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Life Assurance
Saturday, March 1, 2008
The devil’s advocate – a study in ambivalence

I’ll never forget a colleague telling me morosely that his work contract had just been extended by 5 years. I started to congratulate him but soon realized that what I should be doing was cheering him up.
The reason - the contract was good but it also signaled the date when his relationship with the company could end. Like with death, most people would prefer not to know when it comes, beforehand.
To a certain extent the outcomes of the SOI agreement signed with the life industry and National Treasury may also be seen in such ambivalent terms.
Take for example the penalties that a policyholder may be expected to incur on existing policies – here the undertaking is that ‘no more’ than 30% of the value may be lost through early termination penalties.
From one angle this is simply a license to do just that.
Last week’s release of the draft regulations which affect prospective policies taken out after the projected implementation date of August 2008 also has a minimum/maximum early termination percentage, albeit of only 15%.
This is a notable achievement in cost reduction due in no small part to a reduction in upfront commission paid to the broker.
However, I still have a fundamental problem with underwritten investment products and I wish to play Devil’s Advocate to stimulate some debate.
There were only a few comments from brokers who by and large seem to have resigned themselves to this inevitable reduction in income. Here’s one:
This is real great news for the consumer. And for those brokers that switched their business away from the insured products to LISP products, the new legislation will have no negative effect at all.
However, the LISP products already work on 100% value protection for the investor. (The protection issue is about early terminations and amendments), thus 85% is simply not good enough.
The assurers are still naive about the real competitive edge. With the new commission structure, intermediaries will have more reason to favour LISP products.
And for the consumer, why would 15% penalty by OK if 0% penalty is already available.
Nevertheless, it is great to see some positive outcome in favour of the consumer, who is the most important of all the role players.
Next is, kicking the LOA’s butt for the prohibition of trail fees on sect. 14 transfers. May the Treasury discover the truth soon.
So who would go into a contract knowing that they stand to lose up to 15% if they wish to terminate prematurely? Surely there are better investment structures out there?
Is it purely because the life company stands to make more profit from the sale of these products that the industry refuses to let go?
Secondly, I have an issue with the whole concept of assurance being tainted with the possibility of loss. Rightly or wrongly, there is a public view that holds that assurance is about preserving value.
Many naïve policyholders believe in life insurance for this very reason and they will combine life insurance with anything that has the appearance of savings. RAs, endowments, bond protection; you name it, they will buy it because they understand the concept of preserving value.
Yet, somehow, when you combine an insurance policy with an investment product, the possibility, indeed probability, of loss enters into the equation. And it is for this reason that I feel ambivalent about this kind of product.
And from experience we know that this loss can come from a variety of sources in the smooth, balanced and stable portfolios of this world: lack of real growth, performance failing to beat inflation, exchange rate fluctuations, market volatility etc (never shareholders) are all explanations with which we have become all too easily familiar.
Yes, we understand insurance because of risk but how did we ever allow the mechanism of risk to become part of an insurance product?
In short I fear that underwritten investments may have damaged the concept of insurance fundamentally.
But perhaps the most disturbing aspect of the underwritten investment is the lack of transparency of costs and performance.
It is in this respect that these products have become outdated and socio-politically unfashionable – the consumer is unable to fathom the machinery that is supposed to deliver the desired end result.
Perhaps Treasury should simply outlaw these products?
I welcome comment to editor@itinews.co.za that would convince me otherwise.

Copyright © Insurance Times and Investments® Vol:21.2 1st March, 2008
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