allow for new data that has since become available. Contributions to the study are accredited to Swiss Re Life & Health Africa who made available their recent results from the Swiss Re Individual Risk Market New Business Volume Survey, 2013. References are also made to 2013 True South ASISA Insurance Gap Study, mid-2013 labour force information from Stats SA, and FMI’s in-force disability cover.

“In the latest data we see a number of encouraging ‘green shoots’. Most exciting perhaps, is the extent to which new sales seem to represent a more appropriate mix of temporary and permanent disability cover. In addition there seems to be less reliance on both lump sum and accelerated cover. These are all positive for the consumer,” says Paul Zondagh of True South Actuaries & Consultants.

Gaps in disability cover

True South quanti?ed the permanent disability cover gap at 60% which means only 40% of the required disability cover is actually in place. This is the same gap as seen in the previous study. However, in terms of rands, the shortfall is greater due to the growing South African workforce. The R11.1 trillion shortfall seen in the 2013 report now sits at R14.7 trillion. This is largely due to consumers consistently being under-insured and thereby exposing themselves to the severe ?nancial impact of a temporary or permanent disability.

The gap in temporary disability cover has seen an improvement. This is a positive sign as the previous survey in 2013 concluded that potentially between only 7% and 25% of the true need for temporary disability cover was in place. The new data estimates the situation to have improved to between 12% and 27% of the underlying need being covered. The 2013 survey also estimated that the South African temporary disability cover market was between 75% (best case) and 93% (worst case) while the new survey stats show cover as being between 73% (best case) and 88% (worst case). This is an improvement but it highlights the fact that a worryingly large amount of the population remains exposed.

Life, disability, and critical illness cover

The majority of South Africans still regard life insurance as the most important form of cover. As a result, life cover still dominates sales. In this study, updated data has shown life cover to account for 61% of sales with disability cover sitting at just 29% and critical illness cover at 9%. Looking at the difference in sales of life cover versus disability cover the level of critical illness still remains high, which indicates that consumers are potentially purchasing critical illness cover in place of disability cover.

“Critical illness is designed to meet a different need – its purpose is to provide a payout to meet the costs associated with the diagnosis and treatment of a defined critical illness or any costs associated with changes to your lifestyle. Income protection is meant to provide an income when you are unable to earn one. Income protection also covers a broader set of events and will pay for any illness or injury that results in your being unable to work (even for a short period of time) while critical illness pays out based on a defined list." says Toerien.

If one looks at what the average breadwinner of a household should be considering in terms of cover, logic dictates the following: life cover to replace 64% of income after death and disability cover to replace 98% of income. Disability sales should theoretically exceed life cover sales by a great margin as the disabled individual will continue to be part of the household. As such, there is a signicant discrepancy between what cover is needed and what is actually being purchased.

The mix between permanent and temporary disability cover

The increase in sales of temporary disability cover has been encouraging and shows consumers to be focusing more acutely on their real insurance needs. Expected to account for 3% of the total sales of disability cover, this number still falls short but has increased from 0.8% in the 2013 report to 1.4% in the updated survey.

In comparison to permanent disability cover, which stands at 98.6% and has remained fairly constant over the years, temporary disability cover has seen a steady increase since 2008 proving South Africans are becoming more aware of the need for this cover.

The mix between lump sum and income cover for disability

Recent data shows that lump sum benets have decreased slightly while income benets have increased, which is a positive sign. Lump sum disability benets make sense to consumers for once-off costs at the time of becoming disabled, however, they would be well advised to rather buy the bulk of their disability cover in income benets. The reason being, that lump sum benets rarely help the consumer in the long term as most individuals are unable to properly manage the money needed to see them through their time of disability. This results in nancial problems down the line.

In this report, income benets only account for 18% of new disability sales. In 2011, only 17% of permanent disability sold was made up of income benets so the gure has increased, albeit marginally.

The nancial services industry has a legal responsibility to ensure that when lump sum cover is sold to an individual, they are fully aware of what the quantiable risk is of a shortfall. Unfortunately, many insurers do not do this. Clients must be made aware of this risk and the percentages for which they need to cover this in their payments to avoid their lump sum pay-outs falling short.

Accelerated and standalone disability cover

According to the 2013 data, for the first time, stand-alone cover has accounted for more than half of total disability sales. It now stands at 51%, a steady increase from 48% in 2011. Accelerated cover, although lower than the 52% seen in 2011, still stands at 49% which proportionately is relatively high. This begs the question of whether consumers are being given sufcient advice from nancial institutions when it comes to using accelerated cover correctly.

Key issues

Although disability cover has improved in some areas, there remain some key issues.

Firstly, not enough consumers are being sold the right cover. To x this, consumers need to educate themselves as to what type of cover they really need. In turn, insurance providers need to be candid with consumers in helping them to identify their needs properly.

Secondly, there needs to be a shift in thinking when it comes to life cover versus disability cover. Although life cover is essential, it will not help you if you nd yourself unable to work for any length of time, due to a disability. With the majority of the population in high amounts of debt, you could nd yourself exposed to deep nancial trouble if you are not covered properly.

Thirdly, True South refers to ‘sensible buying behaviour’ which is crucial when it comes to insurance. Consumers need quality products that suit their individual needs.

“The lack of sufficient disability cover remains the single biggest point of financial exposure for South African consumers. With the unsold need in 2013 already in excess of R15 trillion, this is a big opportunity for advisers and industry,” says Zondagh.

“In conclusion, moving forward we hope to see the temporary gap steadily getting smaller and the percentage of income replacement cover versus lump sum growing, but realistically we know it will take a long time to completely close the gap. At FMI we will keep driving what we believe – that the best way to achieve complete income protection is through a combination of lump sum and income benefits, an income based solution for replacing monthly earnings and lump sum for once-off expenses such as repaying long-term debts and major lifestyle changes. And of course, our core belief that all financial planning should start with temporary income protection,” concludes Toerien.

To see infographic of survey click here.