CONSUMER TRUST IN THE LIFE INSURANCE INDUSTRY: IS THE GLASS HALF EMPTY OR HALF FULL? Prepared for the FinMark Trust by Illana Melzer Eighty20 Consulting March 2006 INTRODUCTION The life insurance industry seeks to be the custodian of long-term savings and protector against key risks for consumers and companies alike. To play this role the insurance industry requires the trust of those who purchase its products - those who place their retirement funds with the industry must believe that reasonable care will be taken to secure the value of those funds over the long term and those who transfer risks to an insurer must believe it will make good on its promises to provide against losses in the future. While accounts of intermediaries who neglect their fiduciary duties or act in their own rather than their clients best interests have always been featured in the financial press, recent rulings by the pension fund adjudicator as well as research into the high costs of retirement products are thought to have impacted on levels of trust in the life insurance industry. Indeed, a recent press release of the Life Offices Association acknowledges that the decline in sales of retirement annuities could be the result of recent negative publicity surrounding the pension funds adjudicator s rulings, impacting on both consumers and intermediaries perception of the product 1. Bravely, the LOA s topic at their 2005 Convention focused on consumer expectations of the industry where issues of trust were also tabled. In presentations, the net positive attitudes to insurers in the UK were around 5% (vs. 38% for banks and 68% for supermarkets) against similarly low levels in South Africa as will be shown later in the article 2. Against this backdrop an investigation by the insurance industry into levels of consumer trust is well warranted to assess what action if any is required to rehabilitate the reputation of the industry and prevent negative consumer perceptions translating into observable outcomes such as a diminished propensity to purchase or retain insurance products. 1 LOA press release dated 29 September 2005 2 Cover Magazine, October 2005.
While it is not possible to track long-term trends in consumer trust (historic data on trust levels is not available) it is possible to assess current levels of trust by reviewing survey data. In particular, the recently released FinScope TM 2005 survey contains a number of questions that may shed some light on this issue 3. These questions explore decisions to purchase or lapse insurance policies as well as attitudes to insurers relative to other financial service providers. In analysing this data it is important to assess what differences if any there are in levels of trust across various market segments. Do those who are familiar with life insurance have different levels of trust to those who are not? In addition, is it possible to assess whether trust in insurance companies is higher or lower than in competing financial providers? This short paper summarises data on some of these questions. It also contextualizes the issue of trust given the significant proportion of the market that has to date had limited access or exposure to formal insurance products. FINDINGS According to FinScope TM 2005 only 30% of all adults aged 16 or more say they trust life insurance companies to provide good policies when purchasing long term insurance 4. Overall levels of trust in insurance products as assessed by the above data appear to be low. Of course given the fact that only 13% of adults have insurance, the data will be significantly skewed by responses of those who have no personal experience with life insurance products or companies. There are also differences based on income discussed in more detail below. Restricting the analysis to those who have formal life insurance 5 encouraging but not altogether satisfactory finding. yields a more 3 FinScope TM 2005 has 3,885 respondents aged 16 or more. The survey was conducted between June and August 2005. 4 FinScope TM QLT10. When choosing a life insurance policy to buy, would you.trust the insurance company to provide good policies 5 Note this includes products such as life insurance, group life, endowments, credit life, disability insurance, education policies, dread disease cover and professional insurance. It does not include funeral insurance.
