the value of the financial adviser in life...

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



DirectInsurer2 68 R52million R78million



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









Discovery(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:



12

Life cover

Direct Insurer 3

Direct Insurer 1

DirectInsurer2









Discovery(Standard)


Direct Insurer 3

Direct Insurer 1

DirectInsurer2









Discovery(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





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)

[email protected]

GM_10873DL_20/06/2011

the value of the financial adviser in life...

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