By Clyde Parsons
IN SOUTH Africa’s complex financial landscape, life insurance stands as a crucial pillar of financial planning for individuals and families. However, the sector faces significant challenges due to high inflation and the rising costs of living. The insurance industry must continually adapt to these economic pressures to ensure policyholders receive the benefits they expect without undue financial strain.
Understanding the dynamics: Inflation and insurance premiums
Inflation, the rate at which the general level of prices for goods and services rises, erodes purchasing power over time. South Africa’s inflation rate averaged around 5.9% in 2023, a significant factor influencing the financial planning of households and businesses alike.
Unfortunately, historic life insurance premiums often increase at a rate that exceeds inflation, sometimes significantly. When we face a global cost of living crisis, this squeezes what we have available to spend on insurance. If premiums were set to increase unsustainably, maintaining insurance becomes near impossible – a reality a number of older South Africans are facing now.
In a depressed economy, where clients prioritise basic living costs and tangible assets over intangible purchases like insurance, insurers and advisers need to focus on delivering and demonstrating value for money. We simplify and customise our offerings to better support the advice process and shift the discussion from a commoditised premium-based focus to one centred on how our risk solutions meet people’s needs.
Technology plays a critical role in simplifying the decision-making process, especially when consumers are preoccupied with just getting by. This means we are (and have been) able to offer our clients not only more cover, but premiums that don’t necessarily increase unsustainably.
Quantifying certainty
At the heart of every insurance contract is the exchange of uncertainty (risk) for certainty (cover). Policyholders pay a predictable insurance premium in return for an undertaking by the insurer to cover an uncertain, possible future event. Several components underpin the certainty life insurance policies should offer clients and advisers:
Clients need to know how much they’ll pay for their life insurance cover over time and how long premium projections and increases are guaranteed (the guarantee should apply to the entire premium increase). Advisers should consider behavioural factors like participation in loyalty programmes and economic conditions that may affect premiums during the guarantee period.
A mismatch between clients’ expectations and the actual performance of their product often drives dissatisfaction and complaints. Despite industry standards and a focus on treating customers fairly, there is still room for improvement, especially post-sale. Clear, simple policy documents and personalised content can bridge this gap, ensuring clients know what is and isn’t covered, and how their policy and premiums work. Premium increases are an area clients have not always understood because of the names given to certain increases;
For income protection needs, it’s crucial to guarantee both the lump-sum value of the client’s cover and the monthly recurring income amount that the lump-sum cover can buy. Newer generation products offer clients the flexibility to choose between the lump sum and a guaranteed income amount at the point of claim, providing maximum value and certainty.
Futureproofing the insurance sector
The impact of rising premiums, driven by inflation and sector-specific factors, necessitates a shift in how insurers and advisers present their value propositions to clients. It’s imperative for insurers to ensure clarity and predictability in their policies. This involves transparent communication, clear policy documentation, and adaptable products that meet clients' evolving needs.
* Parsons is a chief innovation officer at BrightRock.
PERSONAL FINANCE