Jacques Magliolo
WHEN Albert Einstein said that imagination was more important than knowledge, the South African assurance industry probably thought he was talking about them.
The latest Financial Services Board statistics reveal shocking figures for 1993, heralding an industry-wide investigation by the LOA. In addition it highlights how assurers develop new imaginative schemes to sell policies. They do this despite knowing that a host of these policies will be surrendered with the first three years or lapse within the first nine months.
A policy lapses when the policyholder stops paying the premium and a policy is surrendered when the policy holder effectively cashes it in, usually getting back only his contributions without inflation being taken into account.
Among the numerous top assurers surveyed by the Registrar of Insurance, eight were selected to ascertain their financial strength within the R50-billion-a-year industry. Of these only one had a reasonable rate of policies surrendered or lapsed.
Fedlife’s total income for the year was R1,8-billion. This fell to R250-million after deductions for commission and management expenses. This assurer’s percentage of lapsed and surrendered policies at R12-million or 11,4 percent of total income is favour-able when compared to other assurers.
Southern Life and African Life both have a rate of just below 60 percent, while Liberty Life and Charter Life have rates of over 50 percent. Norwich Life managed to keep the figure down to 37,6 percent, Sanlam to 34 percent and SA Mutual to 26,6 percent.
Despite these unacceptable rates, assurers continue to boast that they have managed to increase new business under tough economic and business conditions.
For instance, in its 1994 annual report Southern Life chairman Thomas Chapman proudly claims: “It is pleasing to report that your company has had an excellent year.” Indeed, shareholders would be pleased to hear that the assurer issued more than 80 000 new policies during the period under review. The problem is, none of the negative aspects to these companies is ever brought to light.
One insurance analyst says: “Nothing is being done to limit the number of policies sold to people who simply cannot afford or have no need for them. While it is everyone’s right to own a life policy, brokers do not explain the intricacies of assurance to prospective clients.”
He says that most life assurers have targeted the lower income market and use fear to sell policies.
Graham Bailey, insurance analyst at stockbrokers Martin & Co says: “The quality of salesmen is questionable. They get paid a commission and obviously sell as many policies as they can.” He believes that salesmen should be paid after the average lapse rate.
“Looking at these figures, Liberty Life cannot be pleased,” he says, adding, “The company is bound to change some of its brokers.”
At 12 percent of total income, Liberty’s expenses are high, particularly when compared to SA Mutual (9,7 percent), which sold nearly five times as many policies.
With lapse and surrender rates as high as these, why do assurers continue to market themselves as “being there for you”, and “protecting your future?” What they actually mean is being there for the shareholder and protecting the value of the shareholders’ shares.
A look at a breakdown of total income earned during the year shows that these companies use policyholders’ funds to invest in the stock market and it is this exposure that ensures “their lack of concern towards the growing number of lapsed policies,” says a Cape Town-based analyst.
Bailey says: “The bull market run in equities has ensured that assurers’ assets are valued at above the inflation rate, while liabilities are revalued at the inflation rate.”