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Nearly six million individual recurring-premium risk policies were bought in the first six months of 2021, according to the Association of Savings and Investment South Africa (ASISA). However, in the same six months, 3.7 million policies lapsed.
Although lower than in 2020, the actual number of lapsed policies is still high. A lapsed policy leaves a family without protection and a business without income. Managing lapses is going to be key for financial advisers in 2022.
Lapse rates are a critical measure for life insurers, who regularly monitor and report on the number of policies no longer in force. Financial advisers need to be equally diligent, as high lapse rates negatively affect their businesses, with clients and earnings adversely affected, and access to favourable commission payment structures limited. Advisers with low lapse rates often have access to payment options such as daily commission payments, which helps with cash flow management in their business.
2022 economic conditions put lapses in the spotlight
In the year ahead advisers need to pay extra attention to clients with unpaid premiums and potential lapses. Underlying economic conditions are making it difficult for many households to make ends meet, real disposable income is not growing significantly and take-home pay in the country has not changed much in the last two years.
In fact, take-home pay declined by 3.1% in October 2021 compared to the previous year, the largest decline since 2018. This is according to the Bankserv Africa October 2021 take-home pay index, which also shows that take-home pay has remained between R12 000 and R13 150 over the last 25 months.
For most households, this pay has to stretch further to pay for higher food, transport, electricity, education and healthcare costs, not to mention higher interest rates. Salary increases, which are not expected to be high, will most likely be used to relieve some of the strain rather than increase spending. In this climate, households may well start to make either or choices and allow insurance policies to lapse.
However, it is clear that consumers appreciate the value of risk products such as life insurance and funeral cover. Fewer policies lapsed in the first six months of 2021 compared to 2020, and a high number of new policies were bought.
Furthermore, the coronavirus pandemic has seen the country’s life expectancy fall by 3.1 years for males and 3.8 years for females, according to Stats SA, further pointing to the importance of life insurance and funeral cover.
Finding a solution and alternative to a lapse is a preferable option – for everyone.
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Analyse lapses and take action
Advisers need to closely follow lapse rates to identify any trends and investigate reasons for any changes so they can take action to protect their clients and brokerages. A family left without a breadwinner and no insurance after an unexpected or early death is devastated financially and emotionally.
There are a number of actions advisers can take to make sure as few clients lapse as possible:
Monitor unpaid premium reports
Look for spikes or falls in unpaid premiums and changes in the age of policies that make it onto these reports. Any unpaid premium should be investigated, but unpaids occurring more frequently on policies that have been in force for many years is a warning sign to pay attention to. Keep a record of unpaid premiums using either software such as a practice management system, or product provider reports, so the information is easily accessible, and problems can be identified quickly.
Analyse the reasons for unpaid premiums and lapses
Sometimes preventing a lapse is as easy as changing a debit order date, banking details, or fixing a service issue. Sometimes it’s about adjusting the budget to make space for the essentials, which includes life and funeral cover, or finding solutions to a temporary cash flow problem.
Advisers need to take some time to find out from clients exactly why premiums are unpaid – before a policy lapses. There are times when clients simply cannot afford premiums, and then alternatives such as lower cover can be investigated after an FNA has been completed to show how needs and affordability can be matched. From a 1Life perspective our 1Plan uses an algorithm to determine the client’s affordability at life stage. Insurance is not an all or nothing product – it is flexible and adaptable.
Advisers can also use the information obtained when analysing unpaid premiums to identify clients with a similar profile who may be at risk for potential future lapses. Proactively discussing budgets and affordability with these clients can prevent unpaid premiums and lapses.
Talk to product providers
If lapses are high, advisers need to meet with product providers to let them know their findings and concerns. Product providers have a wealth of experience, and as much interest in clients not lapsing policies. Together advisers and product providers can come up with ideas and solutions for clients struggling to pay premiums.
Policyholders have a 30-day grace period to pay premiums. Most insurers give further grace periods and only lapse policies after two or three unpaid premiums, so there is time to identify problems and find solutions.
Preventing lapses builds trust
Working with clients to make sure they have cover and finding affordable solutions when budgets are tight is essentially a trust building exercise. It makes business sense, but it also builds relationships and helps clients protect their families and their assets – which is always critical, but perhaps more so in 2022.