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Client value is defined from the client’s perspective rather than the seller’s perspective. […] the ultimate question is whether, and to what extent, the product enhances the welfare of policyholders, their families and their communities. In the context of insurance, client value is about reducing vulnerability due to improved risk management practices that then contribute to improved well-being.1
The first article in this segment establishes a role for financial products as promoters of social mobility and financial well-being. The second article considers how customers assess the value of a product. The third article summarises the statutory obligation and business imperative for banks, insurers and other financial services providers to meet customer needs and minimum service requirements. In this discussion, we consider the broad characteristics of South Africa’s existing insurance and savings products and assess how they might be enhancing the financial well-being of the people who buy them.
The PACE toolbox is a method proposed by Michal Matul and his co-writers for assessing the value of a product to its customers. They take the view that a microinsurance company (and its products) can be regarded as offering value only if they meet the following requirements:
Simplicity is regarded as an overarching requirement. It achieves a number of objectives, including clarity on whether the product meets the needs of the customer. The other desired requirements are assessed through the PACE framework, which assesses product, access, cost and experience. The authors argue that, while some of these requirements may be more important than others under specific circumstances, product designers should aim for a balanced mix of all five. We see these requirements as being appropriate to other insurance and savings offerings, too.
The product categories that follow are considered at a high level. We suggest that product providers assess their offerings through this lens, which is what the Treating Customers Fairly regime, described in Part 4: Chapter 3, calls on them to do any way.
Insurance that pays out on death plays a critical part in protecting customers against the adverse effects of losing a loved one, particularly an income earner. Life insurance is widespread and provided in many forms. Parts of the market are competitive and price sensitive. However, pricing and distribution dynamics in other parts, particularly for low-income customers, somewhat mitigate providing good value to customers. This appears to be largely due to market inefficiency.
Life insurance products form the bedrock of South Africa’s long-term insurance industry. Life cover is provided in a variety of forms:
Life insurance products are available to customers through a variety of channels. They can be purchased online, directly from an insurer, through an agent of the insurer or an independent financial adviser. If life cover forms part of the employee benefit offering of a company, an individual may have little or no say in the nature or amount of cover. Life insurance may also be distributed through burial societies, funeral parlours or other parties to the funeral process.
The needs of life insurance buyers vary. Larger policies tend to be used to protect against the income or asset shortfall resulting from the loss of an income earner in a family or business arrangement. Low-income customers typically purchase life cover in the form of a funeral policy. This provides generally low levels of insurance designed to match or offset the costs of a funeral. These products have sold in very large numbers, perhaps because they offer the one thing that low-income customers need most: a rapid payout.
Many would describe the market for life insurance as competitive. To an extent this is correct. Simple, transparent life cover products are available online. Customers can obtain multiple quotes and compare them, suggesting that life insurance has become something of a commodity. And a number of insurers price the starting premiums for life cover aggressively (with some adverse consequences, which we touch on next).
Price competition may have improved but there are signs that this is limited. Some providers may use life insurance as the competitive entry-point to a portfolio of risk products with higher margins for profit. Also, in some cases the starting premium hides an overall proposition that is rather less attractive as it comes with high, fixed premium increases later.
Competition is particularly limited at the low end of the market. Funeral products sell in large numbers, so competition and scale might be expected to contribute to low prices. They are, however, regarded as profitable, with room for significant expenditure on distribution channels (which may not always have the best interests of customers at heart). Regulatory initiatives suggest that entities in the chain of service for funerals may have been selling and underwriting policies without the authority to do so. This is cause for concern in a market whose effective and competitive operation is critical to the well-being of poor South Africans. Recent developments, among them the entry of a major bank into this market, provide hope that price competition may be improving. Employers could play a part here by negotiating lower premium rates for their employees.
A large part of the global life insurance market, in the number of policies if not in aggregate cover provided, aims to protect lenders against the risk that a loan is not repaid on the death of the borrower. These products, generally known in South Africa as credit life insurance, are frequently sold (at high profit margins) as a condition of the loan. However, their existence, terms and conditions are often not even known to the borrower. Issues with the credit life market have been emerging for some time and regulatory changes to protect customers are under way.
Products that pay benefits on the permanent disability of policyholders have existed for some time and are widespread, particularly in formal employment where this type of protection is generally seen as a legitimate employee benefit. The payment of benefits on temporary disability was the first significant innovation in this space. Benefits paid in the form of income instead of a lump sum have grown in acceptance.