Around 50% of policyholders say they trust insurance companies to provide good policies when purchasing life insurance. The industry might ask what level of trust is desirable. Should this target be an absolute one or one that is relative to other providers? In this regard FinScope TM can shed some light as it investigates attitudes to various financial providers with reference to life insurance purchases. As shown below when it comes to purchasing life insurance, more policyholders trust insurance companies than banks, family or friends and employers. It is interesting to note that trust in insurance companies appears to be negatively correlated to income. The challenge for the industry is to retain the trust of the upwardly mobile. Like a parent who receives a child s unconditional love in its early years and only needs to retain it, the industry faces a bigger challenge in practice than in theory. However, by and large the opposite is true for financial advisors who are trusted more by the affluent, a reflection of advisors willingness to spend more time with those of higher income. Table 1: When choosing a life insurance policy to buy would you Percentage YES responses by income for policyholders 0-R R1 000 - R2 499 R2 500 - R4 R5 000 - R7 R8 000 - R10 R11 000+ Refuse to answer Uncertain/ Dont know Trust the insurance company to provide good policies 57% 58% 54% 52% 44% 39% 39% 60% 48% Trust your financial advisors recommendation 18% 44% 37% 45% 57% 40% 46% 34% 41% Trust your banks recommendation 19% 12% 21% 23% 21% 21% 16% 59% 19% You do not want a life insurance policy 8% 7% 7% 16% 7% 25% 15% 5% 12% Trust your friends and family 19% 17% 9% 9% 5% 1% 8% 4% 9% Believe what is advertised (on the TV/radio) 10% 8% 12% 10% 1% 5% 9% 0% 8% Trust your employer 4% 10% 10% 9% 15% 9% 3% 0% 8% Other 0% 0% 0% 0% 0% 0% 0% 0% 0% Grand Total
FinScope TM also investigates attitudes to financial providers more generally including life insurers, banks, short-term insurers, retailers and micro lenders. According to FinScope TM 74% of policyholders regard banks as ideal financial service providers compared to just 19% for life insurance companies, which are next on the list. This is despite the fact that in this segment banks are regarded as being expensive (44% say their fees are too high compared to 11% for insurance companies), providing poor service (68% say there are long queues compared to 27% for insurance companies) and generating low returns (39% say your money does not grow quickly compared to 17% for insurers). Clearly the designation of term ideal provider to banks is not absolute. For those who have life insurance, insurance companies fall short of banks in providing accessibility to money ( you cannot get your money immediately if you need it ). In this regard, the survey does not distinguish between claims payouts on risk products (such as funeral insurance where access to quick payouts is essential) and accessing money tied up in investments, a distinction which is critical if the insurance industry is to understand whether it should streamline onerous claims management processes or provide more appropriate investment product education.
Table 2: Policyholder attitudes to financial providers Banks Life insurance companies Furniture and clothing retailers Short term insurers Mzansi accounts Microlenders Mashonisa / cash loan shop None / Don't know Ideal provider 75% 19% 2% 6% 2% 4% 3% 12% The charges (service fees/premiums) are too high 44% 11% 14% 6% 1% 31% 24% 14% Your money does not grow quickly 39% 17% 8% 13% 5% 12% 0% 26% Their products dont meet your needs 8% 5% 4% 7% 4% 30% 26% 46% You cannot get money immediately if you need it 27% 42% 6% 14% 1% 7% 3% 24% They are not understanding when you cant make your repayments 14% 8% 32% 7% 3% 33% 31% 27% There are long queues for their services 68% 27% 8% 15% 2% 3% 1% 21% They cannot speak to you in your language 13% 4% 2% 3% 0% 4% 3% 80% They give you status in the community 46% 18% 6% 6% 1% 1% 1% 46% They treat you with respect 81% 42% 19% 24% 2% 4% 3% 8% You dont understand how they work 6% 7% 5% 18% 20% 26% 25% 35% For an industry that has been accused of focusing for too long on a small segment of the South African market, perhaps a bigger challenge lies in altering the awareness and perceptions of the 26,5 million South Africans aged 16 or more who do not have life insurance 6. According to FinScope TM only 25% of those without life insurance would trust an insurance company to provide good policies when purchasing an insurance policy. Of interest too is the high percentage of those without life insurance who do not want a life insurance policy as shown in the table below. 6 According to FinScope TM there are 3.9 million people with funeral policies at large institutions. Of these, 2,2 million also have life insurance.
Table 3: When choosing a life insurance policy to buy would you Percentage YES responses by income for those without policies 0-R R1 000 - R2 499 R2 500 - R4 R5 000 - R7 R8 000 - R10 R11 000+ Refuse to answer Uncertain/ Dont know You do not want a life insurance policy 44% 29% 32% 32% 27% 43% 50% 48% 41% Trust the insurance company to provide good policies 24% 28% 36% 32% 25% 37% 14% 17% 25% Trust your financial advisors recommendation 18% 27% 26% 20% 22% 43% 19% 26% 20% Trust your friends and family 19% 20% 10% 19% 19% 1% 13% 9% 18% Trust your banks recommendation 12% 16% 18% 19% 15% 0% 15% 17% 13% Believe what is advertised (on the TV/radio) 10% 11% 11% 7% 28% 14% 2% 5% 10% Trust your employer 3% 11% 5% 1% 10% 10% 2% 0% 4% Other 0% 0% 0% 4% 1% 0% 1% 0% 0% Grand Total For many respondents, the lack of interest in insurance products or trust in insurance companies might in reality be a lack of awareness about life insurance and its potential benefits. Of those who do not have life insurance, only 56% have heard the term life insurance and know what it means. This compares poorly with awareness levels of informal products such as burial societies (77% awareness) and stokvels (66% awareness). While awareness levels overall are skewed by those who may not currently be in the market because they are too poor 7, according to the survey there are over 1,4 million people who earn more than R1,000 a month who do not understand the term life insurance. 7 84% of those who have no policies and who do not understand the term earn less than R1,000 per month.
