Disability a Rich Source of Future Business

An independent survey conducted by True South Actuaries & Consultants, and commissioned by FMI Income Protection Specialists in March 2013, revealed that the South African disability insurance gap currently stands at R11.1 trillion. That means in South Africa, almost 2 million self-employed and commission workers are dangerously under-insured when it comes to disability.

 “Temporary disability is the thing that most self-employed South Africans will need cover for. Without properly insured income streams thousands of people, particularly self-employed individuals, business owners, their employees and dependants could find themselves in catastrophic circumstances.”

True South quantified the disability cover gap at 60% which means only 40% of the required disability cover is in place. Putting that in rand terms, the insurance industry has sold R7 trillion of disability cover and the market needs R18 trillion. That’s an R11 trillion shortfall.

Currently the three providers of disability cover are government, employer group schemes, and retail companies. Realistically, the retail sector is the only one of these three that can or will cover this gap. Currently retail cover is only R2 trillion. That needs to become R14 trillion to cover the gap, which is a seven-fold increase.

“The truth is that temporary disability is as much as 40 times more likely to occur than permanent disability. 90% of disability claims last for less than 90 days and yet we are only giving South Africans 7% of the temporary cover they need.”

“Temporary disability does not only cover the serious illnesses or accidents we typically associate with disability, but includes common conditions such as pneumonia, bone fractures, mumps, sprains, and strains. We have established actuarially that life and critical illness is oversold compared to disability cover, and, within disability, permanent disability cover is oversold compared to temporary,” explains Brad Toerien, CEO at FMI.

Another important factor in the disability space is lump sum payments versus income replacement benefits. True South’s assessment is that new sales of permanent disability cover indicate a heavy skew in favour of lump sum benefits. In 2011, only 17% of all permanent disability sold was income protection.

This points to consumers buying lump sum benefits for use as income replacement. This is inherently risky, because many individuals do not have the skills or the discipline to manage large amounts of cash (what some call ‘the Lotto winner effect’). With a lump sum policy, a number of risks are being passed to the individual including interest, inflation, longevity, and currency.

 “The important point is that if a client gets a lump sum pay-out, they are taking on major investment and inflation risks, whereas with a monthly income payment, that risk sits with the industry, which is where it should be. Insurers should not be passing these types of risks onto unwitting consumers,” says Toerien. “Even if the individual uses the lump sum to purchase an annuity and eliminate some of these risks, they then face additional fees and commission. In addition, income protection premiums are tax deductible and by only purchasing lump sum, consumers are not getting this benefit.”

In conclusion, True South estimates that without changing the size of the overall insurance market, the income protection market in South Africa should be nearly 10 times bigger – it should grow from R57 billion to R524 billion which represents a very big business opportunity for advisers and the industry as a whole.

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