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The role of group risk products in retirement planning… is this changing?

01 August 2013 Viresh Maharaj, SEB

On a philosophical level, the purpose of planning for retirement is ultimately to improve the lives of working South Africans and their families. As such, much of the focus of the process is on accumulating a sufficiently large asset base in order to provide a sustainable and material income in retirement. While this has traditionally been the case, recent research has shown that members of retirement funds actually now place as much importance to risk as to investments.

This is to be expected as group risk has evolved from being considered a grudge purchase with capped costs, to being appreciated as an increasingly relevant financial instrument to provide a degree of independence to claimants. This evolution is being driven by a combination of product development, increased competition, improved analysis and a better understanding of the impact of HIV/AIDS.

Product development

New generation products have been introduced that are attuned to the financial needs of the modern workforce. Core and flex benefits allow intermediaries to propose a core level of cover that is appropriate for most members and empower individuals to obtain higher amounts of cover by flexing upwards. In this manner, individuals have the opportunity to align their cover more closely to their actual risk needs.

Lifestage structures vary the level of cover provided according to the age of the member. Younger members are seen to require higher levels of cover. This is being driven by the virtues of having younger dependents and lower levels of saving built up in their respective fund accounts. In this way, group risk is used to align the financial needs of the workforce with their risk benefit structure. Education products have been introduced to specifically cover the potentially large costs of paying for the education of a member’s children on their death. Such products target a specific financial need that carries significant emotional weight and directly enables intermediaries to improve the lives of the families of retirement fund members.

Increased competition

Group risk is typically provided as one-year term cover with prices being annually reviewed by an active intermediary market. This creates substantial pricing pressure on insurers and consequently drives quoted prices down to their lowest possible levels. As such, members of retirement funds enjoy group risk cover that is more efficiently priced and empowers intermediaries to source holistic financial solutions using the buying power provided by the wholesale nature of group risk.

Improved analysis

Better technology has enabled actuaries to mine data to an extent never previously possible. The richer insights have empowered consultants to structure retirement planning to better fit the actual financial needs of diverse member bases. For example, recent working life mortality studies have shown that approximately 95% of high income earners at age 20 will live to normal retirement age whereas only up to 60% of very low income earners at age 20 will live to 65. Such knowledge enables intermediaries to structure retirement planning to better fit the actual financial needs of the relevant member base as risk benefits are granted a higher profile when a significant proportion of members will not live to see retirement and will therefore not benefit from their investments.

HIV/AIDS

Historically, significant loadings were attached to risk prices due to the anticipated impact of HIV/AIDS on mortality and morbidity. Over time, actuaries have been able to better quantify the impact of the epidemic and have consequently been able to reduce premiums. As such, HIV/AIDS no longer presents a material threat to the sustainability of risk prices and the majority of funds no longer cap the costs of risk benefits .

This was a tactic initially introduced to limit the impact of HIV/AIDS costs on retirement planning. As such, intermediaries now have the scope to introduce new generation risk products.
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