Still a lot of life in Life

We sometimes get the feeling that life insurance has become “unsexy” in the intermediary environment. It feels as if nothing new or fresh has happened on this front for a while. We spoke to Marius Botha, recently appointed head of Life at Munich Re of Africa, to find out what he thinks about the current life insurance environment, product development and providing access to the emerging market.

COVER: What are your views on life risk products locally?

Marius: South Africa’s risk products are quite sophisticated and comparable to the best globally. Our market has also been reasonably resilient with good business still being written, albeit in a challenging economic environment. Insurers continue to find innovative ways of selling risk products. Regarding disability products, these are very complex, creating challenges for individual policyholders who still struggle to understand what exactly it is that they are buying.

At the lower end of the market, the planned Microinsurance Act will probably stimulate some development as we are not optimising opportunities there yet. In our opinion the initial developments will probably take place in the higher LSM 6 and 7 market segments as opposed to LSM 1 to 5. However, the objective should be to grow new demand and not simply to move existing business (eg. funeral) to the new regulatory segment. Although HIV/ AIDS remains a significant factor in rating, things are looking a lot more positive after introduction of the new ASSA AIDS models.

In the Employee Benefits market, we have not seen inherent growth mainly due to low GDP growth. EB business is commodity business where service and price are the dominant levers for competition, especially during tough economic times. This sector will probably only see growth once we have turned the economic corner and GDP growth takes off.

We are therefore more bullish on individual life risk business over the long-term and expect to see further growth in this market.

COVER: How are we doing in the innovation stakes?

Marius: Historically, drives for innovation have often led to more complex products in our market. Whilst there is room for innovation in both complex and simple products in the market, in my opinion there is a need to sell simpler products (that are fully understood) in more efficient ways. These products should be sold according to the profile of the client and the needs that are identified.

An interesting development to follow is the development of the direct models. Globally, online has not taken off yet as much as originally expected, but certainly will as the market develops and people become more accustomed to online financial services business.

Munich Re benefits from being a global company, learning from innovation and growing expertise across the globe. The value-add is in bringing the right solutions to our clients in the different markets based on global best practice.

COVER: What about distribution innovation?

Marius: Traditionally, reinsurers were not overly involved in the distribution part of the insurance cycle, but this is changing and reinsurers are assisting to create successful distribution channels according to product possibilities. Online (automated) underwriting is an example where we are heavily involved as a group.

COVER: Have we seen any development in the competition between lump sum and income benefits?

Marius: We have definitely seen an increase in interest in income disability benefits as consumers see the benefit of income protection on disability. However, disability on the whole is not taken up sufficiently by consumers. There is still a lot of people who think: “I don’t need it”. Human behaviour is interesting in that way. The LOA (now ASISA) gap study showed that there was a massive shortfall in consumers’ take-up of disability insurance, income and lump-sum. They don’t fully grasp the wide-spread impact of a potential disability on themselves or their families.

On the EB side, most employees at least have some disability benefits, but not necessarily sufficient cover. They don’t really check, but simply accept that they have some cover. Because of these perceptions of adequacy, there may have been a lack of sales of individual disability products to the formally employed, which has a negative impact on development of these products. Advisors should be updating them and offering extra disability cover. This is where individual products come in. In the last few years, we have seen many stand-alone disability products coming onto the market, but take-up is still low.

COVER: What about Critical Illness products?

Marius: There is a strong need for these products but people don’t always understand what they have. There are a few main illnesses that drive claims. The rest of the benefits are perceived as value-added benefits, but this is debatable. We should make sure that clients have the right benefits and understand when and how much will be paid on events. Because cost is an issue on the EB side, the sale of these products must be driven on the individual side. Because of the underwriting challenges on the direct side, the opportunities with Critical Illness products is on the advisor side and advisors should take advantage of this position that they currently enjoy. However, some developments will certainly be taking place in the direct underwriting space in the future.

COVER: What are some of the challenges in the life risk environment?

Marius: There are many challenges, but a few that come to mind are demographic factors such as longevity, regulatory changes and the pressure on delivering more underwriting profits when investment return is low. .

Longevity is definitely an issue affecting pricing of products, but it is not simple to deal with. Factors coming into play here are medical innovation and population diversity and the great divide in terms of the quality of healthcare and the incoming National Health Insurance scheme. What will the impact be on people’s standard of health going forward in each market segment? This makes the issue of longevity very complex to deal with, especially when pricing for rate guarantees

Then we have many regulatory issues in distribution. What will the impact be of the FAIS exams on the number of agents or brokers in the individual life market, and what will that do to sales over the long-term? There is also the issue of TCF (Treating Customers Fairly) and where we draw the line. A good example here is in the EB environment. For example, the policy is between the insurer and the employer or retirement fund and that is where the advice is given, often by a corporate broker. But how does the employer or fund, or corporate broker, communicate that to the individual employees? When does consultation regarding appropriate cover take place? In principle the trustees are acting on behalf of the fund members in a retirement fund. Are they skilled enough in every instance to advise employees on their risk benefits and implications of cover? And what about the role of the employer to communicate to its employees on say disability income group business? TCF is aimed more at individual life business. But the risk is that in EB business the insurer, the corporate broker or the employer or fund try to “distance themselves” from the ultimate “advice” that has been given to individuals in a scheme and they don’t aim to apply the same TCF principles in that environment. T

Lastly, we have the matter of investment returns. Due to market challenges, returns are lower than historically enjoyed and the obvious focus goes towards increasing underwriting results. But there is a balance to be achieved with the cost of risk benefits. Margins on risk benefits are already very low due to strong competition and it is an even bigger challenge for reinsurers that are further down in the value chain. In the future, reinsurers and insurers will select partners very carefully to ensure sustainability and stability in the risk market. Quality partners and good margins are essential to ensure long-term success.