The value of the financial adviser in life insurance

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1 The value of the financial adviser in life insurance Exploring the myths and realities of direct life insurance and the value of the financial adviser About this document This document gives the reader information about research done by Discovery Life on the value proposition of direct insurers compared to the value offered by insurers who use intermediaries. The research explores all aspects of direct insurance, including initial premiums, the long-term sustainability of funding patterns, and comprehensiveness of the benefit offerings, as well as maximum cover amounts and protection for policyholders against the risk of becoming uninsurable. It also investigates the role and value of the financial adviser for consumers. What s inside: Myth 1: insurance is cheaper than buying life insurance through a financial adviser...2 Myth 2: Financial adviser commissions inflates premiums compared to direct insurers who do not pay commission...3 Myth 3: Consumers will be able to maintain direct insurance premiums over the long-term...4 Myth 4: insurance products offer comprehensive benefits...5 Myth 5: Consumers do not need financial advice as information is readily available...7 Myth 6: Financial advice is the same whether a call centre agent or qualified financial planner provides it...8 Myth 7: Claim payouts from direct insurers are transparent and certain...9 Myth 8: Intermediaries do not add real value to consumers...10 Case Studies: A comparison between direct and intermediated insurers...11

2 Exploring the myths and realities of direct life insurance and the value of the financial adviser The South African life insurance market has seen the entry of several direct insurers insurers who do not use intermediaries over the last few years. This follows the increased use of the internet and mobile communication in South Africa, as well as the increased awareness among consumers of direct life insurance products. How the research was done The research was done by Discovery Life and looked at the following life insurers: Insurers who use intermediaries Discovery Life Liberty Life Momentum Old Mutual Sanlam insurers 1Life Frank.net Instant Life Outsurance Life We developed case studies based on comparative quotes and benefit information for three individuals males aged 31, 43 and 51. Details of the individuals are based on fictitious information. We kept the occupation, health and wellness, family history and socio-economic status of the three individuals the same to ensure no loadings. For the insurers who use intermediaries, we collected quotes with no commission discount, or where full commission is to be paid. This was done to test, among other things, whether the financial adviser s commission inflates life insurance premiums and reduces the value proposition to clients. Key research findings Results from the research concluded that: 1 On average, the initial premiums of direct life insurance companies are approximately 9% more expensive. 2 Limited premium guarantees a feature of direct life insurance products create uncertainty for consumers and could lead to increased unsustainability. 3 Benefits offered by direct insurers are not comprehensive and do not address consumers needs at every life stage. 4 insurance products restrict maximum cover amounts, thereby limiting the protection consumers enjoy and rendering them unsuitable for high income earners. 5 insurers have a poor claims payment record. These research findings support the view that in the complex life insurance industry, intermediaries add value to consumers by providing indepth financial needs analysis, consumer education and support for consumers during the underwriting and claims process. 1

3 1: insurance is cheaper than buying life insurance through a financial adviser On average, direct insurers are 9% more expensive than insurers who use intermediaries to sell their products insurers claim that buying direct, benefits consumers as it is cheaper and more efficient. Because the traditional financial adviser channel is taken out, consumers can avoid the associated commission expense. This saving is then passed onto consumers through lower premiums. The empirical evidence from Discovery Life s research proves differently. We collected quotes from the selected direct insurers for identical applicants and the same amounts insured. Funding patterns were selected for each insurer to give the most like-for-like comparison. We collected quotes for: R1 million life cover R1 million lump sum non-accelerated disability cover R1 million non-accelerated critical illness cover for a 31 year old male and a 43 year old male R non-accelerated critical illness cover for a 51 year old male The results show that direct insurance products are 9% more expensive than insurers who use intermediaries to sell their products. It is also important to note that this is for less comprehensive benefits as will be shown later in this document. The average premiums were: Age insurers Insurers who use the financial adviser model 31 R446 R395 13% 43 R955 R920 4% 51 R1 453 R % Average R951 R872 9% Details of the breakdown of the comparisons are on page 11. insurance products are on average more expensive for the following reasons: Percentage that direct insurers are more expensive than insurers who use intermediaries 1 The way ancillary benefits are structured on direct insurance policies make them more expensive. This refers to how ancillary products or benefits, for example critical illness, are structured and added onto a policy. They are offered as stand-alone benefits while insurers who use intermediaries, offer a non-accelerated structure. Non-accelerated benefits fall under one overriding policy. This means there is only one expense loading. As stand-alone benefits, ancillary products on direct insurance products are structured as separate policies with their own expense loadings. This results in the policyholder incurring multiple expense loadings, which makes it more expensive. 2 Although there are no financial adviser commissions, direct insurers rely on other sales channels that have similar expenses insurance products are typically sold over the phone by sales advisers. These sales advisers are full-time employees whose salaries are normally based on performance and measured according to the total premium size and number of policies sold. This payment structure is based on the same principles as the commission structure of intermediaries or agents and is an expense that impacts the final premium the consumer has to pay. 3 The lower underwriting criteria that direct insurers use attracts high volumes of anti-selection risk insurers generally have less underwriting criteria than insurers who use intermediaries. Their marketing strategies also typically target the mass-market. This results in a higher volume of anti-selection risk, and hence higher premiums. 4 One-size-fits-all products from direct insurers lead to lower persistency and less loyalty from consumers insurers product offerings are largely commoditised because they can only offer limited financial advice. This creates an easy-in-easy-out attitude from consumers. Lower consumer persistency and loyalty is expensive for a life insurer. On average a 1% increase in lapse rates requires premiums to increase by approximately 3%. 2

