Goedkoop koop is duur koop

Jonathan Faurie, FAnews Journalist

In tough economic times, clients are often on the lookout for cheaper rates on certain risk policies. However, there is another window that we need to look at this through. There is an Afrikaans proverb which states that goedkoop koop is duur koop; are your clients really benefitting their pockets in the long run when entering into survival mode?

benefitting their pockets in the long run when entering into survival mode?

Downward revisions

Neil Cilliers, Actuarial Team Leader: Group Risk Sanlam EB, says that the 2016 Sanlam Benchmark Survey indicates that price is by far the biggest driver in the selection of a risk insurer.

“The turbulent economy has caused consumers to tighten their belts. Insurers’ rates are being forced down in an effort to increase the savings component of pension fund contributions. The size and brand of the insurer becomes less important, as employers and funds simply want the confi­dence that their insurer will pay all valid claims and maintain a high service level,” says Cilliers.

But this is also a challenge. Looking from the outside in, it becomes hard to see how a service provider must provide the same level of cover and service to a client if the costs of risk coverage are decreasing. If this is the case, one wonders what is going on behind the scenes at product providers; how are they managing their own costs in order to offer appropriate coverage and services? What do they have to sacrifice to provide this?

 The effects on death benefits

Cilliers points out that the average cost of death benefits has decreased steadily from 1.56% of a policyholder’s salary in 2011 to 1.31% in 2016. He adds that this reflects the increase in competitive pressure experienced by insurers in the market. “Not much has changed regarding the benefits provided to members; the majority of members still have cover of around three to four times annual salary.”

There has been a marked increase in umbrella funds offering flexible death cover in the form of age-banded cover and life stage cover. This may be an indication of funds trying to overcome general member apathy and achieve the desired outcomes for their members. It may also come down to the fact that there has been a recent general outcry from younger members who want personalised cover and not be in a situation where their premiums are cross subsidising the cover of an older member.

The outlook for disability

The Sanlam research indicated that the average cost of disability income benefits has decreased steadily from 1.22% of a policyholder’s salary in 2011 to 0.99% of their salary in 2016. “Again, this reflects the competitive nature of the industry in recent times. With the economic downturn having a negative influence on disability claims, we expect this trend to turn around soon,” says Cilliers.

He adds that 69% of respondents are not making, or have not made, any changes to their disability income benefit structures to accommodate the tax changes recently outlined by Treasury. This number of respondents not making the required changes was down from 76% last year. There has been very little consensus in the market as to the best way to address these changes. “This has caused confusion among clients and might be the reason the majority of policyholders have implemented no changes to their benefits despite the tax change being an important one.”

“Additionally, we have seen a decrease in the number of respondents who have increases of CPI on their income disability benefits, without a cap. This could suggest that insurers are trying to protect themselves against rising inflation,” he said.

Other determining factors

Apart from price, confidence that claims would be paid, and service levels of the insurer were again listed as the three most important drivers in choosing a risk provider.

Cilliers points out that the number of respondents selecting ‘price’ as the most important factor has increased from 28% last year to 42% this year. This highlights the downturn in the economy and really emphasizes the competitive environment insurers find themselves in.

“The number of respondents who selected confidence that claims will be paid has increasedfrom 61% last year to 76% this year.Service delivery is still important, butclients are looking for the cheapestinsurer who will pay out all valid claims,” concluded Cilliers.

Editor’s Thoughts:
The public simply cannot have unrealistic expectations of product providers. If product providers are decreasing rates, then a decrease in service levels will be inevitable. Is it up to advisers to manage these expectations? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.