Don’t ignore the power of hybrid industry models

Closing your mind off to one industry model may not be the best way in which to do business. There are a number of examples of companies around the world who adopt a hybrid business model when it comes to their business. Perhaps this is an approach that the Financial Services Board (FSB) needs to bear in mind when adopting a legislative framework for the South African market.

South Africa has been very late in its adoption of the Retail Distribution Review (RDR) and Solvency Assessment and Management (SAM). The advantage of this is that we can look at models that have been implemented around the world, and adapt our own models accordingly.

Don’t over regulate

Every year, Johan Minnie, Sales & Distribution Director at Liberty Group, attends the LIMRA Sales and Distribution Conference in the USA where insurers come together and discuss issues that are pertinent to the industry. The experience that Minnie got in that market regarding RDR is in stark contrast to any other market in the world.

He points out that while the UK insurance industry is trying to achieve consumer based outcomes by taking a compliance approach, the US industry is purely customer focused in the way that they conduct business without the necessary codification from their regulator.

“The Executives from the life and investment companies I deal with every year feel strongly about the fact that an over regulated industry is not good for business. So they reject any steps that threaten to tread this fine line. That is not to say that there is no regulator or regulation in the US, but they let their justice system regulate and control how remuneration is conducted in the industry,” says Minnie.

It is important to point out that this approach will probably never work in South Africa purely because the South African legal system is not based on the US system where every man and his dog can be taken to court for the silliest misdemeanour. It is purely a case of horses for courses as it is clear that their system works for them. Intermediaries in their market have to comply with about 68 pages of Justice Department prescribed recommendations before selling a product. If they don’t, they will have their day in court.

Many hands make light work

The US industry is however not an industry without challenges. In fact, they have struggled with the same challenges that currently plague the South African market, but their approach to business is just different.

“Four years ago, the US market realised that 72 million Americans were underinsured. And they realised the only way to resolve this issue would be through increasing the adviser force in the industry. A case in point is a company I meet with every year. In two years, tied adviser numbers for this company grew from 18 000 to 105 000.” says Minnie. This is an average increase of 3 625 advisers a month moving into the industry over that period.

Minnie points out that the Americans realised that the application of simplified compliance was the only way to bridge the under insurance gap that they faced. Once this was achieved, they recruited people who have normal day jobs – such as teachers and nurses - to sell insurance in a part time capacity to certain segments of the market such as middle to lower income earners.

A bridge too far?

The biggest challenge with the South African market is that the South African public is not as educated on the financial services industry as the US or the UK market. That is the problem of having people who have other day jobs selling insurance; how are they going to increase financial literacy if they haven’t got the relevant qualifications. The FSB and the Association of Savings and Investments South Africa (ASISA) have always been outspoken about the value of professional advice in the industry.

But just imagine how the South African public could benefit from this. The lower income earner won’t be left in the lurch. A good relationship with a financial adviser is built on trust. Who better to build this trust than a prominent community member in the rural community who is known and trusted?

Create a formalised savings culture

There is a desperate need to create a culture of formalised savings in South Africa. While stokvels are popular among lower income earners as a method to save money, it is not recognised as a formal savings vehicle; creating this savings culture is something that the FSB and National Treasury hope to encourage in South Africa.

There is also a significant advice gap in the UK, and it is arguably more pronounced than the US if we take a like-for-like comparison of the size of their markets. The UK decided to go the compliance route and introduced RDR, which scrapped commission. The result was that advisers left clients who they thought could not pay a fee for advice high and dry. This left a large portion of the population looking towards the state to fund their golden years. This simply cannot be the case in South Africa as we do not have a comprehensive social grant system.

Editor’s Thoughts:
Perhaps a hybrid regulatory model is what South Africa needs, we just need to be careful on the form that it takes and that it is suited to the South African industry. While the UK were losing advisers at a rate of knots, the US was growing its adviser base. We can learn from the mistakes made in other markets. Minnie points out that perhaps the solution to “who would sell an insurance product to a spaza shop owner in Kakamas” would be bringing in advisers who only specialise on the lower income earning group. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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