Cover enriched by fewer HIV deaths

If you have funeral cover, you may be getting better value from an existing policy, or if you need it, you may find a policy offering enhanced benefits, and this could improve further in future.

This is because there has been a significant improvement in the average life expectancy of South Africans following the roll-out of anti-retroviral treatment (ART) for people with HIV. The biggest impact has been on funeral policies and other so-called “entry-level” life cover policies, which have swelled life assurers’ profits in recent years.

A paper presented at a recent actuarial conference showed that profits were up such that, if they were passed on to policyholders rather than shareholders, life assurers could afford to cut funeral policy premiums by 11 percent or increase cover by 29 percent.

The improvement in life expectancy – known in actuarial circles as “mortality” – has also had positive effects on group life cover and, to a much lesser extent, life cover offered to higher-income earners. But life assurers say that group life cover costs are typically adjusted annually, resulting lately in a higher portion of your employer’s contributions being allocated to your retirement fund. And, they say premiums on higher-value life policies have either been negatively affected by other factors, resulting in premiums staying relatively stable, or they have come down.

Life assurers have traditionally been quite conservative in their approach to cover for people with HIV/Aids. It took until 2007 for assurers to stop excluding deaths caused by HIV/Aids in life policies, and until last year to offer people with HIV the same policies that are offered to people with other chronic illnesses, but with premium loadings for the diseases. Before that, most larger assurers did not offer life cover to people with HIV, and only some smaller ones offered it to those who proved they were adhering to ART.

This is despite research presented to an inter national actuarial conference showing that mortality rates among people with HIV were, in many instances, better than for those with diabetes.

The life industry’s conservative approach to those with HIV/Aids was highlighted at the recent Actuarial Society of South Africa conference in Cape Town during a presentation on how the turning of the HIV epidemic has affected funeral and entry-level life policies.

Independent researcher and former Merrill Lynch analyst, Marius Strydom, together with actuaries Davy Corubolo of the University of Stellenbosch and Carike Nel of Deloitte, presented research showing that life assurers are likely to see their margins on new funeral policies increase by 60 percent as a result of improved mortality (policyholders living longer), and these margins could be 64 percent higher following the government’s decision to provide more people with HIV with ART from January next year.

The current policy is to provide ART to you if you have a CD4 count of less than 350. From January next year, you will be eligible for ART if you have a CD4 count of less than 500. CD4 blood cell counts measure the progression of the disease.

You typically do not need to go for any medical tests to take out funeral cover and entry-level life policies, and Strydom says the paper he wrote with Corubolo and Nel, “Accelerated ART roll-out: an investigation on the potential impact for SA life assurers”, again highlights an issue that you should be aware of: if you are healthy, you are likely to get a better rate on a policy that requires you to have medical tests than on a policy that does not. This is because, as a healthy person, you will get a better rate than the group rate set for people who take out funeral and life cover that does not require medical tests or underwriting.

According to Strydom, Corubolo and Nel, in 1985, the average life expectancy for South Africans at birth was 62 years. When the HIV/Aids epidemic peaked in 2006, the average life expectancy fell to below 54 years. It is now back to 61 years, and the authors predict that in a decade it will be at 65 years.

The authors note that in recent years life companies have passed on to you, as funeral and entry-level policyholders, the benefits of the improvements in the mortality rates.

WHAT ASSURERS ARE DOING

Andrew Cartwright, Old Mutual’s general manager for protection solutions, told Personal Finance that on existing policies you will typically get the benefits through an increase in the amount for which you are covered each year.

Cartwright says life assurers do not usually adjust premiums on existing funeral and entry-level policies, because they often do not have the mandate to do so without the policyholder’s consent – so it is easier to adjust cover.

Anne Livingstone, the chief executive at Sanlam Sky Solutions, says all life assurers that offer funeral cover and entry-level policies have recently launched new products with features intended to offer you greater value for money.

However, while new products may appear attractive, be careful of a long waiting period on a new policy.

But Strydom, Corubolo and Nel say that while some improvements in mortality rates have been taken into account, the mortality data used by life assurers is not up to date. They also say that assurers have not taken into account future improvements in life expectancy that are expected to come about due to the expansion of the government’s anti-retroviral programme. Life assurers typically wait for confir mation of improved trends before changing their rates, they say.

Almost 60 percent of the Actuarial Society conference delegates attending Strydom’s presentation said that life assurers’ assumptions on mortality were conservative and could in future result in better benefits for you.

Strydom urged life assurers to put the improved profits they are likely to make on funeral policies to better use. He said one of the biggest problems with funeral policies is the high number of policies that are allowed to expire, or lapse, due to a failure to pay the contributions.

Funeral policies have a 17.3-percent lapse ratio, while higher-value life policies have a much lower 7.7-percent lapse ratio, Strydom says.

He says life assurers could use the profits they make on these policies to be innovative and prevent policyholders from lapsing their cover. He suggested “sizeable cash-back” payments of, for example, 13 months of premiums, could be made to policyholders every five years, or policies could have a surrender value (a cash value on termination of the policy) that can be realised only after five years.

This would help to keep policyholders paying their premiums, particularly in the first four years of the policy, when the lapse ratio is high, he says. Fewer lapsed policies could allow more benefits to accrue to you, as each new policy has upfront costs that life assurers recoup from your premiums.

Livingstone and Cartwright say Sanlam and Old Mutual are already offering cash-back payments on policies to lower the lapse ratios, but don’t believe that cashback payments can prevent lapses entirely.

Cartwright says that if you have a minor financial crisis, a future cash-back payment may incentivise you not to terminate a policy, but if you have a major crisis, such as losing your job, you will be unable to pay the premiums and the cashback payment will be irrelevant.

Life assurers charge higher premiums to fund cash-back payments, so if you are forced to terminate a policy, you will have paid higher premiums without enjoying the cash-back benefit. For this reason, Old Mutual does not believe these payments alone are the way to pass on the benefits of improved mortality, he says. Giving higher cover for the same premium passes the benefit to all policyholders, while premium holidays, or premium waivers, of up to six months can help to prevent policies being lapsed.

Cartwright says that life assurers offering surrender values on policies could give you an incentive to cancel your policy to get the cash.

Strydom also suggested that life assurers use the profits made on funeral policies as a result of improved mortality to allow policyholders to stop paying premiums at the age of 60. Alternatively, he says, life assurers could provide “premium holidays” of between two and four months.

Livingstone says Sanlam’s newest funeral policy offers free cover for anyone over the age of 85 covered on your policy after you have been paying premiums for 15 years.