4 2: Financial adviser commission inflates premiums compared to direct insurers who do not pay commission All insurers have new business acquisition costs which impacts the premium insurers claim that their product and price offering are better and more cost-effective for consumers because there are no commission costs that inflate the premium. Although they may not pay commission, there are still new business acquisition costs that need to be accounted for. Higher marketing budgets and operational expenses including call centre salaries and sales incentives replace commission. This results in direct insurance premiums being higher than those of life insurers who use intermediaries, as shown in the previous section. Bigger marketing budgets are needed to attract new business The table below shows an extract from The Top 100 Achievers in terms of the advertising spend of six direct insurers: Company Rank Total spend* Projected annual spend** Insurer 1 27 R122 million R183 million Insurer 4 33 R101 million R152 million Insurer 5 50 R60 million R90 million Insurer 2 68 R52 million R78 million Insurer 6 83 R42 million R63 million Insurer 7 92 R38 million R57 million Source: Financial Mail Adfocus 26/11/2010 *Total spend from January to August 2010 **Projection based on online and interpretation The ratio of marketing spend to gross premiums is significantly higher for direct insurers, resulting in costs that are carried by the consumer through higher premiums. Insurer 2 for example, was projected to spend R78 million on marketing expenses in This generated R25 million in sales, or gross premium income. A ratio of 317% in marketing spend to gross premiums highlight the inefficiency of direct insurers strategy to attract new business. life insurers rely on extensive advertising and marketing campaigns to attract new business because there are no intermediaries to give advice to consumers. These marketing expenses offset the savings achieved from not paying commission. Insurer 2 Gross premiums Marketing spend Ratio 316.6% Source: Strategic and Emerging Issues in SA Insurance (PWC 2010) insurers have far lower ratios of commission to premiums indicating a more efficient method of distribution and advice. 3

5 3: Consumers will be able to maintain direct insurance premiums over the long-term Limited premium guarantees expose consumers to the risk of unaffordable premium increases On average, it was found that the premium pattern of the direct assurance companies were most comparable with the AcceleRater or age-rated funding pattern of intermediated companies (see graph below). insurers also offer far less flexibility in terms of choices of various funding patterns to meet varying client needs. The premium guarantees are, however, shorter and provide consumers with limited certainty. Limited premium guarantees expose consumers to the risk of unaffordable premium increases later on, in addition to compulsory premium increases. Long term premium sustainability 1,200 1, Average Insurer Average Insurer (Accelerated) Average Insurer (Standard) Assumptions: R1 million Life Cover, Male age 43 next birthday, non-smoker, single, Height 1.8 meters, Weight 70kg, Income R50,000 pm, 3-year degree, Accountant, No Travelling, No Manual labor, Exercise 3 times per week for 1.5 hours per session, No Alcohol, no family medical history Life insurers who use intermediaries generally offer a life-long premium guarantee, thereby giving consumers more certainty that they will be able to maintain their insurance premiums over the long term. Insurer Insurer 2 Insurer 8 Insurer 1 Insurer 3 Discovery Premium guarantee 5 years 5 years 3 years 5 years Whole of life Of all the direct life assurers considered, none of them offered an Annual Benefit Increase option of CPI. Not being able to increase your cover in line with inflation can seriously jeopardise the long term real value and relevance of the risk protection. 4

