Forget direct… Financial intermediaries add real value!

As more direct insurers enter the life insurance space, Discovery set out to test the “direct is cheaper” myth.

Large financial services providers such as Discovery, Liberty, Momentum, Old Mutual and Sanlam swear by their intermediated distribution channels. They believe that professional financial intermediaries offer the best value to both product provider and consumer.

Taking it a step further

Discovery Life tested the “direct is cheaper” myth by obtaining a number of quotes for similar life, disability and critical illness covers from a number of traditional insurers who distribute product through the intermediary force (Discovery Life, Liberty Life, Momentum, Old Mutual and Sanlam) and those following the direct distribution route (1Life Direct, Frank.net, Instant Life and Outsurance Life). The findings of this ‘mystery shopper’ exercise were startling… and dashed a number of direct insurer myths.

It’s not cheaper!

The first myth to fall by the wayside was one created by the direct insurers’ marketing machinery, namely that direct insurers offer ‘cheaper’ life product. It turns out the average initial premium charged by direct life insurers is 9% more than the equivalent cover offered via the intermediated channel. Although this ‘gap’ fluctuates according to covers purchased, the consumer comes out top via the intermediated route more often than not.

Another myth rubbished by the study grew out of direct short-term insurers’ advertising campaigns, which claim their pricing ‘edge’ was due to “cutting out the middle man”. The direct life insurers wasted no time in ‘peddling’ the same lie. It seems the higher marketing budgets and operational expenses among direct players, including call centre salaries and sales incentives, easily offset the commissions paid by traditional insurers!

Premium patterns

Discovery found that direct life insurers’ premium patterns were comparable to the ‘age-rated’ funding patterns of intermediated insurers, except that they started from a higher base and offered less flexibility in terms of funding choices to match clients’ individual needs. And instead of offering life-long premium guarantees, the direct life insurers favoured three to five-year periods. A consumer purchasing direct life cover could be in for a nasty surprise when premiums are reviewed so soon after policy inception.

What about benefits?

Consumers are not getting ‘like for like’ cover when they buy a life policy direct versus from a broker. “The marketing strategy of direct insurers focuses largely on price competitiveness rather than a complete value proposition,” says Discovery Life deputy CEO, Kenny Rabson. He believes that direct life insurers were remiss in not incorporating the latest benefit innovations in their product.

Needs analysis

One of the issues financial intermediaries are most up in arms over is the ‘soft’ regulatory oversight of telephone sales agents. Discovery believes that a financial needs analysis – an early step in the financial advice process – requires specialised expertise and customised software. A financial advisor is better placed to understand each client’s circumstances and needs – and there is no way that a call centre agent can offer similar advice to that provided by a qualified financial planner!

Claims payouts

Direct life insurers’ claims payouts also came under scrutiny. “There are concerns about the level of underwriting undertaken by direct insurers at point of sale,” observes Rabson. The trend is to perform additional underwriting checks at claims stage, with the result their claims rejection rates climb way in excess of the intermediated life industry experience!

Intermediaries add value

When all is said and done, the financial intermediary offers significant value to the consumer. Discovery concludes: “Our research findings support the view that in the complex life insurance industry, intermediaries add value to consumers by providing in-depth financial needs analysis, consumer education and support for consumers during the underwriting and claims process.”