Weaknesses revealed in direct life insurance model
While it is still in its infancy, direct life insurance appears to have a range of price, benefit, advice and claims weaknesses that currently give its established intermediary-driven rival the upper hand, especially in the middle to upper income brackets.
Significantly, it also appears that there is still a major need for brokers in the life insurance space, where financial planning advice is seen as a crucial element of the process.
Research by Discovery Life - entered into due to the emergence of several direct life insurers - has produced some key findings that dispel some myths and underpin realities in the life insurance sector.
The research covered insurers who use intermediaries - Discovery Life, Liberty Life, Momentum, Old Mutual and Sanlam - and direct insurers - 1Life Direct, Frank.net, Instant Life and Outsurance Life.
According to the research, the key findings are that: direct life premiums are on average 9% more expensive than the intermediated option; direct life premiums have limited guarantees; benefits offered by direct life insurers are not comprehensive and do not address consumers' needs at every life stage; direct insurers restrict maximum cover amounts; and direct insurers have a poor claims record.
The research compared premiums for a 31-year-old male, a 43-year-old male and a 51-year-old male across one million rand life cover, one million rand lump-sum non-accelerated disability cover, one million rand non-accelerated critical illness cover and 500,000 rand non-accelerated critical illness cover.
Although it is unsurprising that a company utilising an intermediated model is going to pick holes in the product offerings of competitors using an un-intermediated model, the research does show some very real shortcomings in the direct life insurance model.
For starters, life insurance is much more complex than short-term insurance, where the direct model has flourished in recent years.
"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," Discovery Life's research report document stated.
Importantly, direct life insurers market themselves very much on price - such as life cover for x rand per day - but Discovery Life's research points to direct life insurance being more expensive than intermediated insurance for four main reasons: the way ancillary benefits are structured; although direct insurance does away with brokers, it has other sales channels with similar expenses; the lower underwriting criteria that direct insurers use attracts high volumes of anti-selection risk; and one-size-fits-all products from direct insurers lead to lower persistency and less loyalty from consumers.
"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," said Discovery Life's report.
According to Discovery Life's deputy CEO, Kenny Rabson, there is a big gap in the definition of benefits between intermediated and direct life insurers, meaning that consumers are not getting like-for-like benefits.
"Many of the benefit definitions in the direct life insurance model are not robust enough to ensure certainty of payment. This is particularly so when it comes to disability and critical illness cover," he said.
He said waiting periods could also be a major stumbling block for consumers, giving heart attacks as an example. While statistics show that 25%-30% of heart attack victims die within weeks of their trauma, some direct life policies require the individual to survive for 28 days before any critical illness payout is made.
While Rabson believes there is a role for direct life insurers, especially at the lower end of the income market, he believes more regulation and consumer education is needed. He also believes that direct life is more suitable for piecemeal insurance rather than broad coverage of a range of circumstances and life stages.
Alarmingly for the fledgling direct insurance market, Discovery Life's research shows an extremely high claims rejection rate in the direct market.
Whereas in 2009, Discovery Life paid out 1.12 billion rand in claims and rejected 2% of claims worth 23 million rand, a direct insurer paid claims of six million rand and rejected claims of 38 million rand, showing a rejection rate of 86% of claims.
"Less strict underwriting protocols with direct insurance companies, compared with insurers who use intermediaries, results in more underwriting taking place at the claims stage," said the research report.
Also favouring the intermediated model, says the research, is that intermediaries are strictly regulated in terms of the Financial Advisory and Intermediary Services Act (FAIS). They also now have to pass a series of examinations to maintain their ability to give advice and earn commissions.
According to the research, it is a myth to assume that financial advice is the same whether a call centre agent or a qualified financial planner provides it. Another myth is that consumers do not need financial advice as information is readily available.
"A financial needs analysis requires specialised expertise and customised software and is necessary to best understand each client's insurance needs," the research report said.
Commenting further on the research, Discovery Life marketing director Hylton Kallner said consumers needed to be educated into what to look for in life insurance products.
"Premiums may start off low, but where will they go. Premium guarantees are also important, as are body coverage and multiple events in the disability and critical illness space," he said.
The bottom line appears to be that while there is a definite niche for direct life insurers, anyone switching from intermediated cover to direct cover should carefully examine premiums and benefit details before making the move. Individuals applying for life insurance for the first time also need to be fully aware of what they are buying.
What may appear cheaper at the beginning may end up being more expensive in the long run, especially when benefit restrictions or claims rejections come into play.
To be fair to direct insurers, they have a valuable role to play in a demographically diverse market, but there is clear evidence that they need to fine-tune their offerings if they are to provide real competition to traditional life insurers using the age-old broker network to write their business.