Don’t under-estimate the worth of the non-breadwinner

Many people believe that only the family breadwinner needs to have life, disability and severe illness cover. This view is fundamentally flawed, a financial planning professional says.

Craig Torr, director at Cape Town-based financial planning practice Crue Invest, says that just because the stay-at-home partner does not earn an income does not mean the family would not suffer financial loss if that person were to die or become disabled.

“According to our financial planning principles, we believe in preparing a joint financial plan for both spouses – irrespective of who works, who doesn’t, or how much each earns,” Torr says. “Regardless of income, qualification or career, the couple is running a joint household and is jointly responsible for the financial future of the family.”

Torr takes as an example a family of four, where the wife is the sole breadwinner and, by mutual agreement, the husband is a stay-at-home father to the couple’s two small children. The natural, and correct, assumption is that the wife would require assurance in the event of her own death or disability, Torr says. If she were to die, she would need her life cover so that  her husband could  maintain the family’s standard of living , invest for the children’s education and fund his retirement. If she were to become disabled, she would need her disability cover to pay her a monthly income until she reaches retirement age. And if she were to suffer a debilitating illness, she’d probably also require lump-sum severe illness cover to provide capital to cover the additional expenses.

“However, many couples fail to ask the question: what would happen to the working partner and children if something happened to the stay-at-home partner – in this case, the father?” Torr says.

A  host of functions  would have  to be replaced, he says. The stay-at-home parent’s job description is likely to include performing household chores, grocery shopping, paying and managing  domestic workers, lifting children to and from school and extra-murals, liaising with schools and teachers, supervising homework, and preparing meals and school lunches.

“The reality is that a full-time father might not earn an income, but he does work. His role is the most important job on Earth,” Torr says. If the husband were to die, questions the breadwinner wife would need to consider are:

• Would I have to hire an au pair or a child-minder to take care of the children in the afternoons?

• Would I need to hire a tutor to help my children with homework?

• What would happen during school holidays? Would the children go into  holiday care, or could I rely on other members of the family to look after them?

• Would I need to hire a domestic worker (or increase domestic help) to prepare meals ?

• Would I consider cutting back on my hours of work in order to spend more time with my children?.

• Would I consider having my parents (or in-laws) move in with me to assist with the children?

Torr says: “Our society, in general, undervalues the role of the stay-at-home-parent, and this is never more evident than  in the field of financial planning. In the words of GK Chesterton, ‘How can it be a small career to tell one’s own children about the universe? How can it be broad to be the same thing to everyone and narrow to be everything to someone? No, a [stay-at-home parent’s] function is laborious, but because it is gigantic, not because it is minute.’”

The reality is that the loss of a stay-at-home parent is greater than anyone can  quantify, and you need to consider risk cover for that person too, Torr says.

Needs-matched cover for stay-at-home parents

Schalk Malan, the chief executive of life assurer BrightRock, says although his company is not the only provider to insure stay-at-home parents, its needs-matched approach to life and disability assurance makes it well suited to do so.

“With BrightRock’s needs-matched product structure, disability and income protection cover for a stay-at-home parent can be uniquely tailored in terms of cover amounts, premium increases and pay-out structure to meet the family’s household, childcare, healthcare and debt needs. Unique features include the ability to choose between a lump sum and a recurring income at the point of claim, when the family better understands the stay-at-home parent’s prognosis and their financial needs. Families can also buy additional cover or change cover when their needs change, without medical underwriting.

“BrightRock will calculate the stay-at-home parent’s ‘income’ at a maximum of half of the working spouse’s income, and maximum rand limits apply. Income-earning clients who choose to become stay-at-home parents, take time off work or take extended maternity leave will keep all their BrightRock cover in force at their existing cover amounts for up to 12 months. In both of these scenarios, clients will continue to have access to the additional features of our product offering, which enables them to change their cover as their needs change.

“We believe it is worth protecting income for stay-at-home parents, given the role they play in families’ financial well-being,” Malan says.

This article first appeared on Saturday, 1 July 2017 in the Personal Finance section of Independent Newspapers (The Weekend Argus, Pretoria News Weekend, Saturday Star and the Independent on Saturday), as well as IOL.co.za. Click here to read the original version.

