Education and income drive life and disability insurance

Gareth Stokes, FAnews Online Editor

A couple of days ago we attended a media presentation that dealt with the “gap” in South African life and disability insurance cover. This insurance “gap” is the difference between the insurance covers currently held by, and the actual insurance needs of local households, extrapolated across the entire economy. The experts say that the nation is underinsured to the tune of R18.3 trillion, split to life cover (R7.257 trillion) and disability cover (R11.137 trillion). The November 2010 SA Insurance Gap study, was commissioned by the Association of Savings and Investments SA (ASISA) and conducted by True South Actuaries and Consultants (TSAC) with assistance from Unisa’s Bureau of Market Research (BMR).

The value of the latest survey stems from the depth of statistical information supplied by the BMR. This allowed researchers to present the survey findings across a number of income segments and also comment on the impact of family size, education and geographic location on insurance decisions. “The research found that people vastly underestimate the level of cover that is required,” says Steve Braudo, chief executive of Liberty Retail.

On education and covers

The survey conducted some ground breaking research into insurance trends among groupings with different levels of education. Six categories were identified: those who never completed any school grading (No PS), those with some primary schooling (PS), those who completed primary schooling but not high school (Some HS), and those with Matric, Diploma or Degree. How do these categories shape up in the insurance stakes?

Before we answer this question it might help to consider the average personal incomes calculated for each group – ranging from R30 593 per annum in the No PS category, to R294 630 per annum in the Degree category. The report states: “A higher education level is associated with higher personal income, as one would expect.” And it turns out the higher the education level (salary) the smaller the gap in life insurance cover. The death insurance gap reduces as the education level increases… A more complicated pattern emerges in the disability shortfall due to the substantial government grant available in the event of disability. The report confirms a tight correlation between insurance behaviours measured across education and income levels.

“Consumer education is critical to help South Africans understand the importance of both life and disability cover,” says Braudo. The research shows that individuals who are educated have more appropriate levels of cover than the uneducated. “A person with tertiary education is three times more likely to have life insurance and five times more likely to have disability cover, highlighting the important role education plays within the life industry,” he says.

Financial intermediaries play a key role

The task of educating South Africans across all education and income distributions is near impossible. Historically insurance companies have been reluctant to enter low income markets, a tendency which persists today because of the cost of reaching this market, the stricter regulatory environment and various economies of scale associated with low value premiums. But inroads are being made through clever initiatives such as Zimele, a set of insurance standard adopted by the industry and aimed at South Africa’s 19 million low income earners.

Higher income earners are “educated” by the country’s dedicated financial services intermediaries, both tied and independent. Insurance giants such as Liberty remains committed to the broker distribution model. The company says sound financial advice is critical to make sure people are adequately covered. “The benefit of using a financial adviser is that they are able to conduct a proper financial needs analysis to map an individual’s needs versus the cover required,” says Braudo. If we hope to address the insurance gap identified in the ASISA research, then both the financial adviser and consumer education programs will play a fundamental role.

Editor’s thoughts: I’ve spoken to a number of people who believe the R18.4 trillion “gap” touted in the study is a touch on the steep side. Whether it’s high or not is beside the point – because the message is clear. South Africa remains grossly underinsured, regardless of how you “slice” the statistics. Is enough being done to educate the country’s low and middle-income earners about the benefits of insurance? Add your comment below, or send it to gareth@fanews.co.za