Personal-Finance

Will technology make life cover cheaper?

2017-11-14 13:43

New financial services companies are starting to challenge the status quo through technology that enables them to engage with customers directly and use data collected through the use of smartphones, reward programmes and social media to improve the application and underwriting process.

The aim of these new, technologically driven financial products is to come to the market with more competitive rates coupled with flexibility to provide solutions at an individual level.

This month, I tested two new players in the life insurance space, Simply Financial Services and Indie Financial Planning.

Simply, as the name implies, focuses on providing simple, cost-effective cover, while Indie has built in a rewards element that acts as a savings fund so that you receive a payout irrespective of whether you make a claim.

Both use technology that allows a customer to get cover in a matter of minutes by providing a simple underwriting and application process; although selective applications may have follow-up underwriting processes, such as blood tests, if the company feels the application carries a high risk.

LOW COST, NO FUSS

Simply has aimed its offering at the mass market by providing “no bells or whistles” cover at a low premium.

Although the product is targeted at individuals earning up to R45 000 a month, Simply Financial Services CEO Anthony Miller says higher-income earners are also applying for the cover as they value simplicity and speed.

The Simply Financial Services test

Having tested the chatbot, I was impressed by how quickly I was able to get a quote on basic cover including life, disability and funeral.

The chatbot asked my age, income and gender, and then generated a quote.

In the trial quote, I stated an income between R8 000 and R18 000 a month and it offered a policy for R181 a month, which would provide R200 000 life cover, R300 000 disability cover and R20 000 family funeral cover.

I also generated a quote for Domestic Cover and, for R117 a month, I could cover a domestic worker for R100 000 life cover, R30 000 funeral cover and R100 000 disability cover.

In comparison, I generated a quote with another direct financial services channel and they quoted R249 a month for funeral cover only of R20 000 for the principal member, spouse and three children.

So that compared extremely favourably for Simply – in the case of Domestic Cover, you would pay R132 less yet receive more funeral cover, as well as life and disability cover. 

By using technology, including a chatbot through Facebook messenger, the company can generate life policy quotes in seconds. Its policies are underwritten by Old Mutual Alternative Risk transfer.

It is not yet selling life insurance through Facebook, but the Facebook chatbot provides a way to generate a quote and set up a suitable time for an agent to contact you.

Alternatively, you can sign up for a policy on the website without any human interaction and it takes about 10 minutes.

If you use the website to take out the policy, you receive a 10% discount on your premium.

To keep the premiums as low as possible, a Simply policy limits disability cover to impairment such as the loss of a limb, blindness or mobility.

Policies start from as little as R59 a month and include a funeral benefit for the principal member and their direct family.

There is also limited underwriting required. An applicant fills in three health questions, cover is instantaneous and no blood or medical tests are required.

Simply will run random underwriting tests on applicants, but the cover is already in force and will only be changed if it is found that the individual was not truthful in their application – for example, if they claim to be a non-smoker but the blood test shows they smoke.

Due to the limited underwriting, there is a waiting period on claims and only death or disability due to accidents will be covered in the first six months.

If an individual does not make it through the filtering process because they have a chronic, life-threatening illness, they would still be offered cover for accidental death or disability.

Since launching in January, Miller says they have identified three key markets – Family Cover for a main breadwinner, Domestic Cover for employers who want to provide cover for their domestic workers and Group Cover for people employed by a small businesses.

Domestic Cover and Group Cover is proving popular for employers who want to provide a basic life, disability and funeral cover for employees to ensure that, if anything happened to them, their families are not left destitute.

BUILD UP SAVINGS AND STAY COVERED

Indie targets higher-income earners who are looking for more comprehensive cover. It uses its technology-driven cost savings to build up a savings fund, or Bounty, for its client.

CEO Peter Castleden is quick to point out that the Bounty is yours irrespective of whether you claim as it is a loyalty reward, not a no-claims bonus.

However, to receive the full benefit, you need to be a client until the age of 70.

The Indie Financial Planning test

I tested the quote system on the Indie website. It is very easy to use and generated a quote in less than a minute.