Sophisticated insurance does not have to mean it is complicated

SA is seen as tops for life insurance innovation and BrightRock’s flexibility fits the bill, writes Stephen Cranston.

Product complexity in insurance is one thing and it was what made the old universal life policies so confusing. It was hard to work out if these multiheaded hybrids of protection and savings were good value for money.

But there is also product sophistication, when highly customised technology can add something new and desirable to the product range.

BrightRock falls in the sophisticated rather than the complex bucket. This insurer was formed in 2011, at a time when there was a race to the bottom as plutocrats such as Douw Steyn turned life cover into a commodity.

BrightRock was founded by a multidisciplinary team, some of whom wanted another challenge after the big company atmosphere at Discovery. No company in the world runs its policies in the same way as BrightRock. As CEO Schalk Malan puts it, it is a needs-matched approach.

A traditional life policy combines all cover in a single capitalised lump sum, which might be fixed or grow at a set rate over time. The trouble is that some financial needs exist only for a few years, others last a lifetime. So why should you pay for cover you don’t actually need?

You might have heard of BrightRock from its sponsorship of the Stormers as well as from some chat shows it sponsors on SuperSport and kykNET. But you won’t see it much on peak-time conventional advertising slots. I sometimes think Willem Roos of OUTsurance has bought all the slots there and sells them on to competitors when he is feeling generous.

Anyway, BrightRock quite rightly doesn’t believe its product set is appropriate for direct sales. It is sold through 3 800 accredited financial advisers, who gathered R6100m in premium income in 2016.

BrightRock’s key selling point is that it strips out wasted cover to deliver premium savings. And you never lose the value of your savings: when needs fall away you move your premium to buy more cover for a different need, say from death to disability. And if the client needs more cover, he can reserve future years and take it up when needed.

A feature that impresses me is the ability to make a choice on how to take on disability or critical illness cover at claims stage. It is hard to know at the inception of a policy whether a guaranteed income or a lump sum is more important. Expected longevity and severity of the condition need to be taken into account.

At BrightRock, the client does not have to choose upfront but can decide if income, a lump sum or a combination of both is the right approach.

BrightRock provides a graphic with six kinds of needs ranging from household needs, which are likely to grow at least at the rate of inflation, to healthcare, which tends to grow ahead of inflation, as would unpredictable costs of illness or injury and death-related needs such as estate duty and bequests.

In contrast, debt – such as bond and car payments and personal loans – should eventually come to an end, as should childcare costs. Each of these financial goals is provided for by a distinct tranche of the policy, each of which has its own termination date and is disclosed in the written updates.

I was interested to see that SA is seen as the most innovative life insurance territory, accounting for 46% of the votes in a recent Munich Re survey. Australia scored a feeble 6%. But in spite of this there is an inefficient pricing structure here and the policies can’t adapt to clients’ changing needs. It is hard for clients to alter their cover in what BrightRock calls critical change moments.

Marketing director Suzanne Stevens points to a real case in which BrightRock proved to be a better option than any of its competitors. A teacher just 38 years old tool out a policy in May 2014 worth R5.5m for disability and dread disease. In September of that year she went into a coma from pneumococcal meningitis and died eight days later. Under the ruling that most life offices follow, if a client dies within 14 days of an “event”, such as a stroke, the policy pays nothing. The only exceptions are Discovery Life, though it would have given less disability cover for the same premium, and Liberty, which would have paid somewhat less than BrightRock for disability and paid nothing on dread disease. But life offices such as Old Mutual, Momentum and Sanlam would have paid absolutely nothing. Is that treating customers fairly?

Karl Leinberger, the chief investment officer of Coronation, seems quite defensive on the topic of long-term investment. I am not sure why, as the Coronation Equity Fund in its 20-year existence has added 60% to the all share index return. Some people see talking long-term as a way to buy time in a poor year such as Coronation experienced in 2015. And quite a lot of mediocre fund managers do ask clients to wait for the long term even though they are doing badly.

Leinberger has probably added as much value from the shares he hasn’t picked than from the shares he has. He showed a slide from the 2008 road show in which he explained why he did not own Murray & Roberts, then seen as bulletproof because the infrastructure boom around the Fifa World Cup was in full swing. The share has since gone from R110 to R11. Leinberger says that in a time of lower returns it makes even more sense to invest with an active manager.

