Income protection set to become the engine for growth

02 November 2015 Nic Smit, FMI & Petrie Marx, Sanlam

The sale of income protection products – as well as the sum insured on these products - has more than doubled in the last five years to 2013, says Petrie Marx, Product Actuary at Sanlam.

“This trend, illustrated by figures from the annual Swiss Re New Business Volumes Survey, is likely to continue as intermediaries and clients are becoming increasingly aware of the necessity and benefit of income protection. While the market for risk products remained flat – and even declined for some products – in the past six years, income protection cover is the only product that grew consistently,” continued Marx.

Rising figures

According to the Swiss Re survey, in 2008, only 45 600 new policies were sold. This amounted to a total sum insured of just R42 billion. In 2013, these figures rose to 115 500 new policies and a total sum insured of R86 billion. The mortality business, which represented 74% of new business sold over this period, started to stagnate in sum insured from 2010. The sum insured on income benefits on the other hand increased by 51% since 2010.

“Against this background, the sale of income protection products is set to become the engine for growth for long-term insurers as consumer spending on other insurance products remains subdued,” said Marx.

The challenge however, is to determine which products are the best for your clients.

Competitor comparisons

It is acknowledged that marketing efforts and product enhancements have played a role in the positive positioning of income protection products, but the main driver behind increased sales is increased awareness about the product.

“Many insurers have revamped their income protection products to offer more benefits following the tax changes earlier this year. Since income protection policy premiums are no longer tax-deductible, companies have become more creative in their product designs, extending benefits beyond loss of income,” continued Marx.

While an increased focus on actual available benefits can only be a good thing, Nic Smit,
Product Actuary at FMI mentioned that the culture of the competitor comparison has introduced a worrying trend in income protection, and that is over-simplification.

“Competitor comparisons are increasingly being used by advisers to rank products. These comparisons summarise a massive amount of information, seeking to present competitors side by side succinctly and consistently. This allows an adviser to quickly compare products and determine which has the best offering, without having to go into all the detail themselves. That is the theory at least,” said Smit.

A fuzzy picture

The problem, according to Smit, with product comparisons is that the differences between products can be complex and forcing every competitor’s information into a set structure often results in important details being overlooked.

“Traditionally, income protection benefits had one claim criterion: occupational disability. Over the years, providers have added other criteria to their products – the main two being functional impairment and critical illness. Many advisers compare providers by the number of criteria on which one can claim. This is the same way that dread disease products are compared by counting the number of claimable conditions,” said Smit.

Smit emphasises that the problem with this approach is that occupational disability still remains the claim criterion under which you are most likely to have a claim.

“Consider this – only around eight percent of our income protection claims are as a result of a critical illness, while the permanence and Maximum Medical Improvement (MMI) requirements for functional impairment mean it is nearly impossible to claim under functional impairment for most of the income protection claims we see,” he said.

Turning a blind eye

What is often overlooked when choosing a provider via a comparison can turn out to be the most important detail when it comes to choosing appropriate cover said Smit. Let us look at some examples.

“One in five of our income protection claims are for a partial disability. A provider’s terms around partial claims on the occupational disability criterion are arguably more important than all the other claim criteria available because they are more likely to have an impact at claims stage. Some competitors offer very generous partial claims terms, while others do not pay for partial claims at all,” said Smit.

Another example, according to Smit, is that of aggregation and loss of income. “Products that aggregate or require proof of loss of income can introduce unexpected surprises for policyholders at claim stage,” he continued.

And lastly, experience in assessing income protection claims is key. “What makes the occupational disability criterion the bedrock of all income protection benefits is that it is so non-specific. But the fact that every claim requires an assessor to determine whether a specific injury or illness prevents a client from performing his or her specific occupation introduces uncertainty. Inexperienced assessors who assess claims by reference to rules rather than experience and good judgement can take too long to make a decision, or worse, make the incorrect decision,” emphasised Smit.

It is assumed that providers will start to develop bespoke claim criteria specifically for income protection benefits, rather than borrowing claim criteria from other benefits. “Instead of adding criteria that can only be claimed on in rare circumstances, we will see insurers developing claim criteria that would add certainty and objectivity to income protection claims, complementing the broad occupational disability criterion. Already we see providers guaranteeing minimum payment periods on certain events. This increases certainty as well as allowing payments to be processed faster at claims stage,” said Smit.

Focusing on what matters

As income protection becomes more of a focus, Smit said it is assumed that advisers will become more comfortable with comparing products based on what matters, rather than just comparing the number of claim criteria that can be claimed on.
Even though mortality products still make the bulk of risk products sold in South Africa, Marx said we are seeing a definite shift to disability income benefits.

Looking at products holistically, Marx said currently there have been innovative benefits introduced, such as sickness benefits which provide cover when a client is unable to work in the short-term, irrespective of the actual income lost.

“Another trend has been the move towards the ‘whole of life’ benefit. This benefit provides occupational cover up to the age of 70 and provides income protection when clients live with a disability that prevents them from performing they daily activities in retirement. There is a realisation in the industry that, like other risk products, income protection benefits also need to focus on an individual’s entire life,” said Marx.

Different products cover different needs; therefore each plays an important role in financial planning. Advisers will have an opportunity to ensure clients are adequately covered in areas where previous short-falls may have existed.

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