The system asked basic questions about outstanding debt, income and who I was responsible for financially, as well as existing cover I may already have where one could include, for example, any employer benefits.

From this information, it made a recommendation about cover including life cover, disability and income protection.

It also allows you to set a budget in terms of how much you want to spend on cover, although it highlights that, by selecting a lower premium, your cover may not be sufficient.

It also shows the Bounty that would be invested immediately. 

The quoted life cover premium was in line with my existing cover, however, it is difficult to compare the cover for disability and income protection as this depends on the richness of the cover – what conditions are included, how long before income protection is paid, and so on.

Overall, there did not seem to be a significant premium saving; the attractiveness of the product lies in the ease of taking out cover with the added benefit of receiving a Bounty.

When taking out cover, it is important to make sure you are comparing like with like, and also that you understand when it pays and what it pays for.

This is usually the role advisers play, so working with an unadvised product means you need to do the research and comparisons yourself.

Many large traditional insurers are incubating financial technology disrupters within their group and Indie is fully funded and backed by Sanlam.

Castleden says that, while Indie has created the technology to deliver the product, it is able to benefit from Sanlam’s risk management, data and capital while the team is left to innovate.

“Market entrants underestimate the intellectual property that goes into the technical nature of insurance. Without Sanlam’s backing, it would have taken longer and cost more money,” says Castleden.

The differentiating element for Indie is the way it rewards clients for remaining covered.

“We put money into an investment from day one.

"Clients can manage the investment and even switch to different funds,” says Castleden, who adds that if a 25-year-old takes out a policy and doesn’t cash in their Bounty, the investment would be equivalent to the total premiums they paid until the age of 70, plus growth.

Bounty works like this – if a 30-year-old takes out insurance at a premium of R500 a month, R50 000 will be invested in their Bounty account on day one.

You cannot draw the money immediately, but it grows in a money market account. Over time, certain events allow you to draw out the investment as a “cashdrop” in increments of 5% of the value of your Bounty.

For example, you can draw R2 500 when you have paid 60 premiums (five years) or you can leave it to keep growing.

You can also shorten the time to a cashdrop or boost your Bounty by referring a friend.

If you decide not to access the funds immediately, you can take out your 5% any time after the Bounty becomes due.

This Bounty provides younger people with a boost for their retirement savings and it also provides a lump sum payment when they retire.

“People often don’t need life protection after they retire as, by then, they are debt free, so a lot of the cover is no longer necessary. At the age of 70, whatever is still in the Bounty is yours to take,” says Castleden.

However, he adds that if you die before the age of 70, your estate will not receive the Bounty, but if you make a claim, such as for a critical illness, and you are still a client at the age of 70, you will receive your Bounty.

So how can Indie afford to pay their customers a Bounty? Would it not be more efficient to pass on the benefit in a lower premium?

Castleden says that the cost saving comes from the consistency of keeping customers because lapses are expensive for the industry.

The upfront costs of acquiring a client are high and only pay off if the client stays for a long period of time.

“We want people to stay long enough to receive their full Bounty payment as it means we have covered those upfront costs,” says Castleden.

He adds that the attractiveness of paying a Bounty also decreases the costs of acquisition as they do not need a broker force to go out and convince people to take out cover, thereby saving on commissions.

Castleden says that, if the cost of acquisition is lower than expected, these savings will be transferred into lower premiums.

They have also added features to make it attractive for younger people, such as a simple underwriting process, and flexibility that allows you to chop and change your cover and for temporary reduction in your cover (and lower premiums) if you are facing financial difficulties.

They are also relying on good underwriting to keep costs low. For example, they have decided not to insure motorbike riders, who fall into a high-risk category.

“We will give you a quote, but it will be so much higher that you will want to go to another insurer.”

They also have a five-year suicide exclusion, which Castleden says has a big impact on premium costs.

Indie provides six products – cover to settle your debts, funeral benefits, critical illness benefits, income to provide for financial dependants, an income disability benefit and a lump sum disability benefit.

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November 12 2017