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Bulk insurance: Good for the consumer or the underwriter?

01 October 2011 Adrian Hofman, Health & Accident

Insurance involves multiple parties with the same perceived requirements pooling their money with an underwriter. The question is whether this definition can be broadly applied to both members of compulsory group schemes and a collection of individuals.

Underwriters in the short-term personal lines market rate each risk according to the risk profile of the insured, including geographic location, age and vehicle type, among others. In the life insurance industry the underwriter fixates on key rating factors such as level of education, earnings and location. And so it continues – in group life the risks are assessed based on industry, earnings and location – and for funeral cover the group size, earnings and location are considered.

No “unfair” differentiation

The situation is slightly different for medical aid schemes, where underwriters rate according to benefit levels and earnings but cannot rate differently between individuals and groups. The only differentiation a medical aid scheme can make is to set waiting periods.

The common factor among all forms of insurance risk rating seems to be earnings (or perhaps levels of personal success and education). But in some cases it simply boils down to the more you earn – the more you pay – and the more you claim. This is definitely the case with medical aid schemes.

Life insurers, on the other hand, believe the more you earn the less you should pay! A life insurance underwriter’s ‘perfect client’ is the higher earner who typically knocks on the medical aid’s door for medical and related expenses.

The cost of insurance

If you work for a company of say 300 employees you could enjoy group life cover for as little as 35c per R1, 000 of life cover – so R350 per month for R1 million cover. An individual who approaches the same life insurer for individual life cover would probably pay in the region of R900 to R1, 400 per month for the same cover (age and earnings dependent).

Similarly group funeral cover of R10 000 (individual) would probably cost about R20.00 per month on a group scheme versus R60.00 per month as an individual – once again via the same life insurer. The consumer in this case should be asking why they are paying up to 300% more for the same cover when for all intents and purposes they are the same “life” as that insured in the group scheme. To put it another way: Do underwriters make more profits from “individual” business than “group” business?

Freedom of choice

It is generally argued that individuals who purchase cover only do so when a want or need for said cover arises – after they suspect their personal circumstances might lead to a claim. In contrast members of a compulsory group scheme do not have “freedom of choice” with regards taking up the cover.

These unknowns could be addressed by the underwriter by imposing waiting periods rather than different rates. But this becomes an issue when personal lines cover is concerned. How do you, for example, impose waiting periods on cover for accidental and unforeseen events? Both underwriters and the public who purchase insurance cover struggle with these challenges on a day to day basis.

In the perfect world

The perfect world solution lies with the broker who is tasked with securing the appropriate and cost effective covers for their client. But real world legislation and economies of scale mean that individual brokers often do not have access to all underwriters, and are therefore restricted in their ability to offer lowest cost comprehensive insurance facilities to the client.

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