Of course he would say that, but it seems fair enough to argue that skill becomes more valuable in challenging times. In fact good managers often do more alpha (excess return) in weak markets than in bull markets. Just look at Allan Gray, which routinely adds almost all its alpha in bad markets.

I am a strong believer in giving fund managers a balanced mandate instead of trying to juggle the whole range of different asset-class building blocks in a fund. Leinberger makes the point that a balanced manager can make asset allocation decisions in real time – no need to wait for approval at the next trustee meeting. The manager needs to understand the total portfolio, the rand hedge position across asset classes on a see-through basis, the total interest rate holdings and the total inflation hedge.

* This article first appeared in the Business Day of 10 February 2017. Click here to read the original version.

Failing the number one SME asset in the country

By Schalk Malan, Executive Director, BrightRock

BrightRock views the business owner of an SME as the business’ most important asset, which should be covered just like the physical assets of the business.

The affordability of suitable cover is a stumbling block for many business owners and financial advisers, because traditional business assurance policies are structured in the same form as personal life insurance policies.

We believe business assurance must provide a high degree of flexibility to maximise the relevance and affordability of owners’ risk cover as their businesses grow and develop. There’s both an opportunity and a demand for product providers to introduce more efficient product structures that better address entrepreneurs’ changing needs.

Looking at traditional product structures – whether providing protection for Keyman, Contingent Liability or Buy-and-Sell – most of these products provide cover via a single capitalised lump-sum that is priced for the maximum term and is usually set to grow over time. The structure of this cover is not necessarily in the best interest of the business owner, because the cover increases as your needs decrease, leading to cost inefficiency in the way premiums are structured. The cover is also more expensive because it is priced to extend for the maximum possible term (whole of life, until clients are aged 110, for example), while the business insurance need will cease at- or before the client retires and leaves the business.

KeyMan_Image

This is why we decided to follow a more flexible approach, which allows 40% more cover per premium Rand, allowing business owners to invest more funds in their businesses, or allocate the savings to more cover in the event of underinsurance.

Our premium efficiency and cover sustainability is achieved by structuring business owners’ cover to meet their exact needs. BrightRock’s cover removes premium waste and saves money from the payment of their first premiums. Our unique approach allows advisers to tailor business owners’ cover over time to match the profile of their needs.

In addition to this, business owners have the unique ability for them to redirect their premiums to cover for their personal needs if their business cover needs reduce or end. This is done free of underwriting, giving business owners the benefit of the underwriting they initially underwent and premiums they have paid thus far.

But what should small business owners do in the event where the business’ growth exceeds expectations, leaving the business owner with the desire to increase his or her cover?

This is not a problem for BrightRock policyholders: Standard BrightRock policies automatically have access to an extra cover account, to access later in the business lifetime. The only requirement in this event is an HIV test.

In conclusion, the following product attributes ensure sustainable cover for business owners who are covered by BrightRock:

  • Affordability: In the early stages of a business, entrepreneurs have to juggle the conflicting demands of large capital expenditure, a significant debt liability and limited cash flow. It’s vital that premiums are as low as possible, while delivering the required level of protection. By matching the duration and behaviour of cover exactly to that of the underlying need, BrightRock’s cover is more efficient. We find that this efficient structure gives clients on average 40% more cover

 

  • Relevance: Once a debt liability has been met, there’s no longer a requirement to provide cover for it. Similarly, as a business evolves, its reliance on specific key individuals is likely to change or lessen and eventually end, impacting on the nature and extent of the keyman cover required. Many of these future changes in need can be anticipated with a fair amount of certainty. Business assurance products should offer the ability to structure cover taking these future changes into account from the outset. For example, a business owner may know that his vehicle fleet will be replaced every four years and wish to structure his business’s debt cover to increase in line with inflation every four years. BrightRock offers unique features that allow this level of flexibility;

 

  • Access: While it’s possible to anticipate certain future developments – such as the date that a debt will have been paid off – it’s also possible that new needs will arise or the business’s growth will play out differently than expected. Future insurability and access to cover with minimum effort is a critical requirement. While BrightRock prices cover for the appropriate need to maximise efficiency, we underwrite a client’s premiums for life. This means, should their needs change in future, business owners have the ability to redirect their premiums to different needs and insurance events (even to personal cover) anytime their needs change, free of medical underwriting. They also have the ability to buy up cover with limited medical underwriting (only requiring an HIV test).

