Cape Times

How the insurance sector can adapt to economic fluctuatio­ns

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.