Table 4: Percentage who have heard the term and know what it means: no life insurance R1 000 - R2 499 R2 500 - R4 R5 000 - R7 R8 000 - R10 Refuse to answer 0-R R11 000+ Uncertain/ Dont know ATM 76% 92% 97% 95% 88% 91% 92% 73% 81% Burial society 75% 84% 81% 88% 75% 98% 87% 61% 77% Stokvel 64% 72% 72% 73% 70% 63% 60% 46% 66% Insurance 54% 75% 95% 91% 91% 90% 77% 53% 62% Life insurance 49% 71% 81% 89% 87% 90% 69% 51% 56% Credit card 39% 62% 86% 80% 77% 91% 74% 43% 48% Short-term insurance 24% 46% 67% 73% 69% 89% 60% 46% 33% Retirement annuity 19% 46% 68% 76% 73% 86% 59% 32% 29% Broker 20% 40% 62% 66% 64% 89% 56% 35% 28% Assurance 20% 37% 54% 70% 64% 89% 59% 32% 27% Endowment policy 12% 30% 50% 65% 66% 62% 55% 26% 20% Underwriter 5% 15% 20% 38% 39% 55% 32% 21% 10% Ombudsman 4% 8% 15% 28% 25% 50% 33% 15% 7% Grand Total Given relatively low levels of awareness about life insurance by those without policies it is perhaps unsurprising that terms such as ombudsman and FAIS are also essentially unheard of. Only 7% of those without life insurance know what an ombudsman is and only 2% have head of FAIS. Awareness of such regulatory safety nets and channels for recourse are key for the development of trust in the industry. In addition, the existence of consumer protection mechanisms must surely be powerful differentiators for formal insurance products over informal products where no such mechanisms exist. According to FinScope TM of those without insurance 3.5 million belong to burial societies. Other research has shown that the financial benefits offered by such organisations (ignoring helping hands aspect of burial societies) are often significantly lower than those offered by the insurers and the challenge for the industry is to communicate this message to the market. Opportunities to link with these social organisations will also be key. Attitudes among those without insurance to financial providers differ in some key respects from those who have life insurance. It is interesting to note that perceptions of both banks and insurers as ideal providers by those without insurance are noticeably lower than those of policyholders a result of differences in banking status of those do not have insurance compared to those who do. Perhaps most interesting, 19% of those without policies say they really would like to use life insurance companies. While this is relatively low (30% say this of banks) this represents a significant opportunity for the
life insurance industry given the size of this segment of the market (this translates into roughly five million people). Physical access is a real barrier for a relatively small sub-segment (15% say there is nowhere near to buy insurance products). More noticeable is that 32% of those without insurance associate the statement you do not understand how they work with insurance companies compared to 7% of those with insurance. Table 5: Attitudes to financial providers of those without life insurance Banks Life insurance companies Furniture and clothing retailers Short term insurers Mzansi accounts Microlenders Mashonisa / cash loan shop None / Don't know Is your ideal financial service provider 43% 2% 3% 2% 3% 2% 1% 50% You dont use this financial service provider at the moment, but you really would like to The charges (service fees/premiums) are too high 30% 19% 10% 12% 11% 9% 7% 49% 34% 7% 11% 5% 1% 15% 20% 35% Your money does not grow quickly 29% 8% 5% 5% 3% 8% 0% 53% Their products dont meet your needs 10% 10% 6% 10% 3% 14% 16% 61% You cannot get money immediately if you need it They are not understanding when you cant make your repayments 20% 23% 4% 10% 1% 7% 4% 50% 11% 7% 26% 6% 2% 18% 29% 39% There are long queues for their services 51% 2% 6% 1% 2% 5% 4% 41% They cannot speak to you in your language 13% 5% 2% 4% 1% 3% 2% 79% They give you status in the community 34% 5% 8% 2% 2% 1% 1% 58% They treat you with respect 46% 7% 13% 4% 2% 2% 2% 45% There is nowhere close to you for you to make your repayments/payments There is nowhere close to you that you can buy their products/services 10% 9% 7% 7% 2% 5% 5% 75% 13% 15% 7% 12% 4% 8% 7% 67% You dont understand how they work 14% 32% 7% 34% 17% 30% 22% 29% Using their systems and technology is difficult Their products have safety features to prevent fraud and theft 20% 6% 3% 6% 1% 6% 4% 68% 42% 7% 8% 4% 2% 2% 1% 50% You have to pay service fees 58% 7% 14% 5% 3% 8% 6% 32% They give you too much credit and get you into financial trouble 5% 1% 27% 1% 1% 15% 25% 42% You must have credit references 20% 5% 48% 4% 1% 13% 10% 34% You never get to deal with the same person twice. They dont remember who you are 27% 4% 7% 3% 2% 3% 4% 62% They prevent you from over-spending 23% 2% 8% 1% 2% 1% 1% 67%
