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Discovery Life’s complexity challenge

Are clients always getting what they expect?

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.”

Shared value

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.”

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Quite some time ago Bruce Cameron (when he was still writing for IOL \ Personal Finance), spoke of the dangers of “buying any financial product which you don’t understand” when commenting upon the Discovery Life’s product offering.

Whenever an adviser sells a product which he/she does not him/herself fully understand, that adviser materially contravenes those provisions of FAIS which dictate that advisers must ensure that a prospective client “is enabled to make a FULLY INFORMED purchase decision.” Many Discovery Life purchasers will subsequently (even years later, when reality really starts to bite) discover themselves to have been disadvantaged by having purchased their Discovery product. Those people would do well to remember that their FAIS right of recourse against the selling adviser does not prescribe. No matter this risk, many advisers keep punting the product. Anyone who understands how life assurance commission is paid will also understand why that is so.

On the other side of the coin, the Long Term Insurance Act precludes an assurer from raising your premiums when a client’s health deteriorates AFTER buying life \ disability \ critical illness benefits from that assurer. As the premium escalation of ALL Discovery “Health Integrator” policies will be influenced (mostly upwards!) when a life assured subsequently falls ill (and then begins makes substantial claims against his Discovery Health medical aid benefits, while simultaneously lowering his levels of physical activity), can it not fairly be argued that “Health Integration” is actually the means by which Discovery Life neatly circumvents that inconvenient (to the assurer) provision of the Long term Insurance Act?

With premiums escalating annually at rates way above inflation (and salary increases), simple arithmetic dictates that many Discovery Life policy holders will eventually (and also often before occurrence of any “cost to Discovery” claimable event) run out of the ability to pay their policy premiums. Having by then, over an extended period paid a lot (!!) of money to Discovery, many will then be obliged to either terminate those policies or substantially reduce benefit values.

DSY is the sector darling of the investment community, simply because no other business in that sector is better at extracting money from its clients. Does this not indicate that – while it’s great for anyone and everyone to be a DSY shareholder – it may, for a great many people, be a lot less clever to be a DSY policyholder?

Here is my understanding of Discovery’s life product, Vitality is used as a external mechanism to manage the amount of paybacks paid to clients and premium increases of their life book. I would like to know what the distribution of people across the different levels before and after the most recent changes. And my favourite point that nobody speaks about, how much are the Vitality partners paying Discovery to be partners?

Momentum have recently started to adopt this Discovery model. On their rewards programme it is now impossible to attain the top level without purchasing additional Momentum products.

Funny how they keep going on about how they want you to live a healthier lifestyle, but all they are really interested in is tying you up in their products so that you are unable to change or it’s too much of an inconvenience to replace all the policies.

Next year the discounts will reduce, the benefits will be harder to achieve and their profit margins will grow exponentially.

I believe the reason why Momentum went that way is because Momentum is still a First Rand company via its shareholdings (well sort of).

As a Discovery Life policyholder, I find it incredibly complex to work out what is what with all the buckets, funds, boosters and discounts.
Unfortunately, they do not take into account life changes. I.e. if you have young kids and you are not able to maintain your Vitality status (which would come right in a couple years when your kids are not so reliant on you), your premiums spike.
I can’t cancel easily because other insurers that were competitively priced are now so much more expensive because I’m older.
I’m very disappointed and feel trapped in a system I can’t get out of.
Quite frankly I would be better off paying my monthly premium into a fund of some sort that would be available in the event of my death.

If you don’t understand it now, you clearly didn’t understand what you were getting into when you bought the product. If that occurred after FAIS came into effect on 30 September 2004 you may now have an actionable claim against the “adviser” who – it seems – may have not properly discharged his obligation to ensure that you were fully informed about the product which was recommended.

WheelerDealer, you need to find yourself a decent FA. They get paid bucketloads of commission for selling these products and they should be the ones engaging with the insurers and assisting you in navigating the buckets, funds, boosters and discounts you refer to. They should also be able to assist you with achieving your Vitality goals and in doing so get better premiums and paybacks. I too have young children and a hectic work schedule and my wife and I have been able to achieve our goals simply because we have been properly informed and guided by an adviser that has done what he gets paid for.

