Income protection gap remains alarmingly large

Brad Toerien, CEO of Income Protection Specialists FMI, says that while FMI has experienced positive growth trends, and he has noted an increasing number of competitive products in this market space, "the big mindshift which is required among advisers for the genuine benefit of their clients has not fully taken hold”.

FMI recently funded an independent survey to get an accurate picture of the local income protection market.

"We knew there was a big gap in the disability cover market that urgently needed to be addressed,” says Toerien, "but not even we appreciated just how substantial it was until we saw the True South report”.

• Life cover is being sold in South Africa at twice the level of disability cover when it should be the other way round. Disability cover should be 53% more than life cover as the disabled policyholder will still be in the household after the insured event occurs.

• The amount of critical illness cover being sold (around 10% of the market) is surprisingly high. This indicates that critical illness cover is being incorrectly sold as a largely ineffective proxy for disability cover.

• The disability cover gap in South Africa is quantified at 60%. This indicates an R11 trillion shortfall in cover.

• New sales of permanent disability cover show an unjustifiably heavy skew in favour of lump sum benefits (83%) as against income replacement benefits. This is surprising given that disability benefits are mainly required to provide a monthly income in the event that an individual is no longer able to generate an income - a need far better met by income protection benefits than a once-off lump sum payment.

"To properly protect clients, especially those who are self-employed, in terms of their actual cover needs rather than easy choices or emotional sells, we need to be providing more disability cover with a far higher ratio of temporary disability cover, and a far better balance between a once-off lump sum benefit and income protection benefits,” says Toerien.

FMI has identified several reasons why the inefficiencies in the market remain so marked:

• A historical reliance on life cover among clients.

• An unwillingness to confront the uncomfortable but real possibility of disability.

• The need for more understanding of just how likely a temporary disability is and how damaging it can be financially.

• The easy-sell of a seductive lump sum which actually transfers timing, investment, inflation and longevity risks back to the client when compared to guaranteed income protection benefits.

• A trend towards self-insurance through up-weighted commitments to investment portfolios instead of cover premiums which means the client is carrying the risk and is at the mercy of the timing of the disabling event.

• The rise of omnibus policies claiming to cover everything but, in reality, not offering the holistic cover that is necessary to ensure complete disability cover.

While change is slow, Toerien believes the message around the importance of income protection is getting through, "The True South report findings verify what we have been saying for several years – income protection should be a key component of any insurance portfolio, most especially for the self-employed market. The shift was never going to happen overnight but things are looking promising,” he saya.

Toerien concludes, "Too much of what the market has been delivering shifts the risk onto the client and effectively asks them to roll the dice.”