Looking at reasons people don t have life insurance also provides some interesting insights. Of those who do not have insurance, lack of trust appears to be a relatively minor factor. This would appear to confirm the hypothesis that in this segment of the market increasing awareness rather than building trust is the key issue for the industry. The data also confirms that physical access is a second order problem for the vast majority of potential consumers. Table 6: Reasons for no life insurance 0-R R1 000 - R2 R2 500 - R4 R5 000 - R7 R8 000 - Refuse to Uncertain/ Grand R11 000+ 499 R10 answer Dont know Total Cant afford it 77% 60% 39% 31% 15% 10% 38% 60% 69% Dont want it 12% 13% 27% 24% 23% 20% 32% 15% 14% Never thought about it 6% 16% 18% 14% 26% 13% 4% 10% 9% Dont know about insurance 9% 7% 8% 6% 7% 0% 3% 5% 8% Do not need it 4% 4% 7% 2% 20% 21% 11% 3% 5% Dont know how to go about buying cover 3% 8% 2% 1% 0% 4% 7% 5% 4% Dont know 3% 2% 3% 6% 6% 2% 5% 3% 3% Do not trust it 2% 3% 6% 7% 0% 7% 2% 2% 3% They make excuses not to pay out 1% 4% 3% 9% 0% 0% 3% 3% 2% Dont believe in it 1% 3% 4% 5% 12% 6% 7% 0% 2% Other 1% 3% 2% 6% 13% 38% 3% 3% 2% Do not believe the beneifts are attractive/there is no value 1% 2% 2% 6% 6% 5% 2% 0% 1% for it for me Dont know how to find out where to buy it from 1% 2% 1% 0% 0% 0% 2% 0% 1% There are no brokers/companies near enough for me to get to /no place to buy it from 1% 2% 1% 0% 5% 4% 1% 0% 1% By far the most important reason for not having insurance relates to affordability. It is interesting to note that affordability is an issue even for those who have relatively high personal income - 34% of those earning R2,500 or more who have no insurance say they can t afford it. Of course, where financial decisions are based on household circumstances, personal income may be a weak indicator for the financial capacity to purchase. Nevertheless it is worth making the point that excluding poor households where there is no discretionary spend, affordability is obviously a matter of priorities. According to FinScope TM of those who earn between R1,000 and R2,499 per month who have no insurance and say they cannot afford it, around a quarter spend more than 10% of their income on phone calls (16% spend more than 10% on alcohol).
CONCLUSION The life insurance industry in South Africa faces significant marketing battles on two key fronts. Like its counterparts in the developed world it must rehabilitate and protect its reputation to maintain the trust of its existing client base and historic target market. In addition to this considerable challenge it must also address the perceptions of the industry in the low-income market. While the basic concept and benefits of insurance may be familiar to some segments of that market through their experience with informal institutions, the industry needs to highlight the protection mechanisms inherent in formal insurance in order to enhance its perceived relative value. The challenge for the industry is perhaps greatest in the market segments that have no awareness of insurance or see no benefit in it. Here interventions by the industry to work with players such as the Financial Services Board to educate and reach potential consumers have important social implications as those who are beginning to emerge financially are often forced back into poverty when loss events occur. The good news is that levels of trust are unlikely to impair increased penetration of formal insurance product in the lower income market and thus there is much opportunity to develop this market to the benefit of society and, of course, shareholders.