the value of the financial adviser in life...
TRANSCRIPT
The value of the financial adviser in life insurance
About this documentThis 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: Direct 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: Direct 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
Exploring the myths and realities of direct life insurance and the value of the financial adviser
1
How the research was done
The research was done by Discovery Life and looked at the following life insurers:
Insurers who use intermediaries Direct insurers
Discovery Life 1Life Direct
Liberty Life Frank.net
Momentum Instant Life
Old Mutual Outsurance Life
Sanlam
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.
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.
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 Direct insurance products restrict maximum cover amounts, thereby limiting
the protection consumers enjoy and rendering them unsuitable for high
income earners.
5 Direct 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 in-depth financial needs analysis, consumer education and support for consumers during the underwriting and claims process.
2
Direct 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:
• R1millionlifecover
• R1millionlumpsumnon-accelerateddisabilitycover
• R1millionnon-acceleratedcriticalillnesscoverfora31yearoldmaleanda43yearoldmale
• R500000non-acceleratedcriticalillnesscoverfora51yearoldmale
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 Direct insurers Insurers who use the financial adviser model
Percentage that direct insurers are more expensive than insurers who use intermediaries
31 R446 R395 13%
43 R955 R920 4%
51 R1453 R1298 12%
Average R951 R872 9%Details of the breakdown of the comparisons are on page 11.
On average, direct insurers are 9% more expensive than insurers who use intermediaries to sell their products
Direct insurance is cheaper than buying life insurance through a financial adviser
Direct insurance products are on average more expensive for the following reasons:
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 Direct 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 Direct 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 Direct 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%.
Myth 1:Reality:
3
Bigger marketing budgets are needed to attract new business
Thetablebelowshowsanextractfrom‘TheTop100Achievers’intermsofthe
advertising spend of six direct insurers:
Company Rank Total spend* Projected annual spend**
Direct Insurer 1 27 R122million R183million
Direct Insurer 4 33 R101million R152million
Direct Insurer 5 50 R60million R90million
DirectInsurer2 68 R52million R78million
DirectInsurer6 83 R42million R63million
DirectInsurer7 92 R38million R57million
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.
DirectInsurer2forexample,wasprojectedtospendR78milliononmarketingexpensesin2010.
ThisgeneratedR25millioninsales,orgrosspremiumincome.Aratioof317%in
marketing spend to gross premiums highlight the inefficiency of direct insurers’ strategy
to attract new business.
Direct 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.
All insurers have new business acquisition costs which impacts the premium
Financial adviser commission inflates premiums compared to direct insurers who do not pay commission
Direct 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.
Myth 2:Reality:
Direct Insurer 2
Gross premiums 24633000
Marketing spend 78000000
Ratio 316.6%
Source: Strategic and Emerging Issues in SA Insurance (PWC 2010)
Intermediated insurers have far lower ratios of commission to premiums indicating a more efficient method of
distribution and advice.
4
On average, it was found that the premium pattern of the direct assurance companies were most comparable with
the‘AcceleRater’or‘age-rated’fundingpatternofintermediatedcompanies(seegraphbelow).Directinsurersalsooffer
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.
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.
Average Direct Insurer AverageIntermediatedInsurer(Accelerated) AverageIntermediatedInsurer(Standard)
43 44 45 46 47 48 49 50 51
1,200
1,000
800
600
400
200
0
52 53 54 55 56 57
Long term premium sustainability
Limited premium guarantees expose consumers to the risk of unaffordable premium increases
Consumers will be able to maintain direct insurance premiums over the long-term
Myth 3:Reality:
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.
