In a recent blog post on his InsuranceFundi website, Lawrence Blake argued that: “if there’s an award for the most complicated life insurance product on the market, then Discovery would take it hands down”.
He is far from alone in this sentiment. Many financial advisors and planners are not only concerned about the complexity of these products, but whether those who are buying them are always getting appropriate advice.
“I have been in the industry for 23 years and I struggle to understand how all their products integrate,” says Stephen Cole, a certified financial planner with Core Wealth Advisory Services in Cape Town. “And if I struggle to understand it I can’t in good conscience market it to my clients.”
Discovery Life’s offering is optimally designed to integrate with its Vitality programme and medical aid. The head of research and development at Discovery Life, Gareth Friedlander, says that 54% of Discovery Life products are taken out with the health integrator, which links them to both a client’s Vitality status and their medical aid claims. A further 28% are linked to Vitality only, and only 18% are sold as standalone products.
The rationale for this is Discovery’s emphasis on ‘shared value’. Healthier clients will live longer, make fewer claims and keep their policies in place for longer. This greatly decreases Discovery’s risk as well as the payouts it has to make, and the company can then return a great deal of the extra profitability this generates to clients.
“The core belief is that if you can change behaviour you can create value that never previously existed,” Friedlander says. “This is the only industry that has the ability to convert health and wellness into money because it becomes valuable to us. We have seen that our clients on Vitality have a 20% lower mortality rate than the rest of the industry and client on Diamond status has a 75% lower mortality rate.”
In practice, this means that clients with a higher Vitality status and low medical aid claims can see significantly reduced premiums and cash-back payments. At a best case scenario, Discovery says this can realise as much as a 60% saving on the cost of a policy for a client with the highest Diamond Vitality status.
Discovery also gives a large up-front discount to Vitality members, so that their starting premiums are low relative to other insurers. However, if the client does not keep their Vitality status high, some of this discount will be clawed back, meaning premium increases can be larger than expected.
Appropriate or not?
It is unavoidable that linking these products together makes Discovery Life a more complex offering. The questions this raises are not only about how well advisors can explain this to their clients, but also how well those clients understand what they are being told.
Blake has seen a number of cases where clients appear to have been sold a Discovery Life product on the basis of a best-case scenario that was always unlikely to be realised.
“They get a massive upfront discount based on the assumption going forward that they are going to meet the targets,” says Blake. “But after the advisor walks out, the person who signed the contract forgets about it and ends up sitting on Blue Vitality status (the lowest rating). Then they want to know why their premiums are going up.”
He gives an example of a client who could have expected a standard premium increase of 12.7% based on the annual CPI increase stated in her policy and her age-rated factor. However, because she had made a number of medical aid claims in the year, her premium increase was raised to 16.45%.
“If you are maintaining Gold or Diamond Vitality status, your insurance can be incredibly cheap, and that’s how they market their product,” says Cole. “But most people don’t get there. There is a very specific target market I think it works for, but the majority of the market is sold a product that isn’t really suitable.”
Could things be more simple?
Many independent financial advisors also feel that Discovery’s complexity means that advising on it isn’t worth their while.
“It is a good idea to incentivise people to be healthy, but it’s all become too complicated,” says Dirk Groeneveld, a certified financial planner with Client Care in Port Elizabeth. “In a business where we need to do due diligence on four or five companies to honestly advise our clients correctly, if you have a product like Discovery Life, you just can’t take enough time to do it. I understand the concept from a business point of view, but they really could do it well in a more simple way.”
The really important question is whether those advisors who are selling Discovery Life products are fully explaining their complexity to their clients, because despite Moneyweb finding that reservations about these policies are widely expressed, Discovery Life is the fastest growing assurance business in South Africa. Last year, it accounted for 29.7% of all new business written in South Africa.
“This is a more complex product, but I would argue that the reason it’s more complex is because we’ve found a way to link life insurance with health and wellness in a way that has created an enormous value proposition for clients,” Friedlander says. “For me there is a very big difference between complexity for the sake of value for clients, versus unnecessary complexity. If something is worth doing, and we believe this is, then if it’s done appropriately and explained properly, then that complexity is worthwhile.”