This article was originally published in the April edition of Cover Magazine.

5 companies living in insurance’s future

Professor Bill Fischer of IMD likes to ask “who’s living in your future?”. In the world of insurance, until recently the answer was almost no-one. But things are changing: our basis of competition is getting less about distribution and product and more about customer experience. In a recent article published on LinkedIn, Andrew Rear, Chief Executive: Africa, Asia Pacific, UK and Ireland Life at Munich Re writes there are five companies he is paying attention to.

Brightrock
Brightrock have re-thought products. Their model is quite straightforward, almost old-fashioned: you are buying cover for a specific purpose, be it a mortgage, children growing up, whatever. But life is not static, as anyone with a drawer full of old policies can tell you. So you end up with products you don’t need, often that you don’t know you have, and then you need something else so you pay again. Brightrock brings purpose-led insurance up to date with a product that is inherently flexible, and tools to allow you to manage that flexibility. When (not if!) your needs change – you move house, get divorced, change jobs, have another chid – you simply and easily change your cover to suit. Bright rock’s claim is “we love change”. And because needs go down as well as up, they save you on average 30% by eliminating cover you don’t need. Customer loyalty is hard to earn in insurance, but if you are a Brightrock customer why would you ever leave?

Bought by many
Our world is increasingly about a peer-to-peer economy driven by social media. Bought by Many is that for insurance. It’s a simple idea: people with similar, more or less obscure, needs get together and negotiate better insurance coverage. Coverage that fits their needs, risk appetite and price expectations. At the moment boughtbymany is essentially a broker, but why should they not evolve into being a carrier, or a mutual for their members? What if these consumers leave the insurance market altogether, in favour of their own peer-to-peer market? Unlikely? So said hotel managers about AirBnB. Now they have 80 million room nights per annum and it’s doubling year on year.

Ellipse
(Disclosure: I’m on the board of Ellipse). Ellipse is a UK group life and disability insurer which has pioneered digital delivery of employee benefits. In a paper-dominated sector, they complete 70% of their applications with no human intervention. The broker and/or employer puts in the employee data, gets a quote and accepts it. Higher-earning employees get an email linking them to automated medical underwriting. The premium gets collected and the policy documents get issued. At that point the new scheme appears on the stats of Ellipse’s customer service team, and that’s the first they know about it. The servicing is then done online, by the employer or the broker. Good model for Ellipse. Good enough model for customers for them to win Best Customer Service at the most recent industry awards. Ellipse’s model is rapidly going from niche to normal. My bet is that in 5 years’ time any insurer not having this capability will be effectively out of the market; and that in 10 years’ time this will be the dominant model in most of the major markets world-wide.

All Life  
All Life offers life insurance to people with HIV and diabetes. Not so niche: the world’s fast-growing disease, diabetes affects 9% of the world’s population; 6.3 million people live with HIV in All Life’s home market of South Africa. HIV and diabetes have in common that how you manage your condition matters more than the condition itself. The way the industry looks at this is to measure you once at the outset of your policy and then pretend you stay the same for ever. To reduce risk, we restrict cover, even to those who are on top of their condition and might stay that way. All Life does the opposite: it looks at how you are managing your condition by looking at how you are managing your condition. Are you still on your meds, are you taking the regular tests to monitor yourself. All Life receives electronic data on these tests. The result is that not only do they have much better information about the health of their customers, their customers actually show better health behaviour. But surely we are not far away being able to monitor chronic diseases through mobile applications which would automatically transmit data. What then for the once-and-done model?

My son
OK so he’s not strictly a company. But he is living in the future. And like most 18 year olds, he thinks insurance is boring. He’s right, it is boring. What my son doesn’t get is why you have to have so many products with all the admin and complication associated with them. He lives his life in a public space, and doesn’t really care about the privacy of his personal data if sharing that data would make his life easier. Why can’t the market figure out what he needs, then offer him the right package without all the hassle? Actually, I would quite like that myself. Perhaps I’m living in my own future. I wish my insurance company was.

  • Andrew Rear is the Chief Executive: Africa, Asia Pacific, UK and Ireland Life at Munich Re. This article was originally published on LinkedIn – click here to read the original version.