In its 2013/2014 Global Competitiveness Index (GCI), the World Economic Forum ranks South Africa third in the world out of 148 countries and just behind Hong Kong and Singapore, in terms of financial market development. The 2014 edition of the South African Insurance Industry Survey, performed by South African company KPMG annually, indicates an insurance penetration in South Africa that counts among the highest in the world. The only African country with a well-developed insurance market that consists of life and non-life markets, this state of affairs in South Africa can be attributed to an equally well-developed financial system, which in turn drives growth in the insurance industry.
Trust: A critical ingredient in life insurance
However, an online survey done by advisory firm EY, also in 2014, found that South African consumers trust their banks and even online shopping sites more than they do their insurance companies, which should increase their levels of engagement with customers. Local insurers have been indicated as trustworthy by 62% of the South African respondents, compared to 81% for banks and 78% for online shopping sites (both also indicated for South African respondents). Compared to the global findings, respondents still trust banks more (82% ), but the difference in trust between banks and insurers is not as pronounced, with 70% of respondents expressing trust in insurers.
Trust forms the backbone of the life insurance industry with consumers (customers, policy holders) trusting financial services companies with their personal details and premiums, trusting that it will be handled responsibly, that products will perform as promised and that they will be able to claim in accordance with the policy contract when needed. Much needs to be done to restore South Africans’ trust in the financial services industry, something which a number of regulatory interventions seek to accomplish.
The information provided in this article is not intended as financial advice. It is instead aimed at giving the reader some insight into consumers’ perceptions around life insurance as measured in some recent surveys. The article will also provide a broad definition of life insurance to distinguish it from other insurance products available on the market and touch on some of the regulations aimed at ensuring all South Africans can equally participate in and benefit from a healthy and vibrant insurance industry.
Most new-generation life insurance products offered are fairly complicated and a significant measure of financial literacy on the side of the consumer is required for a full understanding of these products as well as how they work and can or will benefit the insured. It is therefore a necessary first step to enlist the expertise of a qualified and preferably independent financial adviser to assist you in matching your needs with the correct product.
South African consumers are loyal
While South Africans don’t necessarily trust financial services companies selling life insurance, the EY survey report indicates that they do remain loyal to whichever company they bought a life insurance product or products from. A total of 78% of South African respondents had indicated in the survey that they were likely or very likely to recommend their insurance provider to friends or relatives. Compared to the global response of 64% and the UK’s 49%, South African consumers of life insurance can be called loyal.
A further indication of South African consumers of life insurance’s loyalty is the finding that more than 50% of South Africans indicated that they would recommend an insurance provider that they had left in the last 18 months (compared to global respondents’ 67%). Further confirming this and pointing to considerable brand equity of the few dominant large players in the South African market, is the finding that only 9% of these respondents indicated that they were likely to switch insurance providers in the next 12 months, compared to a global average of 18%. The main reasons cited by these South African consumers for considering leaving a specific company in the next 12 months were the costs and terms of an insurance policy, with service rendered by the company being the third most common reason.
What is life insurance?
According to the Internet, the first known use of life insurance was around 1809, and life insurance has its origins in the old practice of saving money to pay for one's own funeral costs.
When defined as protection against the loss of income resulting from the death of the insured whereby the named beneficiary or beneficiaries receive the proceeds and are in so doing protected or safeguarded from the financial impact of the death of the insured, life insurance sounds fairly simple. However, purchasers of such insurance should note exclusions often written into the contract (to limit the liability of the insurer). Some of these are claims relating to suicide, fraud, war, riot, etc.
Life insurance entails a policy-holder buying insurance cover from an insurance company. He or she then pays a specific amount (premium) for the duration or life of the policy. Should the insured die before this term is completed, a specified lump sum is paid to named beneficiaries. If the insured survives the term of the policy, he or she may receive the full or a part of the lump sum of the policy. In the case of members of young families, a life insurance policy creates an ‘instant estate’ before they can accumulate other assets. It also provides liquidity to the named beneficiary (or beneficiaries) to cover some necessary costs before the deceased's estate is settled.
Buying life insurance is not a once-off act, but one that needs to re-evaluated and relooked often, especially after a life-changing event such as marriage, divorce, the birth or adoption of a child, or the purchase of a house or business.
What is the aim or goal of life insurance?
Simply put, it is to provide some financial security for your family after you die. Following from this, important factors to consider before purchasing life insurance include your current or existing financial situation and the standard of living that you would like your dependants or survivors to maintain after you have passed on. Costs to consider include the cost of your funeral as well as outstanding medical bills. Should your dependants have to relocate, you might want to consider that as well. On-going expenses such as day care for minor children, mortgage payments and in the case of young adults, tertiary education should also be taken into account.
Who needs life insurance?
It is important to invest in life insurance while you are young (to benefit from time and compound interest on money invested) and healthy (to prevent incurring high costs as a result of underwriting).
While everyone needs life insurance, there are a few exceptions. These include people who have successfully raised their children and are now living on their own and youngsters who are single and responsible only for themselves. Those that have sufficient financial resources to support remaining family members after they have passed on also don’t need life insurance.