The payment of a benefit in the event of a permanent disability was probably the first big step away from pure life insurance. The benefit was initially available as an accelerator. This meant that the event of permanent disability triggered the early payment of an amount that would otherwise have been paid only on the death of the policyholder. This was attractive to policyholders – in return for a small addition to their premium, the sum assured under their policy is paid out on death or permanent disability, whichever happens first. Policyholders had to wait three to six months from the date of the event giving rise to the disability. This gave the insurer the opportunity to confirm the permanence of the disability and its impact on the policyholder.
Permanent disability products paying out as a standalone benefit quickly emerged and are now the norm in employee benefit insurance packages. Permanent disability products marketed to individuals frequently pay benefits in the form of a lump sum, even when these products are offered on a standalone basis. As the benefit is paid when income is lost as a result of a disability, the design appears to miss the underlying need. The take-up of income-based disability benefits is growing, however. Some providers allow customers to choose between a lump sum and an income at the time of the claim.
The next wave of innovation was the temporary disability product, which brought the industry closer to the health insurance market. This product aims to replace income temporarily lost as a result of injury or serious illness. Waiting periods for temporary disability products are generally much shorter than for permanent disability alternatives, varying from seven days to a month.
Disability products are undoubtedly more complex than life insurance. Much depends on the judgement and integrity of the insurer at the time of the claim. It is not easy for the policyholder to understand the conditions under which a benefit is paid. The waiting period may have a sound rationale, but policyholders must question whether the severity or permanence of a condition could be determined without the delay of the waiting period. Assessing value for money is also difficult, not least because the waiting period itself has a strong impact on the premium.
Except in employee benefits, disability protection is not widely available to those who may need it most: low-income workers, the self-employed or employees of small companies, whose livelihood depends critically on their health, may find the premiums prohibitively high, the waiting period frustrating and the subjective assessment of the validity of claims unclear. This suggests there is a substantial need for risk protection that is largely unmet.
Benefits Barometer 2015: 'Financial Well-being' pointed out that there are three ways to fund the costs of medical care in South Africa. The first is to use state facilities. The second is to use insurance, either through the health insurance products we discuss here or through membership of a medical aid. The third is to save. Saving is a proactive strategy that must find its place in the behaviour of every household. Of course, as also discussed in the 2015 edition, indebtedness measures continue to demonstrate the very low levels of saving in our households, pointing to an equally low level of resilience to health-related disasters.
Products that pay out when there is an adverse health event are available in bewildering variation. Determining the value for money of these products is undoubtedly difficult.
The South African insurance industry is known worldwide for developing the critical illness offering, referred to at times as the dread disease product. Initially, it was probably conceived as an extension of the permanent disability product. It paid out on the diagnosis of one of a limited list of serious medical conditions generally regarded as terminal. Its attractiveness as an accelerated benefit was that it paid the stated death benefit early, allowing the policyholder to use otherwise unavailable resources to fund treatment of the disease or make the last years of life more comfortable. Critical illness policies are now also available on a standalone basis.
The list of conditions under which benefits were payable gradually grew as part of competitive dynamics. Benefits are now just as likely to be used to offset the cost of treatment as to improve policyholders’ comfort of their final months or years of life. The problem with these products now is that the list of conditions has grown so long that customers are in no position to assess the value offered, or to compare one product to another. In addition, the medical terminology used to describe the payment conditions is practically incomprehensible to most customers, making it even more difficult to understand what is covered.
Hospital cash plans are simpler products, providing relatively small payments to some of the cost of a visit to hospital. Although they are rather exposed to the risk of fraudulent claiming, and therefore more expensive than they might otherwise be, they may nevertheless helpfully meet a straightforward need in the low-income market.
Health insurance is not to be confused with medical aid, much discussed in a number of editions of Benefits Barometer, particularly in 2015. Medical aid schemes are not-for-profit gatherings of members who share the risks associated with paying for medical care. The club concept is muddied by the level of control members have over their expenditure, by widespread abuse and fraud, and by medical aid administrators tending to view membership pools as a potential customer base for other products.
Medscheme recently reported recovering more than R107 million in fraudulent claims, and through waste or abuse, and handling more than 1 500 calls from whistle-blowers of potentially fraudulent, wasteful or abusive conduct against medical aids funds.2 Journalist Kenneth Marion reports that 10% to 15% of claims include some element of fraudulent information.3
The stipulation of a minimum set of benefits by policymakers more than ten years ago was designed to prevent the value of belonging to the scheme from being diluted by the incremental removal of benefits in defence against rising health costs. One of its effects, however, was to create an affordability floor, limiting membership to the wealthy few. Efforts to create a lower-cost dispensation have so far not succeeded. The coming National Health Insurance framework is likely to change this environment substantially, as ways are found to share access to South African healthcare facilities more equitably.