Having worked with a large number of financial advisers from different avenues, I have found that most of them are purely interested in the substantial upfront commission that is attached to selling a life insurance policy. They fail to recognise that as part of this significant financial reward they have the responsibility to continuously update their knowledge on the products that they are so eagerly willing to flog to you. This laziness ultimately ends up costing the clients while the adviser cruises off into the sunset or the nearest golf course with the new BMW they just acquired.

Yes, the Discovery products are indeed complex – mainly a result of thorough research and innovation. There are however a handful of advisers that see this as an opportunity, rather than an obstacle, to give their clients the best advice, fair treatment and unrivaled bang for their buck. They stay abreast of the latest product developments and engage with their clients on an ongoing basis, literally walking the Vitality journey with them and ensuring they get the maximum benefit and discounts available. Hats off to you few! Selling a policy is a journey, not merely a once-off event.

Life products (and Discovery being a prime example, is also not the only one) that have complex structures, it’s EASIER TO HIDE PROFITS from clients using a “SMOKE & MIRRORS” design approach.

It’s designed like that on purpose. And actually common in the financial industry (am not knocking the financial industry , as almost every other industry have their own unique way of fleecing customers with a courteous smile, be it medical service providers, the food processing industry, the car service/dealers, construction-industry, time-share industry, banking & finance/loans, etc etc). What I imply, just be acutely aware how the fin industry do it.

Another financial product that’s highly profitable, are those “derivative-based structured investment products” (many with offshore portfolios) which have complex design features to benefit the product designer, first and foremost.
One positive at least, is that many of such products have a capital-guarantee, but the returns upon maturity are so watered down, you may as well be better off in an interest-bearing investment (….even after paying tax on interest income).

Discovery is a bit like Scientology. You have to be a believer and once you’re in, they’ve got your for life…

It’s not just Discovery etc.
My wife/spouse took out a RA with Old Mutual in 1980….
Performance to date only yielded 3 % per annum…
Methinks this sucks!

You not alone, I schemed through my mom’s RA with Old Mutual the poor women has been contributing religiously since 1990 – the performance yield its so depressing to say the least, she was better off just putting the money into a savings account.

…now I feel better. At least my own RA Fund portfolios have also matched yours’ with 3% after cost return *lol*

The only benefit seems to be the tax-treatment, which is way better than the 3% growth (…by the way, which is tax-free within the fund growth. So it just shows how poor returns really are, despite zero tax on fund-growth) 🙁

“Are clients always getting what they expect?”

No. Because when they get it, they are typically dead.

Duh!

A good independent advisor who knows what they are doing will tell you the following:

1. Discovery Life is only one of many options. You should be shown the alternatives and assisted in making the most appropriate choice.

2. Underlying cover benefits must be relevant to your situation regardless of product choice. So should the contributions paid each month and the manner in which they escalate.

3. Discovery Life is not right for everybody. If you are not interested in Vitality then perhaps avoid outright or do not integrate your policy, as the upfront price discounts will over time be outweighed by the increased contributions applied due to Blue Vitality status. But do the comparison with competitor products – go for the alternative if the price is not right.

4. If you are into Vitality and generally have a healthy lifestyle then strongly consider Discovery Life due to the upfront discounts and annual and 5 and 10 year contribution Paybacks. These are significant and they do reward health behavior. Given that insurance is a grudge purchase in the first place, this has an obvious attraction.

5. Go into it understanding your core benefits and how they work – you can always add extras on in future. Understand that you must work hard to get to and remain on Diamond status. Ask your advisor for help on that. Some advisors even arrange regular Wellness days for clients to assist Discovery clients.

6. Your life, disability and dread disease cover is massively important and you will spend a lot of money on it over decades. Take the time to find an advisor who can give you the best options. It is not acceptable to be in the hands of someone who just pushes you into a product for commission and then has no follow up in terms of managing the policy with you over the time (which a Discovery Life policy would generally require). It is also not acceptable to be in the hands of an advisor who refuses to put the Discovery Life product forward at all simply because they themselves cannot understand it.

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