Eugene Kruger, Head of Risk Products at Metropolitan
COVER: Where does the growth lie for risk products and how should we go about achieving new risk premium, rather than just premiums churning around the industry?
The most significant threat of the financial crisis has been the increase in lapses or churning, mainly due to financial constraints. Cash-strapped consumers find themselves in a position where they were having to choose between meeting their debt repayments or paying their risk insurance premiums.
For 2009, risk products actually did fairly well and I anticipate similar figures for 2010. If anything, savings products struggled to gain momentum after the financial crisis. Consumers saved less (which could be attributed to lower disposable income), but many preferred to keep their risk policies in force.
New business figures for risk in the industry may be slightly misrepresentative because of the high levels of churn versus actual new business. If the churning is removed from the total new business of risk products, the picture may not be so rosy with very actual new business being written.
COVER: Has life cover become commoditised and more acceptable as a direct sales product?
Life cover has definitely become commoditised and the only competitive edge or differentiating factor is price. As a result, margins have been squeezed and there is very little margin left in selling life cover. To some extent, lump sum disability cover has also become commoditised.
The potential growth in selling risk cover seems to be in the non-commoditised supplementary or rider benefits, like critical illness, impairment and income protection where the margins are also generally bigger. The approach should be to meet the primary need for life cover, but supplement this with meeting other risk needs, like protecting against loss of income.
There has been a lot of innovation in terms of benefit definitions, grouping of benefits and packaging; for example, some critical illness benefits have catch-all clauses that ensure consumers are covered even if a new disease is discovered. Another example is the advent of combination benefits where two or more different benefits are combined and priced at a discount compared to what a consumer would have paid if the products had been taken separately.
COVER: Where does the competitive edge lie in risk business and what should advisors focus on during 2011 to increase their income and survive the pressure on their income?
Studies have shown that, despite good insurance penetration relative to overseas markets, many South Africans are still underinsured in terms of risk cover. With that said, there are huge growth opportunities in the risk space with a fairly untapped market for real new business opportunities. It may be easier to sell to those who have risk cover already, but the opportunity also exists with those who do not have any, or very little, risk cover. If these consumers can be convinced of the genuine need that exists for protection, they will realise that it is in their best interest to act on this need.
An essential ingredient to maximise opportunity and retention in the risk arena is to establish solid relationships of trust with your clients by conducting a comprehensive needs analysis and doing a thorough job of mapping appropriate solutions to the identified needs, all the while ensuring the customer truly understands the need addressed by the proposed product. If you can get this formula right, your clients will be less inclined to move from one product to another or move to another financial advisor. There will be less churn in the industry and you will preserve more of your business.
Innovation of direct sales of life cover in South Africa versus UK
Life cover sold directly to clients via telephone or the internet is starting to become more popular and we are constantly seeing new initiatives in this space.
There have also been attempts at ‘over the counter’ or ‘off the shelf’ sales of life cover in retail shops, but none have been really successful in South Africa. Compared to the UK direct sales market, which accounts for about 20 – 25% of the total life insurance sales, this figure is less than 1% in South Africa.
When considering whether South Africa will catch up to the UK on this trend, we have to bear in mind that there are significant differences between the two markets. The UK is far more liberal in terms of the cover levels they are prepared to allow without physical medical underwriting. What certainly helps in the UK is the fact that they have a more sophisticated medical care system with access to medical records via the National Health Insurance (NHI) system, so it is much easier for them to check the medical records of any one person on the central database. The risk pools are not as diversified as in South Africa and HIV/AIDS is much less of a threat. The propensity of the market to buy life cover over-the-counter is far higher in the UK than in South Africa.
The attempts to launch over-the-counter direct sales risk cover in South Africa may perhaps have been ahead of their time as the market was not ready for it and certainly not sophisticated enough to tap into it. This is not to say that it will never happen. The ‘silver bullet’ might be discovered tomorrow and it could change the way risk products are sold forever.
Playing by the rules
While there are no exciting distractions like the Soccer World Cup in 2011, there are a number of significant milestones ahead that are likely to make next year an eventful one for the retirement industry.
We will probably see some rule changes and different styles of play and indications of how the whole playing field may change.
Change of Rules
Comments for the Medium Term Budget Statement indicate Regulation 28 will be revised early in 2011. Two likely outcomes are the requirement that funds apply these prudent investment guidelines at a member level and further relaxation of offshore investment limits.
This hopefully means the ability for younger members to access higher returning asset classes. The expectation is that we are in for a period of muted but volatile asset returns as a result of a lower inflation and the world emerging from the global crisis. There may be a push for more exotic investments in this environment to improve returns or reduce volatility and investment risk. Additional focus will be on the costs charged in investments and products as they make up a greater proportion of the total return.
Indications are that, in the face of global investment inflows into South Africa, there will be a greater allowance to invest offshore to counterbalance these inflows which has significantly strengthened the Rand. Most asset allocation models indicate a 30% offshore exposure is reasonable. This means for the first time portfolio managers will need to consider the liquidity of their offshore arrangements to make tactical allocations to extract performance. Indications are that there will be a greater focus on the ability to invest in Africa. This is largely hampered by a lack of investment opportunities. The definition of what constitutes an African investment is also important.
Style of Play
Developed markets monetary policymakers likely to keep interest rates at current minimal levels to try to stimulate investment growth given their subdued recovery. Developed market investors will therefore continue to seek out stable investment environments with reasonable outlooks offering higher returns such as South Africa. This money, further fuelled by Quantitative Easing, flooding into our bond and equity market will continue to drive returns despite the fact that South Africans would be uncomfortable with valuation levels on a historic basis. The difficult investment call will be when the trend to invest in higher yielding markets reverses and there is consequently a fall in demand for these assets. Asset managers need to be able to invest considering sentiment, and it will be harder to pick winners on underlying fundamentals.
South African investors will try to maximise their offshore investment allocation to mitigate this risk. But, given subdued returns in developed markets, investors in this new paradigm will look to the emerging markets in addition to the traditional developed markets.
The effect of the low interest rates has a significant effect on retirees. They are not able to secure the equivalent income as a result. Many may choose to delay purchasing a life annuity until the interest rate cycle turns in their favour.
Changing the Playing Field
All indications are that we should receive a new position paper on social security and retirement reform late in 2010 or early in 2011. This seems to have taken a back seat to the National Health Insurance (NHI) debate. However we have seen comments that preservation is needed to improve the overall savings rate of South Africans. Short term policy fixes to this may be the removal of the means test to the state old age grant. Many South Africans in lower income brackets are spending accumulated retirement savings close to retirement as these savings reduce their claim on the grant.
Existing provident funds allow a full cash payment at retirement. It may be that the distinction between provident and pension funds (where some annuity must be purchased) be removed. The ability to encash the full benefit when changing jobs remains the key problem. While there is clearly a need for access to savings around this time, it would be preferable to pay the cash benefit out on a staggered basis.
Administrators have responded to the retirement reform aspiration of cheaper solutions by trying to direct clients into their umbrella funds. A recent industry study into the cost-efficiency of the South African system found that stand-alone funds compared favourably to international peers; however, umbrella funds could achieve further efficiencies by increasing members under administration.
These changes will take some time to debate to ensure the optimal solution is reached. In the interim, South Africans will need financial advice to help them navigate the changing scenery. Advisors are likely to be faced with a more challenging environment on one hand, but also client and regulatory pressures on their margins in a lower yielding environment.