6 4: insurance products offer comprehensive benefits insurers do not incorporate the latest benefit innovations in their products, or many core features that are prevalent in products sold through intermediaries. insurance products do not incorporate the latest product and benefit innovations. For example, our analysis of the direct insurance products show that disability products do not cover temporary disability, activities of daily living and do not adjust to consider the impact of long-term disability. The marketing strategy of direct insurers focuses largely on price competitiveness, rather than a complete value proposition. By limiting benefit definitions, direct insurers have more ways to reduce costs. In terms of client advice on products and benefits, direct insurers are limited in their ability to assist and explain product benefits to consumers. Therefore, their products need to be more simplistic. Only one of the direct insurers offer an income disability product and none offers products related to indemnity in a life-changing event. Insurers who use intermediaries offer a wider range of benefits. These include specialised products that cover policyholders against the risk of mortality and morbidity in the funding of children s education costs and the costs of medical scheme contributions after retirement. The following table compares the disability product features offered by the direct insurance providers against the more comprehensive features offered by Discovery Life s Capital Disability Benefit. Features of a comprehensive disability product Objective Cover on Activities Conversion to Benefit Benefits consider Waiting Occupation Cover until medical temporary of Daily critical illness does not long-term impact period Definition age 70 definitions disability Living cover at expiry taper of disability Undefined Normal in policy X** Insurer 2 occupation book* X X X X X X Insurer 8 6 months X Own or similar X X X X P X Insurer days X Own or similar X X X X P X Usual or Not X suitable Insurer 3 specified alternative X X X X P X Discovery None P nominated P P P P P P The following table compares the critical illness product features offered by the direct insurance providers against the more comprehensive features offered by Discovery Life s Severe Illness Benefit. Features of a comprehensive critical illness product Whole body coverage Unlimited multiple claims Automatic parents and child cover Survival period Insurer 2 X** X X 28 days X Insurer 8 X X X 14 days X Insurer 1 X X X 14 days X Specified per illness: 3 months stroke, X X X Insurer 3 6 weeks heart attack X Discovery P P P None P Benefits consider longterm impact of disability *Waiting period will be defined in policy schedule **Event-based disability has defined definitions. However these are very limited, and the maximum sum assured is R200,000 5

7 The comprehensive scope of medical conditions covered are of fundamental importance when comparing various critical illness products. The products of most intermediated insurers will cover all body systems and contain a far wider range of illnesses than those of direct insurers. The following graph shows the number of conditions covered by the various direct insurers compared to those of Discovery Life s comprehensive Severe Illness Benefit: Critical Illness Conditions Covered Insurer 8 Insurer 1 Comprehensive 30% 35% Discovery Life Insurer 1 Core 17% Insurer 2 10% Insurer 3 16% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% In addition to having a narrower coverage, the multiple claims definitions of direct insurers are limited.limited multiple claims definitions for critical illness products from direct insurers may expose consumers to insufficient cover after a claim. As a result, a policyholder s cover for related events expires once 100% of the benefit amount has been claimed. They will, therefore, not have cover if they need to claim a second time for a related event. This leaves the consumer without insurance at a time when they need the cover most. insurers also offer limited cover. This is why they are unable to meet the needs of consumers with large insurance needs. These products are therefore unsuitable for high net worth individuals. The table below shows the maximum amount of cover that a consumer can purchase at different insurers: Insurer 2 Insurer 8 Insurer 3 Discovery Maximum Life Cover R 4 million R 6 million R 10 million Unlimited subject to underwriting Maximum Disability Cover R 4 million R 4.5 million R 5 million R 20 million Maximum Critical Illness Cover R 2 million R 3 million R 2 million R 6 million 6

