Income protection: competing with the world’s best

Individual income protection is most popular in Australia and the USA. However, experts believe the industry is bound to grow locally as Africa’s new middle class seeks to protect their hard-earned income. The African Development Bank (ADB) defines middle class as anyone with a daily expenditure of between US$4 and $20.

Africa’s middle class stands at over 120m people. The same ADB report states that middle class households are likely to spend more on private education and healthcare, which will inevitably see an increased uptake of income protection products. This is especially true for self-employed individuals and small business owners who don’t have the benefit of company insurance schemes to fall back on.

Chief Pricing Actuary at RGA Reinsurance, Leza Wells, notes that group income protection offered in the employee benefit market has been pretty stable in SA for some time. "However, individual income protection is relatively new in the local market and is sold mostly to professionals.” She adds that, despite this history, the retail income protection market seems to be growing.

At the same time, the local market is a challenging one. Not least because traditional distribution models are not always economically viable.

While the exact scale of the local market is hard to quantify, it is well short of the $1.4b in force premiums evident in Australia, and the $3.8b in the US. In addition, both of those markets offer state-provided disability benefits that are superior to those available in South Africa.

Despite the challenges and relatively small size of the South African market, there are several local product developments which are superior to those offered abroad. Wells explains that for disability insurance, we seem to be going through a trend of innovation, competition, and relaxation of benefit features which the US and Australian markets went through in the 1980s but which they subsequently tightened up on.

Income protection for older ages is one such development area. Globally, there is a trend towards increased life expectancy and later retirement ages. In short, people are living longer, while state funded pension and health systems are under increasing pressure due to ageing populations and increased life expectancy. With traditional disability solutions only providing cover to age 65, or more recently to age 70, the individual is increasingly being forced to provide personally for their retirement income.

This market is in its infancy, but we are now seeing product providers offering whole-of-life disability solutions that provide for an income stream to be payable for life in the event of a permanent disability. For example, specialist income protection provider FMI has recently launched a solution that not only provides for a lifetime income stream in the event of a permanent disability, but also provides temporary disability cover up to the age of 75.

Similar solutions providing lifetime income streams in the event of a disability have been deployed in the Australian and US markets, but providers have exited this market on the back of poor claim experience.

The main challenge in the local market remains the alarmingly low uptake of disability cover in general and temporary disability cover in particular. As FMI CEO, Brad Toerien, points out, "Life cover is sold at double the level of disability cover even though actuarially we would have expected the relativity to be the other way around. We should be selling twice as much disability cover as life cover. It is time for advisers to start asking what type of insurance their clients need to ensure truly comprehensive cover across all areas of their lives.”