Risk products vital for financial inclusion and resilience
The 2019 Sanlam Benchmark Survey – South Africa’s leading annual survey of the retirement industry – has revealed that, for many employers, group risk fees rose by upwards of 50% over the past few years as a result of a deterioration in claims experience across the industry. A combination of factors – from market-wide pricing practices, worsening national health and taxation changes – has led to the increase in costs which may ultimately result in certain group risk products, like disability cover, becoming unaffordable. Sanlam believes the industry is at a tipping point and is calling for urgent collaboration and action from all stakeholders.
Group risk products contribute immeasurably to the financial resilience of retirement fund members by covering them for disability, dread disease and offering income protection and life insurance. They fill a vital gap in South Africa where retail risk products are not widespread in the middle market and are largely absent at the lower end of the market.
Michele Jennings, CEO of Sanlam Group Risk says as part of its annual survey, Sanlam asked employee benefits (EB) consultants to identify dominant trends in the group risk industry. They noted: 1) increases in funeral cover, 2) increases in rates and 3) the introduction of severe illness benefits. Over half of those surveyed had experienced large rate increases in the last three years, and 1 out of 5 saw more claims being repudiated.
Jennings says, “We’ve seen steep rate increases – sometimes up to 50% – and a firming up of rates across providers. The increases were partly a correction after competition drove prices for this commodity down in the past, but there were many other contributing factors.”
A key contributor, she says, was just how risky South Africa is as a nation, “We have the unenviable title of being the world’s ‘unhealthiest country’ (Indigo Wellness Index) and sixth ‘drunkest country’ on earth (World Health Organisation). We also have the most drunk-driving deaths in the world. A risky population is expensive to insure.
“Consider this. In Australia and the USA, the cost of disability products led to some of them being withdrawn from the market. These countries are considerably less risky than South Africa, so the fact that things became too expensive for these nations, makes the issues back home even more worrying,” said Jennings.
Also contributing to the hikes were:
One of the biggest concerns raised in the 2019 Sanlam Benchmark Survey – is counter-intuitive understanding that our workforce may well be ageing – despite South Africa having a young population. Jennings says new jobs aren’t being created at the scale required to absorb young people. That has the knock-on effect of the average age of the employed South African workforce steadily rising. “This means worse morbidity and mortality rates as the workforce ages – with a 2-10% year-on-year deterioration possible. The young subsidise the old and we don’t have as many young people in the system anymore.”
The decline in national health: South Africans scored exceptionally poorly in the Indigo Index for obesity, alcohol use and life expectancy, amongst other factors. Plus, our public health facilities are deteriorating. The outcome? About 84% of South Africans have very few affordable healthcare options. This is likely to affect the health of our working population, especially those reliant on public healthcare.
Policy changes: The PHI Tax Treatment changed the tax treatment of disability income replacement policies in 2015. While before, premiums were deductible and benefits were taxable, now it’s switched to premiums no longer being deductible and benefits being tax-free. The unintended consequence? Increased claims incidence – especially for claimants above the tax-threshold – and little incentive for individuals to return to work.
Jennings said these factors have combined to create a tipping point in the local group risk market. “We are urging stakeholders to work together to find a way to sustain the financial inclusion that group disability products provide. We need to provide meaningful cover at sustainable rates. We’re in a new normal that requires new thinking. The onus is on all stakeholders to be a part of finding the solutions we need.”
About the 2019 Sanlam Benchmark Research Report
The 2019 Sanlam Benchmark research is South Africa’s most comprehensive retirement funding research, which is freely shared with the public in order to enable better decision-making by all concerned stakeholders. It represents the iteration of a process that began in 1981. After 39 years, the Benchmark survey continues to play an integral role in identifying trends, uncovering issues and setting the precedent for a nationwide industry standard.
The research engages retirement funding stakeholders to understand the drivers of better financial outcomes. This year, interviews were conducted amongst 100 principal officers and trustees of stand-alone retirement funds and 100 key liaison persons at participating employers. A sample size of 100 interviews was retained for each survey. There was a significant 78% and 54% year-on-year participation in the standalone and umbrella funds surveys, respectively.
Interviews with principal officers averaged approximately 70 minutes in duration, and interviews with participating employers were about 55 minutes each. Fieldwork took place between 18 February and 28 March 2019, across Johannesburg, Cape Town, Durban and Pretoria.
The theme for this year’s report:
In her foreword for this year’s report, Acting Sanlam Employee Benefits CEO Jocelyn Hathaway said that despite the renewed energy and hope from the elections, South Africa remains challenged by three structural inefficiencies, namely: unemployment, education and healthcare.
As a result, Hathaway highlights that this year’s Benchmark research takes a deep dive into the concept of financial resilience and a key insight derived from the studies was that income and education are two mutually dependent variables with the biggest impact on financial outcomes for individuals. The research in no way suggests that educated professionals always make the right financial decisions. So, it’s up to all stakeholders in the Employee Benefits industry to actively help future-proof South Africans’ retirement savings.
As part of the financial resilience focus, the research explores cybercrime for the first time, with the Sanlam team developing the inaugural Cyber Resilience Benchmark. This shows shifting trends and how Benchmark research keeps abreast with and actively aims to mitigate the key threats it helps to identify.
The theme for this year’s report is Enabling Financial Resilience.
The research is available via www.sanlambenchmark.co.za