Health insurance has come a long way from its origins as a defined payment in the event of a defined medical event, but not all of the change has been good for customers. Despite the prescribed minimum benefits framework for medical schemes, members frequently have out-of-pocket expenses because benefits payable by the scheme don’t cover the actual medical costs. A plethora of products aiming to fill this gap has emerged. Relatively cheap, apparently, they generally pay out only when the corresponding benefits under the medical scheme have reached their limit, subject to an additional upper limit. Customers would find it very difficult to determine the value provided by these products, not least in the context of a fluid policymaking environment, because they don’t know how likely they are to exceed medical aid limits.
There are numerous risks affecting the health of individuals and households. Health insurance plays a significant part in the microinsurance markets of many countries, larger in many cases than the corresponding life insurance arrangements. This is not the case in South Africa. The combination of a notionally free but ineffective public health system and its prohibitively expensive private counterpart makes it very difficult to provide health insurance to poor South Africans.
Short-term insurance products for individuals and households form a large and broadly competitive market. The extent to which this benefits low-income South Africans, however, is not clear. Are we missing a substantial opportunity to address gaps in the framework for social mobility?
The market for insuring motor vehicles, dwellings, and household and other personal goods – risks that fall under short-term insurance licences in South Africa – is large and generally competitive. The South African short-term insurance industry is broad-based. Apart from market leader, Santam, which in 2015 accounted for 24% of total premium income, no insurer managed more than 12% of the industry total in 2015.4
Competition in personal-sector risks (for example building, household, car and possessions risks typically experienced by individuals) is likely to exceed the corresponding competitiveness of the short-term insurance industry, which includes a number of specialised lines of business.
Products are available to customers through a range of channels, including online. Barriers to switching products from one provider to another are not unduly high. Price-comparison websites are available and concerns that the range of providers on these sites is limited to related companies are being addressed.
However, the value offered by personal products is not easy to compare. While it’s simple enough to get quotes from multiple insurers for a given set of risks, two factors make it difficult to assess competitiveness:
Idiosyncratic risk factors are those that are unique to a customer (the way they drive), not generic to a larger group (whether the car is parked overnight behind a locked gate).
As discussed in the previous article, South Africa’s market conduct regulator is imposing rules that aim to curb practices which make product value difficult to understand without appropriately communicating with customers regarding this value.5
Figures on short-term insurers reaching low-income customers with motor and household insurance have not been found, but penetration is not believed to be high. Third-party insurance for motor vehicle owners is not mandatory. Automobile Association figures report the proportion of the 11.4 million registered vehicles without insurance at between 65% and 70%. To this should be added 800 000 vehicles that are not registered or roadworthy.
Industry efforts to reach low-income customers through the Mzansi product standards have not been particularly successful.6 It is fair to assume that insurers have had limited success in reaching low-income customers with motor insurance and household content cover because, on affordability grounds, these customers might not consider such protection a priority.
Mzansi standards are a set of product requirements agreed by industry players as appropriate for low-income customers. The aim was to use the stamp of approval approach to encourage these customers to consider the product on the basis of trust.
The Land Bank provides an extensive range of short-term and long-term insurance policies. These include asset insurance, which covers farming requirements, and crop insurance, which protects against losses from weather conditions. Other insurers are also active in this market, but it is not clear if they have succeeded in reaching small-scale farmers with the types of index-based products that have proved successful elsewhere.
In the first article of this segment, we present evidence from international surveys of the range of risks low-income households are exposed to. These include price shocks, natural disaster, crime, and asset or crop loss – all of which could be mitigated through the products provided by short-term insurers. We see a substantial opportunity to enhance social mobility by providing appropriate safety nets to low-income households occupied in agricultural or small business activities.
It seems that the distribution channels used by short-term insurers have not been effective in reaching low-income customers. Furthermore, marketing strategies tend to be aimed at middleto- upper-income customers. We ask again whether insurers have looked at the reasons for the ongoing strength of the informal sector and considered whether they might grow their credibility by working with groups in this sector. To do this, they must walk more closely with existing and future customers.
Finally, employers can play an active part in negotiating better short-term insurance rates for their employees, for a start by providing safe parking at work.
Savings products are available in a number of forms. Yet, despite widespread tax incentives, South Africa’s household saving rates remain stubbornly low, possibly because of low levels of trust in financial institutions or the products they offer. Expecting improved levels of saving is perhaps unrealistic in the context of continually high levels of household debt but there may be some signs of hope.
