The Life Offices' Association (LOA) has been extremely productive in the run up to its 2007 Convention. The event will be held at the Sandton Convention Centre on Thursday, 26 July and will address the topic: "Convergence The changing landscape of the financial services industry."
Earlier this week, the LOA released a press statement on the much talked about credit life insurance policy. FAnews Online provided some comment on this statement in Tuesday's newsletter. Today, we comment on the latest LOA press release which announced a significant shift in LOA member positions on projected maturity values on quotations and policy documents.
Regular FAnews Online readers will be familiar with the two-tier, high inflation / low inflation approach used in these forecasts. At present, LOA members use 4% per annum for the low inflation scenario, and 10% per annum for the high inflation scenario. The LOA has monitored the rates used since 1983 to avoid the use of unrealistic projections, though we can remember some fairly optimistic rates in the late 1990s.
Gerhard Joubert, CEO of the LOA points out that these projected maturity values were used to demonstrate the value of long term savings and the power of compound interest to consumers. As such, they were never intended as accurate forecast of maturity values. "Unfortunately this was not always clear to policyholders and some even mistook projected values as guarantees. This often led to disappointment," said Joubert.
For this reason, the LOA has decided that its members will remove the projected maturity values from quotations and policy documents from early 2008.
Financial advisers should use 'fancy' computers
Many policyholders use the projected maturity value as a guideline or indication of the maturity value on their policies. We are sure, given the recent negative coverage of the industry, that these individuals use the lower of the two estimates as a default. How will the policyholder determine their expected policy values now?
The LOA was quick to put the ball squarely back in the court of the financial intermediary. They suggest that financial planners will be responsible for estimating maturity values using the "sophisticated computer programmes" at their disposal.
According to Joubert "Most intermediaries now have access to very sophisticated computer programmes used for financial needs analysis and planning. Since the main purpose of providing projected values was to facilitate financial planning, the life industry has decided that the projection of values should therefore rather form part of the financial needs analysis process and no longer directly relate to a specific product."
What concerns us at this early stage is how the financial planner can be expected to provide an accurate estimate for the maturity value on the insurer's product, when the insurer is not even prepared to take a stab at it. The media release also suggests that intermediaries will be armed "with a standard compound interest projection table (based on a R100 monthly investment) to help them demonstrate to their clients the benefits of savings and the effects of compound interest." Will this make up for the projected maturity values that used to be supplied? Does this sound like a step backwards to anyone else?
And what will the thousands of policyholders who don't regularly sit with their financial advisers do?
Managing policyholder expectations
The LOA indicates that it has extensively consulted with various financial intermediary bodies in the 18 months leading up to this decision. They believe that once "the existing system of projected values has been phased out, intermediaries will be able to use their financial needs analysis systems to create illustrations for clients that are not directly related to the product, but form part of the advice process."
The press release also reveals that the LOA Board still expects its members to communicate at least once a year with policyholders, to "manage their expectations." It is difficult to imagine what these communications might contain if they no longer include any indication of the expected maturity value of the product.
Will the life insurance industry simply send a general newsletter to each policyholder stating: that the policyholder still owns the policy concerned, that everything looks to be on 'track', that the premium will go up by 10% this year, BUT if the policyholder wants any assurance or indication as to the maturity value on the policy they should rather contact their financial adviser?
Editor's thoughts:
The LOA states that its decision to remove the projected maturity values from policy quotations and documents included discussions with various financial intermediary bodies spanning a period of 18 months. We would like to hear from the financial intermediaries out there: Do you think that projected maturity values should be removed from quotations and policy documents? Send your comments to gareth@fanews.co.za