8 5: Consumers do not need financial advice as information is readily available A financial needs analysis requires specialised expertise and customised software and is necessary to best understand each client s insurance needs Although information about financial products is readily available, consumers should not underestimate the value of a comprehensive financial needs analysis. Intermediaries use a sophisticated and comprehensive financial needs analysis to assess the insurance needs of each client. This includes: The client s mandate Analysis of income and expenses Analysis of assets and liabilities Existing individual and group cover Existing pension and provident funds Complexities of estate duty planning Liquidity analysis of the estate Tax implications of financial decisions Online quote tools from direct insurers are inadequate as these follow generic measures to provide quotes and often ask what premium a consumer can afford first, without addressing clients needs. Insurers Insurers 7

9 6: Financial advice is the same whether a call centre agent or qualified financial planner provides it Certified financial planners are qualified and keep up to date on product and industry developments through continuous training Certified Financial Planners are qualified and belong to the Financial Planner Institute (FPI) of Southern Africa. They follow a recognized process to provide accurate and comprehensive financial advice and adhere to the code of conduct as set out by the Financial Advisory and Intermediaries Act. This process includes: 1 Establish and define a professional relationship. Financial planners are able to establish a professional relationship with their clients through face-to-face interaction. This allows them to build trust with the client. 2 Collect information The financial planner must collect all the necessary information about the client s personal financial objectives, needs and priorities, as well as the supporting qualitative and quantitative information and documents. Software tools exist that allow financial planners to collect and capture all the relevant information necessary for the financial needs analysis. 3 Analysis and assessment of the client s financial status The financial planners must analyse a client s financial status by looking at aspects such as personal financial management, investment planning, risk management, tax planning, retirement planning, estate planning, business financial planning and the analysis of existing product portfolios. 4 Develop the financial planning recommendations and present these to the client The financial planner must identify the planning strategies, develop the financial planning recommendations and present these to the client. The financial needs analysis tools that are available to financial planners assist them in producing a financial plan based on accurate and comprehensive information received from the client. 5 Implement the client s financial planning recommendations The client and financial planner will agree on the recommendations, which the financial planner will implement for the client. 6 Review the client s financial position at agreed times The client and financial planner will agree on dates to review the client s financial position to ensure their financial planning recommendations continue to meet their needs or that they are changed according to changes in their circumstances. Certified Financial Planners are required to meet a number of regulatory and Discovery training requirements in order to offer potential Discovery clients advice. Requirements of the Financial Advisory and Intermediary Services Act (FAIS) Regulation of advice-giving activities Disclosure and transparency Consumer platform for complaints FAIS Ombud Requirements of Discovery s internal compliance and training Continued professional development Training academy Knowledge assessments Compliance 8

10 7: Claim payouts from direct insurers are transparent and certain Claims are more often rejected with direct insurance companies Less strict underwriting protocols with direct insurance companies compared to insurers who use intermediaries, result in more underwriting taking place at claims stage. The table below shows the ratio for claims and claims rejected for a particular direct insurer and Discovery Life for insurer Discovery Life Claims paid R6 million R1.12 billion Claims rejected R38 million R23 million Claims rejected % 86% 2% Some of the reasons for claims rejection relate to situations where client policies are lapsed automatically if two consecutive premiums are not paid, as well as non-disclosure of pre-existing medical conditions. Financial planners are able to alert policyholders of lapses and also guide prospective policyholders through the application process and the risk of non-disclosure. Note: Credible claims experience and statistics take a number of years to materialise and many of these direct insurers are too young to draw meaningful conclusions on claim statistics. 9

11 8: Intermediaries do not add real value to consumers Intermediaries perform important tasks for consumers that add significant value Intermediaries are trained professionals who add value to consumers in the following key areas: 1 A financial adviser will usually have several insurance companies he deals with and will ask for quotes on the client s behalf. 2 A good financial adviser will represent the client, can cut through red tape and interpret the jargon. 3 Most individuals say that, in the event of a claim, they feel more comfortable with someone on their side.* 4 Cost of advice is efficient - direct cover is on average 9% more expensive than traditional insurance. 5 The financial adviser will review your cover annually to ensure that you re adequately covered and are not under-insured in the event of changing needs. 6 Financial advisers provide a holistic view on gaps in financial planning or risk cover. 7 Financial advisers are someone you can speak to if you have any questions. *Source: Finweek (24 June 2006): Pros and cons of brokers versus direct channel 10

