Life and death
South Africans’ rising insurance risk
In the face of improved life expectancy and an increasing burden of disease, an overemphasis on life insurance over ‘survival’ cover may be detrimental to South Africans
South Africans may be living longer — but they’re getting sicker and spending more years in poor health, recent claims statistics from some of SA’s big life insurers suggest. Problematically, South Africans tend not to be properly insured for these rising health risks: life cover, which pays out only on death, remains the dominant long-term insurance product.
In rand value, payouts for death still far exceed those for "survival" claims at Sanlam, Liberty and Momentum — three of SA’s big insurers. In 2018, life claims for Sanlam accounted for R3.25bn (83%) of its total R3.9bn long-term insurance payouts.
Similarly, Liberty paid R3.3bn (70%) of a total R4.7bn for life claims, and Momentum paid R3bn (75%) of R4bn.
But a breakdown of the total number of claims shows most settlements are paid to "survivors" — to those suffering from illness or managing the medical consequences of traumatic events. In the case of Liberty, for example, almost 63% of the total number of claims the insurer settled went to survivors, says Ursula Torr, lead actuarial specialist at the company.
In short, people tend to insure for death at a much higher value than they do for survival.
"According to our ‘#RealityCheck Consumer Survey’, South Africans misjudge the risks they face," says Elmarie Samuel, product marketing specialist at retail life insurer FMI. "They underestimate their risk of injury or illness, and overestimate their risk of death."
South Africans misjudge the risks they face. They underestimate their risk of injury or illness, and overestimate their risk of deathElmarie Samuel
The result is that life cover is sold more than twice as much as disability cover, says Samuel.
Janet Hugo, a certified financial planner and director of Sterling Private Clients, has found the same. She says younger people who have group life insurance through their employers tend to be overinsured for mortality: they have "too much life cover, no income replacement, and an insignificant amount of dread disease or critical illness cover".
This is problematic, given the age at which such products are often most required. Sanlam, for example, paid most disability claims to clients aged 36 to 55, and most sickness claims to those aged 26 to 45. In Momentum’s case, most disability claims were paid out to clients aged 40 to 59.
Critical illness, too, is prevalent among clients of working age. Most of Momentum’s critical illness payouts for women went to those in the 40-49 and 50-59 age brackets (about 75% combined), while most for men went to those aged 50 to 59 (35%).
Also problematic, says Samuel, is that clients typically opt for disability cover as a lump sum for permanent disability rather than in the form of income protection, which typically pays when people are temporarily unable to work. But, says Samuel, 88% of the claims FMI received last year were for temporary incapacity, lasting less than three months.
"This means most South Africans are only covered for permanent risks, leaving them dangerously exposed to the risk of a temporary injury or illness."
The insurers say the nature of the disease burden facing South Africans seems to be shifting slightly. While most claims are still for the "big four" — cancer, coronary artery bypass, heart attack and stroke — incidence of other disorders seems to be rising.
Increases in claims for dementia, motor neuron disease and Parkinson’s disease may seem statistically insignificant — Momentum, for example, says claims for these diseases have only increased by about two percentage points since 2015 — but insurers indicate that, for them, there is cause for concern.
George Kolbe, Momentum Retail Life’s head of marketing, says: "Even though the ‘big four’ still represent about 70% of our total critical illness payouts, there are many other critical illness claim events that fall outside of these."
What it means
In covering themselves primarily for death and permanent risks, South Africans are ‘dangerously underinsured’ for temporary incapacity
In Sanlam’s case, diseases affecting the nervous system and sensory organs were the second-biggest reason, after cancer, for disability payouts last year. They accounted for 23% of claims — up from 9% the previous year. Just two years before, conditions such as motor neuron disease did not feature among top reasons for claims.
Mental disorders have also increased marginally as a standalone reason for claims, according to Sanlam chief medical adviser Dr Marion Morkel. They were the third-biggest reason for income-protection claims (13%) and fifth-biggest for disability claims (11%) last year. But while this increase was marginal, Morkel says there’s been a huge increase in such disorders reported concurrently with other illnesses.
Then there are lifestyle-related diseases, such as diabetes. Morkel says the disease itself doesn’t headline claims, but it is contributing to clients’ susceptibility to other critical illnesses, including cancer.
Liberty’s lead specialist medical officer, Dr Thabani Nkwanyana, says that because of people’s increasingly sedentary lifestyles, diseases that were traditionally seen as ailments affecting older people — arthritis and knee problems, for example — are increasingly being diagnosed in young people, as they are "carrying a lot of weight around".
He says: "We are also seeing people under 40 having an increase in claims like prostate cancer. Whether screening is a huge driver or if the diseases are becoming more prevalent, I think it’s a question that still needs to be answered."
Insured for survival
Liberty’s lead actuarial specialist, Ursula Torr, says it’s becoming clear that people are living longer with their burden of disease than they did in the past, in part because of medical advances.
But that means they need to shift their financial focus, and plan for survival costs rather than focusing exclusively on death benefits.
So how does one close the gap?
Greg Knowlden, a certified financial planner and wealth manager at Sterling Private Wealth, says the average group scheme offered by employers tends not to include severe illness cover because it’s expensive. So the first stop is to ascertain whether your scheme provides such benefits and whether these are sufficient for your needs. If you are part of a scheme that doesn’t provide enough — or any — of the living benefits, you need to look at getting these benefits in your personal capacity.
Knowlden says it’s important to pay attention to what is covered by the critical illness product. You need to consider at what severity or progression of illness your cover will kick in, whether the benefits are standalone (the amount paid for one benefit does not affect potential payment of other benefits in future), and whether your cover should be biased towards the “big four” critical illnesses, with smaller percentage payouts for other diseases.
There is no one-size-fits-all prescription for an insurance portfolio, says Madri Jacobs, a senior certified financial planner at Sanlam. Your needs, given your life stage, may require you to prioritise some benefits over others. For instance, someone with debt and family obligations may need more life cover than a younger person with less debt, for whom income protection would likely be more important.
She does, however, advise that you get critical illness cover while you are still healthy and insurable; and that you disclose medical and other material information upfront.