With the UK protection market continuing its trend of poor results, Herschel Mayers explains that the same glitches were experienced by the South African sector a decade ago
The 2007 Term & Health Watch survey, produced by Swiss Re, paints a bleak picture of the UK protection market. There has been little progress in closing the £2.3trn protection gap; income protection (IP) and individual critical illness (CI) policy sales have fallen (again); term assurance sales have increased only marginally; insurers have failed to promote the value of life assurance; and, consumers are becoming increasingly disillusioned.
To a South African reader, this picture may appear familiar. Between 1997 and 2000, premium growth in the South African life assurance industry, although positive, more than halved. With the growth of consumerism, policyholders had become aware of the shortcomings of their policies. Complaints to the Life Offices Association (a self-regulatory body in South Africa) increased and newspaper articles on the failings of protection policies were everywhere. Little innovation in the industry had led to its stagnation.
As in the UK market, the South African market is dominated by life, CI and disability cover. In South Africa, disability cover is not included as a condition within CI cover, rather it is sold as a separate benefit. While CI benefits cover the impact of a change in lifestyle following an illness, disability benefits cover outstanding debts. There is a separate need for disability and CI benefits and the cover required for each may differ. In South Africa, IP is provided largely by employers as part of a group benefit scheme.
Financial needs
Most life and CI policies provide cover for the whole life of the policyholder. Analysis of an individual's financial needs has shown that cover is needed not only for the outstanding amount on a term mortgage, but also for the lifestyle impacts of a CI, tax planning and expenses incurred after a life-changing event. These needs extend over the whole life of the policyholder. South African insurers offer limited guarantees on premiums - most policies allow insurers to review premiums every five or 10 years. There is significant medical testing at underwriting stage and most policyholders are required to undergo an HIV test before a policy is activated. This reflects the reality of the environment in South Africa.
Key problems in the South African protection market were inconsistent claims assessment; significant gaps in cover and inflexible product structures. Claims were often assessed on subjective definitions. For example, an assessment of total and permanent disability was based solely on the assessor's judgement of the insured's ability to perform his occupation. Without an objective set of criteria upon which to base decisions, the assessment of similar claims became inconsistent. To policyholders, the receipt of a benefit payment had become a lottery. In the press, dissatisfaction was apparent.
CI products, too, faced criticism. Initially, coverage of most products was limited to cancer, heart attack, coronary bypass and stroke. Body areas, such as the endocrine system, respiratory system and the urogenital tract, had been ignored completely. Policyholders who suffered a critical illness affecting these body areas soon realised that the impact on their lifestyle was as significant as the impact of cancer, a heart attack, or any other illness initially covered by CI. Unfortunately, this realisation was met by another - their CI product did not cover the illness. With medical advances, the detection and awareness of critical illnesses not covered by insurers increased. Declined claims became commonplace.
When the CI products did pay, they did so at the same level regardless of the severity of the condition. Policyholders were left in an unenviable position - they received no payout when they needed it most and too much payout when they needed it least. Policyholders had misunderstood or been misinformed of the cover provided by their CI products. The benefit did not meet the policyholder's needs.
Product design lagged behind the technological advances that would allow greater flexibility in servicing policies. Policyholders who wished to change their cover levels as their needs changed incurred large penalties or were forced to cancel their policy and reapply. Insurers' indifference to the needs of their policyholders led to poor service.
By 2000, it had become apparent that the South African protection market required significant change. The catalyst for the change was a new entrant to the market - Discovery Life. Discovery had been established in 1992 as a private medical insurer. It quickly established itself as the market leader by promoting consumer-engaged healthcare. In 2000, the company turned its attention to the protection market. It realised that the environment provided vast opportunities and that, if it could launch a product that resolved the flaws of existing products, a captive market awaited. In October that year, it did just that.
The focus of the product was objective claims assessment, full-body coverage, payouts based on lifestyle impact and policyholder flexibility. Other insurers initially resisted Discovery Life's approach. They argued against Discovery's use of medical definitions to assess disability and against the need for full-body coverage. But, with Discovery's sales soaring, their arguments were proved baseless. Resistance gave way to acceptance and, in April 2001, a second life assurer offered a "new generation" protection product. Today, most major product providers have changed their approach to protection in South Africa.
CI products now cover a wider range of conditions and body areas. The benefit payouts from these conditions are tiered so that the payout reflects the impact of the illness on the policyholder's lifestyle. For example, a claim for stage 1 cancer of a localised tumour would lead to a payout of 25% of the sum assured. This form of cancer can be contained and is, in the main, treatable. The impact of the cancer on the policyholder's lifestyle is limited, with the condition being temporary. A stage 3 cancer claim, where the cancer starts to spread to other parts of the body, would lead to a payout of 100% of the sum assured. This type of cancer would have a significant impact on the policyholder's lifestyle, with the policyholder likely to require intense chemotherapy, a lengthy rehabilitation period and support to overcome the emotional distress caused by the condition.
New generation
The new generation CI products provide multiple benefit payouts. A policyholder can claim for a subsequent critical illness regardless of whether the illness affects the same or different body area. Where a condition is progressive, further benefit payments are made as the condition worsens and the impact on the policyholder's lifestyle becomes more severe.
Insurers identified the need for CI cover to be extended to the children of the lives assured. A child's illness is likely to affect the lifestyle of the parents. Parents may need to give up work to care for their children or will incur expenses in adapting their lifestyle to support the child.
The assessment of disability has also changed. Assessors no longer rely solely on occupational definitions. Disability is assessed relative to objective medical criteria that define when a person is disabled. In addition to this, the ability to perform activities of daily living (ADL) have been introduced in the assessment process. A final criteria used to assess disability is the loss of income experienced by the policyholder. A combination of occupational definitions, medical criteria, ADLs and loss of income lead to a fair assessment of disability.
Changes in product design have led to more flexible policies. Policyholders may change cover levels, add or remove benefits or adjust premium payment patterns at any time during the term of the policy. An entire family (husband, spouse and children) can be covered by the same policy. There is also flexibility in terms of premium payment patterns. Policyholders can pay level premiums, premiums that increase with inflation or premiums that increase with age.
The changes in the market have benefited both consumers and insurers. Consumers have benefited from products that better meet their needs and insurers have been rewarded through increased sales. The number of policies in force has increased from about 2 million at the end of 2001 to about 4.8 million at the end of 2005.
South Africa now has a thriving and significant protection market. In 2005 life insurance premiums in South Africa were 10.8% of the country's GDP. This compares to 8.9% in the UK. Only Taiwan had a higher ratio than South Africa. The South African protection market is competitive. It is dominated by five large players. A number of smaller companies operate in the direct market and niche areas.
The South African market has long been the pioneer of innovation of protection products. The idea of a CI product was conceived in South Africa. The first CI product was launched in South Africa in 1983. It was only in 1986 that CI products appeared in the UK.
In the last seven years, South African providers have led a new wave of innovation. This innovation is beginning to appear in the UK. Prudential's Flexible Protection Plan was an example of this innovation. The experience in the South African market has demonstrated that this type of innovation is required to close a protection gap, increase sales and change the attitude of consumers towards protection products.
Herschel Mayers is chief executive at Discovery Life
