Bridging the life insurance deficit gap

02 June 2014 Schalk Malan, BrightRock

Around the world, the economic recovery is taking longer than hoped. In South Africa, consumers are currently faced with rising food and fuel prices and a tough job market.

These less-than-favourable conditions could impact negatively on the insurance sector. As we know, consumers are more likely to reduce or lapse their insurance cover when times get tough. Yet, life insurance as a sector continues to grow and has the potential to continue doing so.

Ernst & Young’s latest quarterly industry survey, released in April 2014, shows continued double digit premium growth thanks to the high take-up and low lapses among the affluent market. However, in terms of the mass market, the report mentions weaker growth in this segment due to industrial strife, slow employment growth and weak disposable income growth.

South Africa as a leading insurance market

South Africa ranks among the world’s top 20 insurance markets, and its products are rated as world-leading in terms of innovation and quality.

Unfortunately, South African life insurance products have become increasingly commoditised in recent years. Product enhancements increasingly centre on discounts and add-ons like cash-back bonuses. However, the basic product structures have remained unchanged.

The growing need for cover

According to the Association for Savings and Investments South Africa’s latest insurance gap study, South Africans are underinsured by a staggering R24 trillion. Employed South Africans between the ages of 18 and 65 years require 62% more death cover than they currently have and about 60% more disability cover.

In other words, there is still a great need and demand for life insurance cover among South African consumers. The value of this cover is borne out by the performance of life insurance products. The industry paid risk benefits to the value of R13 billion on individual life policies in the first six months of 2013 and a further R6 billion in risk benefits on group life policies .

These contradictory results speak not only to the disparity in income and need among South Africans, but also illustrate the unique tension between opportunity and risk that exists in our industry. The industry’s track record, the extent of consumers’ need for cover and the current market conditions are the ideal conduits for a rejuvenation of the life industry, if we are able to rise to the challenge.

To address these issues, industry regulations over the past few years have focused on financial advisers and the appropriateness of the advice you deliver. However, as advisers, you are reliant on product providers to create products and systems that better support and streamline your advice task.

Creating sustainable product structures

Traditional life insurance products are priced for the maximum term and set to increase over time. This is typically funded by a premium that increases too, often at a rate exceeding the growth in cover. As costs go up, consumers inevitably buy down or lapse their cover. In practice, they are buying term cover but paying a whole-of-life rate for it.

This is inefficient and wasteful

Because of this inefficiency, premiums are higher than necessary. Since affordability is a primary concern for policyholders, product providers have focused on reducing the initial premium without actually changing the inefficient product structure.

More efficient products free up premium savings that help to negate the need for aggressive age-rating. Needs-matched insurance prices each component of a policyholder’s cover for the exact duration it is needed.

As an industry, we need to create an awareness of the importance of life insurance and the role it can play in contributing towards financial prosperity. The last thing a parent wants is to leave their dependants destitute when they pass away.

This seems like a hard task, but is achievable.

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