Know your enemy – understanding the direct insurance market

One reason for the increased uptake of direct insurance is the growth in domestic Internet access. Another is the strong increase in advertising expenditure by direct operators. Although local direct insurers lag their developed-world counterparts they are making steady inroads in both the life and short-term markets.

Direct operators account for about 3% of total recurring and single premiums written in the life industry in 2010 – and nearly 20% of the short-term insurance personal lines market (based on Q1 2012 estimates). And it is thought that the largest direct short-term insurers, Outsurance and Telesure, boast market shares of 6% and 5% respectively.

Advisors need to educate their clients about the many misconceptions around direct insurers. The most popular belief is that direct insurers offer cheaper premiums because no commission is payable to an advisor. In most cases the consultant selling direct insurance is paid variable remuneration, a fact that is not disclosed to consumers.

Research has shown that policies bought directly are not necessarily cheaper than policies bought through an intermediary. Premiums can vary across providers depending on factors such as age, gender and health… And it is unlikely a single provider will consistently offer the cheapest premium across all categories or product lines. Your clients should take the direct sales operator’s "cheapest premium” claim with a pinch of salt!

Direct insurers also use "competition” to their advantage. Consumers are being fooled into believing that they have obtained several objective comparative quotes, when in reality they are dealing with brands within a single insurance group. Whether they transact with direct insurer A, B, C or D – it is the same holding company that benefits.

Direct insurers compete mainly on price. They often write new business at low premiums only to increase the premium on the policy anniversary or after the first claim. They are also known to offer consumers who cancel their policies a lower premium to entice them to retain the policy.

Another consumer belief is that an affordable premium is the most important aspect of insurance cover. They base their decision to purchase insurance on the premium quoted rather than the policy wording, with the result they buy "blind” from direct insurers.

To buy purely on price can be an expensive lesson. Consumers are often not aware that certain benefits fall away to secure the cheaper premium. They may also be unaware of applicable excesses until – or if – they read their policy documents. A shock usually awaits these consumers at claims stage.

Thirdly, consumers may think that insurance is all the same. Yet, the offerings from traditional insurers and direct insurers differ. Importantly, the advice around the offering also differs. Direct operators tend to give information rather than advice.

Take disability cover, for example. It is imperative that customers have absolute clarity and understanding of issues like waiting periods, which events are covered and whether the cover is for permanent or temporary disability – something they seldom get form a telesales consultant.

In 2011 it was reported that a direct insurer rejected 86% of claims totalling R86m. The bulk of these claims were rejected because the policies were no longer in force. Complaints about direct life insurers increased significantly in 2011 too, mostly due to poor information during telesales calls.

Insurance industry results confirm that our leading direct insurers pay considerably less in claims than their traditional insurer competitors. This may be due to improved risk management (underwriting), but could just as easily be due to tougher claims settlement policies or higher excesses charged.

The average consumer is not equipped to deal with the details and the intricacies of risk insurance, especially where life and disability cover is concerned. Advice from an experienced and qualified financial advisor is worth significantly more than the saving the consumer may make on a premium from a direct insurer.