Insurer DirectInsurer2 DirectInsurer8 Direct Insurer 1 Direct Insurer 3 Discovery
Premium guarantee 5 years 5 years 3 years 5 years Whole of life
5
Direct 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
Waiting
period
Objective
medical
definitions
Occupation
Definition
Cover on
temporary
disability
Activities
of Daily
Living
Conversion to
critical illness
cover at expiry
Cover until
age 70
Benefit
does not
taper
Benefits consider
long-term impact
of disability
Direct Insurer2
Undefined
in policy
book*
X**Normal
occupation X X X X X X
Direct Insurer8
6months X Own or similar X X X X P X
Direct Insurer 1
180days X Own or similar X X X X P X
Direct Insurer 3
Not
specifiedX
Usual or
suitable
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 coverSurvival period
Benefits consider long-
term impact of disability
Direct Insurer2
X** X X 28days X
Direct Insurer8
X X X 14 days X
Direct Insurer 1
X X X 14 days X
Direct Insurer 3
X X XSpecified per illness: 3 months stroke,
6weeksheartattackX
Discovery P P P None P
*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
Direct insurers do not incorporate the latest benefit innovations in their products, or many core features that are prevalent in products sold through intermediaries.
Direct insurance products offer comprehensive benefits
Myth 4:Reality:
6
10% 30% 50% 70%
DirectInsurer8
Direct Insurer 1 Comprehensive
Direct Insurer 1 Core
DirectInsurer2
Direct Insurer 3
0% 20% 40% 60% 90%80% 100%
Critical Illness Conditions Covered
30%
35%
17%
10%
16%
Discovery Life
Direct Insurer 2 Direct Insurer 8 Direct Insurer 3 Discovery
Maximum Life Cover R4million R6million R10millionUnlimited subject to
underwriting
Maximum Disability Cover R4million R4.5million R5million R20million
Maximum Critical Illness
CoverR2million R3million R2million R6million
Direct 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:
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.
Asaresult,apolicyholder’scoverforrelatedeventsexpiresonce100%ofthebenefitamounthasbeenclaimed.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.
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:
7
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:
• Theclient’smandate
• Analysisofincomeandexpenses
• Analysisofassetsandliabilities
• Existingindividualandgroupcover
• Existingpensionandprovidentfunds
• Complexitiesofestatedutyplanning
• Liquidityanalysisoftheestate
• Taximplicationsoffinancialdecisions
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.
Direct Insurers Intermediated Insurers
A financial needs analysis requires specialised expertise and customised software and is necessary to best understand each client’s insurance needs
Consumers do not need financial advice as information is readily available
Myth 5:Reality:
8
Certified financial planners are qualified and keep up to date on product and industry developments through continuous training
Financial advice is the same whether a call centre agent or qualified financial planner provides it
Myth 6:Reality:
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)
• Regulationofadvice-givingactivities
• Disclosureandtransparency
• Consumerplatformforcomplaints
• FAISOmbud
Requirements of Discovery’s internal compliance and training
• Continuedprofessionaldevelopment
• Trainingacademy
• Knowledgeassessments
• Compliance
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.
9
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
aparticulardirectinsurerandDiscoveryLifefor2009.
Direct insurer Discovery Life
Claims paid R6million R1.12billion
Claims rejected R38million R23million
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.
Claims are more often rejected with direct insurance companies
Claim payouts from direct insurers are transparent and certain
Myth 7:Reality:
10
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
Intermediaries perform important tasks for consumers that add significant value
