Insurance: What You Don’t Know Can Hurt You

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Is the insurance industry asking the right questions for protecting this unpredictable world? One thing’s for sure – as the world gets stranger, insurance is more important than ever.

Most urban-dwelling people have at least one form of insurance. What people don’t realise however, is that the insurance industry providing them that peace of mind has experienced more uncertainty in the past three years than it had in the three hundred before that.

Take the upcoming Retail Distribution Review regulatory changes for insurance as an example. First communicated to the industry in 2014 and implemented in the UK and Australia already, this regulation represents some of the most radical shifts the industry has ever seen. RDR aims to simplify insurance products to be sold with less barriers via simpler processes under TCF (Treating Customers Fairly). While certainly hoping to make things fairer for the policyholder, it has meant insurers everywhere rethinking the way they’ve done business for centuries.

This is just one ‘disruption’, a polite industry term for the rules of the game being turned upside down. In a time of climate change, political uncertainty and rapid technological innovation. Then there’s blockchain, robo-advice, driverless cars… the list goes on.

According to Swiss Re’s 2017 Sigma Report, it’s also getting more expensive – stating that the total economic losses from disasters in 2016 were the highest since 2012 at $175 billion, and a significant increase from $94 billion in 2015. That’s climate change alone.

Known unknowns

This has transformed the previously straight-laced insurance industry. As Avishal Seeth of Semeka says in the 2017 Sanlam Benchmark Survey: “in a world in which the rate of change is faster than the rate of research, gaps have opened up for those who think innovatively and take chances.”

“The key issue is that there is a lot unknown about the future, and yet we seem to be looking for solutions or a set of checklists that are conclusive,” says MiWayLife’s Head of Operations Zingisile Mtsutsa. “I’m asking myself if we are asking the correct questions in an environment that is clearly littered with uncertainty, and I don’t think the industry is asking the right questions for me as a consumer.”

This brings to mind the famous Donald Rumsfield quote: “there are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.”

Unknown knowns

Another ‘disruptor’ the average person may not know (but that each insurer is painfully aware of) is that longevity is not necessarily a good thing. We know that people are living longer and longer, with their retirements running out of steam before they do. According to America’s National Association of Insurance Commissioners, the U.S. average life expectancy at birth increased 62% from 47.3 years in 1902 to 76.8 in 2000, with expectations it will reach 79.5 in 2020. When you combine that with the Association for Savings & Investment South Africa (Asisa) saying that South Africans only have between 4 and 47 percent of the life cover they actually need, you know that we have a problem.

But what’s more concerning is that no insurer’s calculations or graphs can with 100 percent certainty tell you how much you’ll need to cover the rest of your life and the lives of your loved ones as the world is a very different place to the one that existed when life insurance was invented in the 1700s.

“The primary objective of insurance is to protect your financial position and hopefully give your dependents a financial boost after you’re gone,” says Mtsutsa. “This is regardless of when and how this happens. But statistical analysis is becoming less and less valid to predict future – just ask millions of 50+ year-olds worldwide who thought they had saved enough, until the 2008 financial crises (an unknown “black swan” event) hit. This means that success going forward is becoming less replicable. The fact that your salary and pension might be enough for you, does not mean it will be enough for your offspring.”

Unknown unknowns

Far from making insurance obsolete, these ‘interesting times’ make insurance more vital than ever before, argues Mtsutsa. “Financial decisions and structures need to be designed to accentuate the fact that there is more that we don’t know and therefore insurance becomes the life preserver for those known, futures. Life insurance is a reliable way to ensure that if you die, your loved one will be paid. And that gives your beneficiaries choice in quite an uncertain future.”

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This article by Miway.co.za first appeared in the FA news magazine.