The insurance industry has had a ‘good pandemic’, with many people becoming more aware of the value of protection. Life insurance has increased as a priority among consumers worldwide, and while new sales were lower due to economic uncertainty, we’ve also seen lower rates of policy cancellation and lapsation. This is certainly good news for the industry, where traditionally life insurance is sold, not bought.

But while the worst of the pandemic seems to have eased, we’re still seeing its effects in key areas. One of these is Group Insurance – that is, the purchase of life, disability, critical illness, funeral and other risk policies, sold on a group basis to a retirement fund, employer group, or other group.

What’s happening is that the excess deaths caused directly or indirectly by Covid have seen insurers incur greater claims and higher mortality rates than normal. As a result, we’re seeing premium increases – and some of them are dramatic.

Our own staff policies incurred a 30% increase in premiums, and we had no choice but to accept the large increase to retain the current benefit structure. As we are a ‘cost to company’ business, which means employees pay for these benefits themselves, our staff have effectively experienced a drop in their take-home pay.

And we got off relatively lightly. Some large retirement funds have seen their premiums doubling, or in one case, even tripling. Our clients find these situations unacceptable and unfair, and we agree with them. It certainly feels like an overreaction on the part of the insurance industry. As one large retirement fund pointed out, more than 90% of their membership is fully vaccinated, and they can’t understand how their insurer can justify a doubling of the Group Insurance premiums on a forward-looking basis.

So, what’s going on?

The South African Group Insurance market is usually highly competitive. Many brokers and intermediaries earn their keep simply by getting other insurers to quote for a particular group or scheme. There’s almost always someone that’s trying to grow market share or taking a more positive view of the risk characteristics of the particular scheme. So, the cover moves to a new insurer (or the incumbent matches the lower price), the scheme saves money, problem solved. That’s not happening right now.

As intermediaries, we’re remunerated mostly by commission on the premiums paid. So, if we do nothing, our income goes up when premiums go up. This creates a misalignment of our interests and those of our clients and members. 

The enormous increases we’re seeing right now are impacting the Group Insurance market much more than the Individual market, where premiums are guaranteed, at least for mortality risks. This is concerning, because the payers of Group Insurance premiums are ultimately the ordinary members of Retirement Funds and the employees of companies.

What are we doing about it?

For a start, we won’t simply accept higher commissions from insurers because of premium increases without doing extra work.  

Secondly, we are requiring insurers to justify their increases actuarially through historical claims experience and forward-looking projections. We carry out our own Covid-modelling, using our actuaries’ models, but with assumptions on vaccination rates and prior infection based on the client’s situation. We will need a lot of convincing and detailed analysis before we accept that premiums need to be increased to the extent being quoted.

We are also providing these services in collaboration with smaller intermediaries and third-party brokers, so that their clients get the same level of assistance.

Thirdly, we are working closely with the larger funds and clients to implement a much greater degree of self-insurance or alternative means of transferring risk. In normal times, the Group Risk market works well, and it’s often not worth the effort even for large schemes to establish a self-insurance or risk transfer mechanism. With premium increases of hundreds of millions of Rand, however, that equation changes dramatically.

One of the greatest challenges facing the South African retirement funding industry is the fact that few employees accumulate enough savings to be able to retire with the same lifestyle they enjoyed during their careers. With risk costs increasing drastically - and in our view, excessively - it’s our duty to ensure that our members’ interests are protected, ahead of those of the shareholders of enormous financial institutions.

Disclaimer: The information in this communication is for information purposes and is not intended to be detailed advice described in the Financial Advisory and Intermediary Services Act. The fund, administrator and trustees cannot be held liable for damage or loss suffered as a result of any action that you take based on the contents of this communication.