Regulating the financial services industry in South Africa
South Africa has very high penetration of life insurance, with premiums averaging around 11% of gross domestic product over the last five years. This can be attributed to the state providing limited social security as well as a well-established and sophisticated life insurance sector. The affluent sector significantly contributes to overall premium growth, but growth in the mass market is lower, in the last year or two markedly so as a result of strikes, unemployment and weak growth in disposable income. However, lower income consumers present a significant growth opportunity due to them generally being under-insured and insurance companies are increasingly targeting these markets, as well as other opportunities for growth in the rest of Africa, India and Southeast Asia.
Other regulatory interventions
Some recent regulatory interventions, some of which are still being discussed in view of finalising it for implementation, are aimed at addressing challenges that remain despite existing regulation. However, it is also aimed at ensuring a sustainable and more accessible financial services sector in South Africa. The first piece of legislation currently under discussion is the Financial Services Board’s Retail Distribution Review (RDR), aimed at addressing challenges that remain despite significant progress achieved through the Financial Advisory and Intermediary Services (FAIS) Act in increasing the professionalism of intermediaries.
The Protection of Personal Information (PoPI) Act will impact how the financial services industry handles consumers’ personal information, including financial information.
Retail Distribution Review (RDR) and Treating Customers Fairly (TCF)
The Retail Distribution Review (RDR) as proposed by the South African Financial Services Board (FSB) and currently being discussed with and among industry stakeholders in view of implementation as soon as 2016, emphasis the need for brokers to review their core functions and competencies to ensure that they do not lose touch with their clients. They should also up-skill themselves on the technicalities of the business and keep abreast of new methodologies of delivery and technology for customer communication.
The RDR is aimed at improving disclosure to clients and to mitigate conflicts of interest as well as concerns about poor customer outcomes and mis-selling of financial products. These challenges remain despite significant progress achieved through the Financial Advisory and Intermediary Services (FAIS) Act in increasing the professionalism of intermediaries. The proposals of the RDR are also aimed at giving retail customers confidence in the retail financial services market as well as trust that product suppliers and advisers will treat them fairly.
According to the FSB’s proposal document, the RDR represents a new approach to regulating market conduct in the financial sector that will see prudential and market conduct regulation being separated with the latter being informed by the Treating Customers Fairly (TCF) framework.
Over the long-term, it is envisaged that the proposals contained in the RDR, that centre around proposals relating to types of services provided by intermediaries; proposals relating to relationships between product suppliers and intermediaries; as well as proposals relating to intermediary remuneration, will create a more sustainable market.
The RDR wants to ensure that consumers of financial products have a clearer understanding of what advice or services they are getting, how much these will cost as well as how it will be paid for, and to provide them with confidence that their financial adviser is sufficiently qualified to provide suitable advice and that he or she is acting in their best interests. It should also assist in reducing current negative perceptions associated with the financial advice process while encouraging people to seek financial advice.
Treating Customers Fairly (TCF) wants to ensure that fair treatment of customers is embedded in the culture of financial firms. It speaks to the ‘asymmetry’ of information between the consumers of retail financial services and financial institutions that makes consumers of such services vulnerable to unfair treatment and exploitation.
Financial services have significant amounts of expertise and resources to design products, but consumers do not have (access to) the same expertise and resources when making decisions about and entering into financial transactions. This results in the consequences of ‘unfair treatment’ or poor decision-making lingering on, lasting many years after the transaction and often resulting in financial hardship. Low levels of basic and financial literacy increase the risk of consumer exploitation in South Africa.
Six TCF fairness outcomes are defined in the FSB’s 2011 document titled ‘Treating Customers Fairly, The Roadmap’:
1: Customers are confident they are dealing with firms where fair treatment of customers is central to the firm’s culture.
2: Products and services marketed and sold are designed and targeted to meet the needs of identified customer groups.
3: Customers are given clear information and are kept informed before, during and after contracting.
4: Customers receive suitable advice that takes account of their circumstances.
5: Customers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and what they have been led to expect.
6: Customers do not face unreasonable post-sale barriers to change product, switch provider, submit a claim or make a complaint.
The Protection of Personal Information (PoPI) Act
Modern technology has made it possible to access, collect and process high volumes of data at a high speed, leading to the risk of this information being sold, used for further processing and/or applied for other means as well. In the wrong hands, this capability can harm individuals and companies. The Protection of Personal Information (PoPI ) Act was designed to protect individuals’ right to privacy and abuse of their information.
The purpose of the Act is to ensure that all South African institutions collect, process, store and share another entity's personal information responsibly, while it also holds them accountable should they abuse or compromise this personal information.
The legislation should, however, be interpreted against the responsibility of an individual to protect and take care of their own personal information in the information age. With quite a significant amount of personal information published on public platforms such as Facebook, LinkedIn and Google+, it could be challenging to accuse a third party of sharing or compromising your personal information.
Examples of "personal information" for an individual include your identity and/or passport number, your date of birth and age, financial information, information about your health, your contact details as well as your gender, race and ethnic origin, marital or relationship status and family relations as well as your criminal record. The key lies in information being used in combination so as to enable a clear link between the information and it belonging to a specific individual.
While South Africa is ranked third in the world in terms of financial market development in the World Economic Forum’s 2013/2014 Global Competitiveness Index (GCI), much still needs to be done to restore South African’s trust in the financial services industry and insurance products, including life insurance. Compliance to the Retail Distribution Review (RDR) and its principle of Treating Customers Fairly (TCF) will go a long way towards ensuring a healthy financial services industry which all South Africans trust and in which they enjoy equal participation.