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Short term Insurance
Tuesday, February 1, 2005
Get what you pay for…..

The continued emergence of direct short-term insurers in South Africa, as well as the reported increase in figures by the telemarketing companies, once again highlights the debate as to whether going direct is better than buying cover through an insurance broker.
Direct companies claim that, by cutting out the middleman or the insurance broker, they cut commission costs. On the other hand, traditional insurance companies argue that a lack of awareness and knowledge by the public is largely responsible for the ‘misperception’ that cutting broker’s commission reduces insurance premiums and, furthermore, often results in client dissatisfaction when it comes to actual claim submission.
“The facts are in the figures,” says Anton Ossip, CEO of Alexander Forbes Personal Services.
Average annual expenses, before commissions, incurred by the four largest traditional insurance companies in South Africa was 13%, according to the 2002 report of the Registrar of Short Term Insurance. Alexander Forbes says that broking commissions would bring this figure to about 23% in total. According to the Registrar’s report South Africa’s largest direct insurers incurred annual average expenses of 23%, in other words bringing their total distribution costs on a par with the traditional companies.
“Although it may be true that, without brokers, direct insurers save on commissions, these are merely the service delivery and expert advice fees. So, effectively, if a broker is not used to facilitate the service and product delivery, the service costs are redirected into other, costly marketing delivery vehicles such as extensive marketing and advertising campaigns and call centres, all adding up to notably higher expenses,” suggests Mr Ossip.
“In essence, although direct insurers claim to reduce costs by cutting commissions, they end up charging the same but a different form.”
Due to South Africa’s high crime and accident rates, compared to other countries, insurance is generally thought to be a necessity rather than a luxury.
“While short-term insurance is unarguably a commodity in the high-crime South African environment, what is often not clear in the minds of many policyholders is that not all insurers offer the same product and hence not all insurance cover is all the same.
“Unless policyholders study the small print of their policy contract or are advised by their brokers, they are often unaware of the subtle differences,” warns Mr Ossip. “Some of these may appear insignificant but, if the policy has enough exclusions a high proportion of the insured’s losses will not be covered.”
He goes on to say that this attests to the common criticism of direct insurers; namely, that their policy offers limited cover and their incidence of repudiations are often higher than those of traditional insurers.
“Unfortunately, insurance policyholders, particularly those who don’t use an insurance broker, are unpleasantly surprised at the time of their claim submission when they are told that their claim has been repudiated, often due to some technical issue of which they were unaware,” says Mr Ossip.
“The most vital role of an insurance broker is to act in an advisory capacity to educate, inform and to service the insured. The service includes assessing the needs, advising on the most appropriate insurance product - one that aligns with the policyholder’s requirements - as well as ensuring that the insured is well-informed of all the clauses in the contract, thus minimising the likelihood of repudiation of the claim.
“There is a greater chance the direct insurer will look for ways to repudiate the claim or pay the claim cheaply, as they have a direct benefit in doing so,” he adds.
“As with any product, if a consumer focuses purely on price, ignoring the crucial details of the product (such as what cover is provided), it is no different to shopping with eyes closed. The adage ‘you get what you pay for’ is particularly relevant,” he says.

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