Intermediaries do not add real value to consumers
Myth 8:Reality:
11
Case Studies: A comparison between direct and intermediated insurers
Life cover: R1 million
Disability Cover: R1 million
Life cover premiums
31
500,00
400,00
300,00
200,00
100,00
043
600,00
51
Intermediated insurers: AcceleRater equivalent
Intermediated insurers: Level Premium
Direct insurers
Direct Insurer 3
Direct Insurer 1
DirectInsurer2
IntermediatedInsurer4(Compulsory5%with5%benefitgrowth)
IntermediatedInsurer1(Ageratedwithbenefitincreaseof3.5%)
IntermediatedInsurer2(Compulsory10%/3.5%)
Discovery(AcceleRater)
DiscoveryIntegrated(AcceleRater)
IntermediatedInsurer4(Levelwith5%benefitincrease)
IntermediatedInsurer1(level5%/3.5%)
IntermediatedInsurer2(Level5%/3.5%)
Discovery(Standard)
DiscoveryIntegrated(Standard)
Direct Insurer 3
Direct Insurer 1
DirectInsurer2
IntermediatedInsurer4(Compulsory5%with5%benefitgrowth)
IntermediatedInsurer1(Ageratedwithbenefitincreaseof3.5%)
IntermediatedInsurer2(Compulsory10%/3.5%)
Discovery(AcceleRater)
DiscoveryIntegrated(AcceleRater)
IntermediatedInsurer4(Levelwith5%benefitincrease)
IntermediatedInsurer1(level5%/3.5%)
IntermediatedInsurer2(Level5%/3.5%)
Discovery(Standard)
DiscoveryIntegrated(Standard)
Disability premiums
31
500,00
400,00
300,00
200,00
100,00
043
600,00
51
Direct 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:
Intermediated insurers: AcceleRater equivalent
Intermediated insurers: Level Premium
12
Life cover
Direct Insurer 3
Direct Insurer 1
DirectInsurer2
IntermediatedInsurer4(Compulsory5%with5%benefitgrowth)
IntermediatedInsurer1(Ageratedwithbenefitincreaseof3.5%)
IntermediatedInsurer2(Compulsory10%/3.5%)
Discovery(AcceleRater)
DiscoveryIntegrated(AcceleRater)
IntermediatedInsurer4(Levelwith5%benefitincrease)
IntermediatedInsurer1(level5%/3.5%)
IntermediatedInsurer2(Level5%/3.5%)
Discovery(Standard)
DiscoveryIntegrated(Standard)
Direct Insurer 3
Direct Insurer 1
DirectInsurer2
IntermediatedInsurer4(Compulsory5%with5%benefitgrowth)
IntermediatedInsurer1(Ageratedwithbenefitincreaseof3.5%)
IntermediatedInsurer2(Compulsory10%/3.5%)
Discovery(AcceleRater)
DiscoveryIntegrated(AcceleRater)
IntermediatedInsurer4(Levelwith5%benefitincrease)
IntermediatedInsurer1(level5%/3.5%)
IntermediatedInsurer2(Level5%/3.5%)
Discovery(Standard)
DiscoveryIntegrated(Standard)
Critical illness Cover: R1 million (for age 31, 43) R500 000 (for age 51)
Total insurance premiums
Critical illness premiums
31
600,00
500,00
400,00
200,00
100,00
043
700,00
51
Direct insurers
Total premiums
31
1,000,00
800,00
600,00
400,00
200,00
043
1,200,00
51
Direct insurers
Intermediated insurers: AcceleRater equivalent
Intermediated insurers: Level Premium
Intermediated insurers: AcceleRater equivalent
Intermediated insurers: Level Premium
300,00
800,00
900,00
1,800,00
1,600,00
1,400,00
2,000,00
13
The same client details were used for all comparisons between direct insurance companies and insurers who use intermediaries to sell their products
• R1millionlifecover
• Maleaged31,43and51
• Single
• Non-smoker
• Height1.8metres
• Weight70kg
• IncomeR50000permonth
• Accountantwithathree-yeardegree
• Notravellingormanuallabour
• Exercisethreetimesaweekfor1.5hourseachsession
• Noalcoholuse
• Nofamilymedicalhistory
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:StandardwithABI=CPIandAcceleRaterwithABIofCPI
• DirectInsurer2:premiumsflatforfirsttwoyears,5%yearlyincreasesthereafter
• DirectInsurer8:ACI=12.5%,ABI=5%
• DirectInsurer1:ACI=6%peryearuptoage35,7%peryearuptoage45,8%peryearthereafter,ABI=5%
• DirectInsurer3:ABI=0%,ACI=6%
• IntermediatedInsurer4:Compulsory5%with5%ABIandLevelwith5%ABI
• IntermediatedInsurer1:Age-relatedABIof3.5%andLevel5%with3.5%ABI
• IntermediatedInsurer2:Compulsory10%withABIof3.5%andLevel5%with3.5%ABI
Physical address:
155 West Street,
Sandton.
Postal address:
POBox3888,
Rivonia2128.
General queries,
our details are:
086000LIFE
(0860005433)
Fax number:
0860LIFEFX
(0860543339)
GM_10873DL_20/06/2011