A large part of the South African population consists of low income families and individuals. With the RDR on the horizon and the creation of the money guidance service just around the corner, Andy Milburn looks at what we can copy from the protection products low income families buy in South Africa?
A number of industry experts in the UK were asked what products the industry specifically design for low income family members. Answers included family income benefit, real life cover, Holloway plans (offered by friendly societies - Holloway, Cirencester and Exeter Friendly) and funeral plans. Budget income protection also feature on the list of products that ‘could' be targeted at low income family groups.
Research announced at the recent protection review conference suggested low income families are more interested in protection than other more affluent consumer groups. So, do we do this market segment justice with our product designs?
If a low income consumer contacts the money guidance service post 2012, and decides to buy cover, what options are open to them? It does seem that we fail to offer this type of consumer anything other than mass market protection products designed for the many in the UK.
Other segments of the UK's financial services market have at least had a go at low income products. Stakeholder pensions and child trust funds are examples, although not the best. Both products were designed by Government and have issues which we are all aware of.
A few UK protection providers have begun to offer ‘low cost' cover by stripping out common features to reduce the cost for consumers. Aviva created free life cover for families with new children. A few providers, such as Axa and Engage, have focused more on whole of life plans than other providers in the UK, but is this enough?
One major point we all seem to agree on is that this segment of the market was well served by home service representatives and direct sales forces. Sadly, margins cannot sustain distribution of that type for low premiums, and those days are gone, replaced by direct mail or the internet.
So, how does South Africa tackle this?
Firstly they have different distribution methods for the different market segments. South African IFAs target high net worth clients and are targeted themselves by many provider broker consultants. Low income clients are targeted through call centres and provider-employed customer service representatives.
Credit unions and co-operative organisations are developing - allowing low income families to share the cost of risk where there are common issues faced by many people in the same area.
Products are designed for the segment of the population they are targeted at. Do we do this enough in the UK?
The biggest risks faced by low income families in South Africa are illness or injury, death of a family member, natural disasters, and theft.
South Africa has a few products aimed at the low income market covering these needs, including:
• Limited disability cover for credit debt (similar to our PPI products).
• Funeral plans (covering the life assured, their parents or their children).
• Permanent life cover (similar to whole of life with savings option built in).
• Endowments (mainly used as small savings vehicles - include life cover).
• Physical impairment (e.g. Loss of limb).
In summary, South African providers design different products for different socio-economic groups supported by different distribution methods. Most experts Munich Re spoke to on this subject believe the UK insurance industry simply doesn't do this.
At this point it is important to make one alternative observation. Maybe we shouldn't go down this path? Profitability is vital in any business. If UK providers and distributors changed their ways, and copied the South African model for low income individuals and families, would they see profits from those ventures? What if there is no profit to be made from these markets?
The ABI feel differently. Their work on the future vision for the protection industry continues with this issue included in the scope of their programme. Others in the industry feel the same. As the state reduces or passes off more and more responsibility, such as incapacity benefit, to other potential parties we have to ask ourselves if that gives us an opportunity as an industry to take over from where the state seems to be signing off?
South Africa manages to target low income families. Can the UK protection industry do this successfully too?
Andy Milburn is head of marketing at Munich Re (UK Life)
