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Are we paying too much for group insurance?

In the desperate times of the cascading waves of Covid-19, South Africa’s life insurers, and especially group insurers of employee-based schemes, played a critical role in ensuring financial inclusivity by providing insurance cover to claimants.

Group policies provided financial assistance to thousands of families who suffered the loss of their loved ones during the pandemic. Group insurers mobilised to remain operational without any substantial disruption as they switched to serving clients under work-from-home constraints. Record levels of claims were processed, and claims were paid.

But there have been unintended consequences.

Insurance premiums increased dramatically

Group insurers rapidly adjusted their pricing formulae to allow for the incredible uncertainty delivered by the anticipated and experienced record levels of claims. Insurance prices increased, with most (if not all) group schemes now paying substantially more for their cover than they did before the pandemic, and some are paying more than double.

This made sense when the likely future experience was unknown and claims were escalating at never-seen-before rates. Benefit consultants such as Alexforbes – and the industry at large – understood the need for the increases and supported their implementation to protect the interests of the millions of members who depend on group insurers for protection.

Death claims have greatly reduced

The Association for Savings and Investment South Africa released a media statement on 28 July indicating that the claims levels during the fourth wave decreased to near pre-pandemic levels.

Weekly death statistics from the Medical Research Council also show that the mortality rate in South Africa during the fifth wave during 2022 was close to the “normal” range. For individuals younger than 60 (the vast majority of members covered by group insurance), mortality has been in the “normal range”, even during the fourth wave at the end of 2021.

Yet, group insurers have been reluctant to waiver on their pricing despite the:

  • Higher certainty regarding the impact of the pandemic;
  • Widespread availability of effective vaccines; and
  • Substantially reduced lockdown requirements that signal a return to normal.

Covid-level pricing is no longer relevant

There remains a necessary conservatism on potential future mutations of the virus that require mitigation through pricing. However, prices remain seemingly excessively elevated as they reflect pandemic expectations of death claims to surface, but the actual claims have greatly reduced. Group insurance is typically renewable annually, so prices are set primarily with a one-year horizon in mind.

Interestingly, insurers have not adjusted pricing for annuity rates when providing longevity protection, with the general view that the mortality experience will return to the “normal” long-term trajectory. And annuity rates apply to the age group that are most at risk in respect of Covid. So why has the same approach not been taken for group risk rates?

Insurers also seem to be applying substantial weighting to the elevated pandemic claims experience to price cover for the year ahead, which may unduly prejudice paying customers by being unnecessarily cautious. If so, the insurers will benefit from massively increased profits as a result of Covid-level pricing that may no longer be relevant to the detriment of their paying customers.

This matters because, for most members, every rand spent on group insurance is a rand less invested for their long-term retirement aspirations. Therefore, it is absolutely critical that group insurance be priced both sustainably and competitively so that members can receive fairly priced insurance cover and optimise their retirement savings.

Most umbrella funds have insurers as sponsors

Standalone retirement funds have rapidly consolidated into commercial umbrella funds for most of the past decade. Four of the five largest commercial umbrella funds have insurers as sponsors. They can apply substantial influence at board level to drive business towards their own insurance companies either by limiting the number of insurers available through their umbrella funds or implementing structures to dissuade placement at other insurers.

Consequently, employers and members in such commercial umbrella funds may find limited appetite and ability for these umbrella funds to lower group prices. This is exacerbated when in-house benefit consultants are the primary engagement for employers in these funds.

Although often positioned as independent, in-house consultants invariably place most of their clients’ group insurance benefits with their parent insurance company, creating an additional barrier to the remediation of prices.

There are other forms of lock-ins with other providers, where insurance premiums and benefits are linked to rewards programmes.

Implement extraordinary decreases now

Alexforbes supported the need for the extraordinary increases applied by insurers over the past 18 months and assured our clients that insurers were pricing based on the expected mortality experience into the future.

However, there is sufficient information and experience now for insurers once again to act in an extraordinary manner, this time by implementing extraordinary decreases for the members of retirement funds.

Viresh Maharaj is the executive for strategy and customer experience at Alexforbes.

Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies.

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