South African policymakers provide various incentives to save. Contributions to pension arrangements attract tax incentives at the full marginal income tax rate, subject to a (high) annual cap. Retirement funds are long-term vehicles, however. While flows into these funds are generally good, the evidence suggests that pre-retirement withdrawals from funds are similarly high, perhaps reflecting debt levels in households. To be blunt, the incentives do not appear to be working.
In 2015, a system of tax-free saving accounts was launched to encourage saving in short-term vehicles as well. Limited to R30 000 a year, and subject to a lifetime cap of R500 000, tax-free saving accounts are deductible from income tax. They also accumulate interest free of tax. It’s probably too soon to tell whether the incentives to save in tax-free accounts will make a significant impact on saving levels. But a look at continually high levels of indebtedness suggests that any improvement will come slowly. Providing effective financial education and systematically finding ways to tackle household debt are two important potential solutions to a complex problem.
The level of household debt shows encouraging signs. Household debt as a percentage of disposable income reduced from 74.1% in 2016 to 71.9% in 2017, part of a ten-year trend of declines, and the cost of servicing this debt fell as well.7 The mix of debt is concerning, shifting from home loans, which are backed by property, to consumer credit, which is often unsecured. Commentators are surprised by these figures in the context of a generally difficult economy and some are asking whether the switch to unsecured borrowing is a sign of stress, perhaps exacerbated by the increased use of unregulated providers, whose figures are not reflected in the official statistics.8
Creative approaches to the crisis of indebtedness are surely called for. Could employers create emergency savings funds, such as a workplace stokvel, with contributions deducted from payrolls? The case study on Emergency Savings considers an auto-escalation model that bears further consideration.
For saving arrangements to realise the goal of protecting against financial risk, they need to be efficient and flexible. Banks do not seem inclined to provide accounts that pay interest (net of fees) and also offer good access. Interest-bearing accounts tend to be fixed-deposit or notice deposits, which compromises the potential to protect against risks that undermine the financial security of households.
What is the point of an interest-bearing savings account when a household has to approach a money-lender to get out of trouble because the balance in the account is not immediately available?
This helps to explain why low-income South Africans depend so much on the products available to them in their communities. These arrangements, built on trust, convenience and accountability, are seen as reliable vehicles for disciplined saving and emergency access to cash in time of need.
Unit trust arrangements may have a part to play in encouraging saving, though their appropriateness is somewhat undermined by product complexity and capital gains tax rules. Industry efforts to encourage unit-trust saving for children’s education through the government-subsidised Fundisa initiative didn’t attract as much attention as hoped. It was recently closed in light of the announced plan to offer free access to tertiary education. Providers may need to work harder to explain these products and their associated risks more clearly to customers, but they should start by identifying the needs that these products could meet.
Fundisa is an industry initiative to encourage saving in unit trust accounts for the costs of educating children at tertiary level. It allowed smaller contributions than were permitted in normal unit-trust accounts. Contributions were supported by government subsidies.
South African financial institutions must make an effort to build the trust their customers place in them. A critical part of this process involves taking care to understand the real needs of these customers and to meet these needs as effectively as possible.
1 Matul, M, Tatin-Jaleran, C & Kelly, E. 2012. Improving client value: insights from India, Kenya and the Philippines. In Churchill, C & Matul, M (eds.): Protecting the Poor: a Microinsurance Compendium, Volume II, p. 301. International Labour Organization, Geneva (book).
2 Africa News Agency. 2018. Over R107m recouped from medical scheme fraud, Independent Online, 18 March 2018 (online).
3 Marion, K. 2018. Medical scheme’s fight against fraud and abuse is paying off, Independent Online, 25 March 2018 (online).
4 KPMG. 2016. Business Unusual: The South African Insurance Industry Survey 2016 (online).
5 Hippo. 2017. AA releases statistics on car insurance in South Africa, 5 June 2017 (online); Bubear, R. 2016. Here’s how many cars on SA roads are uninsured …, Car Mag, 21 June 2016 (online).
6 Cenfri. 2011. Insurance products standards to reach low-income consumers in South Africa: help or hindrance?, The Centre for Financial Regulation & Inclusion (online).
7 South African Reserve Bank. 2018. Quarterly Bulletin: March 2018, No. 287 (online).
8 Van Rensburg, D. 2018. Don’t be fooled, there is a credit problem, Fin24, 7 January 2018 (online).
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