12 Case Studies: A comparison between direct and intermediated insurers Case studies from Discovery Life s research between direct insurance companies and insurers who use intermediaries to sell their products can be found below: Life cover: R1 million Life cover premiums 600,00 500,00 400,00 300,00 insurers insurers: AcceleRater equivalent insurers: Level Premium 200,00 100, Insurer 3 Insurer 1 Insurer 2 Insurer 4 (Compulsory 5% with 5% benefit growth) Insurer 1 (Age rated with benefit increase of 3.5%) Insurer 2 (Compulsory 10%/3.5%) Discovery (AcceleRater) Discovery Integrated (AcceleRater) Insurer 4 (Level with 5% benefit increase) Insurer 1 (level 5%/3.5%) Insurer 2 (Level 5%/3.5%) Discovery (Standard) Discovery Integrated (Standard) Disability Cover: R1 million Disability premiums 600,00 500,00 400,00 300,00 insurers insurers: AcceleRater equivalent insurers: Level Premium 200,00 100, Insurer 3 Insurer 1 Insurer 2 Insurer 4 (Compulsory 5% with 5% benefit growth) Insurer 1 (Age rated with benefit increase of 3.5%) Insurer 2 (Compulsory 10%/3.5%) Discovery (AcceleRater) Discovery Integrated (AcceleRater) Insurer 4 (Level with 5% benefit increase) Insurer 1 (level 5%/3.5%) Insurer 2 (Level 5%/3.5%) Discovery (Standard) Discovery Integrated (Standard) 11

13 Life Critical cover illness Cover: R1 million (for age 31, 43) R (for age 51) Critical illness premiums 900,00 800,00 700,00 600,00 500,00 insurers insurers: AcceleRater equivalent insurers: Level Premium 400,00 300,00 200,00 100, Insurer 3 Insurer 1 Insurer 2 Insurer 4 (Compulsory 5% with 5% benefit growth) Insurer 1 (Age rated with benefit increase of 3.5%) Insurer 2 (Compulsory 10%/3.5%) Discovery (AcceleRater) Discovery Integrated (AcceleRater) Insurer 4 (Level with 5% benefit increase) Insurer 1 (level 5%/3.5%) Insurer 2 (Level 5%/3.5%) Discovery (Standard) Discovery Integrated (Standard) Total insurance premiums Total premiums 2,000,00 1,800,00 1,600,00 1,400,00 1,200,00 insurers insurers: AcceleRater equivalent insurers: Level Premium 1,000,00 800,00 600,00 400,00 200, Insurer 3 Insurer 1 Insurer 2 Insurer 4 (Compulsory 5% with 5% benefit growth) Insurer 1 (Age rated with benefit increase of 3.5%) Insurer 2 (Compulsory 10%/3.5%) Discovery (AcceleRater) Discovery Integrated (AcceleRater) Insurer 4 (Level with 5% benefit increase) Insurer 1 (level 5%/3.5%) Insurer 2 (Level 5%/3.5%) Discovery (Standard) Discovery Integrated (Standard) 12

14 The same client details were used for all comparisons between direct insurance companies and insurers who use intermediaries to sell their products R1 million life cover Male aged 31, 43 and 51 Single Non-smoker Height 1.8 metres Weight 70 kg Income R per month Accountant with a three-year degree No travelling or manual labour Exercise three times a week for 1.5 hours each session No alcohol use No family medical history The funding patterns for all comparisons of the direct insurance companies and the insurers who use intermediaries to sell their products are as follows: Discovery: Standard with ABI = CPI and AcceleRater with ABI of CPI Insurer 2: premiums flat for first two years, 5% yearly increases thereafter Insurer 8: ACI = 12.5%, ABI = 5% Insurer 1: ACI = 6% per year up to age 35, 7% per year up to age 45, 8% per year thereafter, ABI = 5% Insurer 3: ABI = 0%, ACI = 6% Insurer 4: Compulsory 5% with 5% ABI and Level with 5% ABI Insurer 1: Age-related ABI of 3.5% and Level 5% with 3.5% ABI Insurer 2: Compulsory 10% with ABI of 3.5% and Level 5% with 3.5% ABI 13

15 Physical address: 155 West Street, Sandton. Postal address: PO Box 3888, Rivonia General queries, our details are: LIFE ( ) Fax number: 0860 LIFE FX ( ) GM_10873DL_20/06/2011

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