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Consumer Affairs
Tuesday, February 1, 2005
Savings question

Consumers have been inundated with advertising from direct insurers that encourage them to make huge savings by cutting out the middle man.
“However, the advertising is misleading,” says Johann van Rensburg, President of the Independent Broking Council (IBC). “It implies that the savings are achieved by cutting out the broker when in fact the savings are largely achieved by cutting benefits.”
He explains that the business models for a traditional short-term insurer and a direct insurer are fundamentally different. “This is especially true when you look at how they distribute their products,” he says. Traditional insurers rely on a network of brokers to distribute their products in return for a commission payment, which averages between 12,5% to 20% of the premium - depending on the type of insurance.
By cutting out the broker network, direct insurers are forced to rely on consumer response to advertising. “This explains why direct insurer advertising is so pervasive,” says Mr Van Rensburg.
Advertising is expensive. Placing just one full-page, full-colour advertisement in one of the popular weekly magazines will cost a direct insurer between R27 000 and R45 000. “Multiply that figure by every print advertisement and you begin to see why the advertising is so misleading,” he explains.
Statistics show that one person in three will claim from a short term insurer every year. The fact that the basic cost of a claims is the same whether you use a traditional or a direct insurer begs the question, how the premium reductions are achieved?
“The answer must be by mainly by cutting the benefits,” he believes. “If you only look at premiums you are not comparing apples with apples. Insurance products are complex and involve a wide range of benefits and features. Often the differences only become apparent when it’s too late – at the claims stage.”
“Competent independent brokers can add tremendous value at any stage of the insurance transaction – from choosing the product through to lodgement and settlement of a claim.”
Mr Van Rensburg uses a recent case to illustrate his point. In this example the client, who had gone to a direct insurer, was under insured. The client was burgled and had submitted a claim for R59 000. Less than half of the claim amount was settled.
The client referred the case to an IBC member broker who discovered that the claim had been under paid by almost R10 000. When he took the matter up with the insurer, the company agreed to pay the difference.
Another problem is that by going direct, you no longer benefit from the services of an independent adviser. “When you ‘phone a direct insurer’s call centre you are speaking to an agent who is trained to respond in a way that will achieve their employer’s objectives,” he explains.
“While an insurer is basically in business to maximise profits, brokers make it their business to protect their clients’ interests. They try to get the most cost effective cover, rather than the cheapest, by making detailed comparisons of insurers, their business practices as well as policy features and costs,” he concludes.

Copyright © Insurance Times and Investments® Vol:18.1 1st February, 2005
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