Insurance shortfall points to opportunities for intermediaries

Gareth Stokes, FAnews Online Editor

If you sell life insurance then the 2010 Life and Disability Insurance Gap Study will read like music to you ears. The latest numbers show that South Africa remains woefully underinsured, to the tune of R18.4 trillion. That’s the amount family and friends would have to “find” to secure their standard of living if each one of South Africa’s 12.4 million income earners (aged 16 to 65) dropped dead today! The 2010 study was commissioned by the Association of Savings and Investments South Africa (ASISA) and conducted by True South Actuaries & Consultants (TSAC).

On closer inspection the R18.4 trillion is a meaningless number, because the “gap” between optimal and existing cover will never be exposed through a single event. The number is designed to shock industry stakeholders and individuals into taking a closer look at the levels of life and disability cover currently “enjoyed” by the general population. The survey’s real “value” stems from insights gained into the insurance behaviours of a number of income segments. The detailed statistical information (on household income and expenditure and personal income data) provided by the University of South Africa’s Bureau of Market Research makes it possible to study the impact of education, family size and gender (among others) on insurance decisions.

What is this “gap” everyone talks about?

Every time someone talks about the “insurance gap” I find myself transported back to my first trip on the London underground. If you’ve used the UK public transport system you’ll be familiar with the automated female voice warning you to “mind the gap” as they embark and disembark from the train carriages. So, if you’re travelling on the underground in the UK – mind the gap. If you’re sauntering through life in South Africa – mind the insurance gap!

The insurance gap referred to in the study is calculated by subtracting the actual cover “paid for” by South Africans from the insurance cover they need. Francois Hugo, Executive Director at TSAC, says the study considered data relevant to South Africa’s (approximately) 12.4 million citizens between the ages of 16 and 65 who were earning regular income.

The insurance “need” calculation considered the household budget deficit post event. A calculation was made to determine how much cover would be required to provide enough income to cover expenses and preserve current living standards until the earner’s intended retirement age. TSAC derived the actual cover from numbers provided by life insurers, pension schemes and government disability grants; but ignored RAF, Workman’s Compensation and short-term insurance.

Getting to more manageable numbers

To make the R18.4 trillion more manageable TSAC divided everything by 12.4 million to create an “every person as equal” assessment. The survey concludes the average death cover “need” is R950 000 versus actual cover of R350 000, leaving a R600 000 shortfall – while the average disability cover “need” of R1.5 million is offset by actual cover of 60 000, leaving a R900 000 shortfall. But the 12.4 million “earners” in the survey have vastly different incomes.

The report therefore considered the insurance “gap” across five income bands. People with take home pay less than R3000 – those “earning” R3000 to R5800 – the bracket from R5800 to R8300, then R8300 to R16700, and finally R16700-plus. And that’s where the results become interesting. In the lowest income bracket – covering the majority of earners – the death insurance cover gap is relatively small. There’s no disability gap in this income category because of the disproportionate relief from social disability grants. The gap is largest among the highest income category – particularly for disability cover.

Taking care of the problem

The only way to address the shortfall would be for each and every South African to conduct a thorough assessment of their individual and household financial needs. Once this is done they can “plug” the gap by purchasing more insurance (at a “cost” of 2.4% of earnings for death and 1.5% of earnings for disability), cutting expenses (to the tune of 30% in the event of death, or 34% in the event of disability) or increasing earnings post event (by R3 177 after tax per month in the event of death, and R4 696 for disability).

Why should we care? The death and disability statistics are frightening. Based on actual experiences in 2010, TSAC estimates there’ll be 159 034 deaths in South Africa next year – and 52 481 disability events. That’s 435 deaths and 144 disabilities each and every day! Are you prepared to “risk” these odds?

Editor’s thoughts: Although the 2010 Insurance Gap Study threw out a much larger “gap” than in 2007, the actuaries reckon it hasn’t widened much. Their data modelling has simply been tweaked to calculate the “gap” more accurately. The common thread running through the two surveys is that South Africans are desperately underinsured. How much time do you spend with your clients to make sure they’re adequately covered for death and disability events? Add your comment below, or send it to gareth@fanews.co.za