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Promoting public trust in the insurance industry by building adequate human and financial capacity

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The insurance business, perhaps more than any other, thrives on trust and commitment.  Any contract between an Insurer and the Insured is a contract of utmost good faith and as such requires honesty and trust from both parties.  For this to happen successfully, the insurance sector must first win the trust and confidence of the insuring public.

Unfortunately, the common challenge facing the industry is low public confidence coupled with a deep seated mistrust of insurance companies.  Some of the reasons for these issues can mainly be attributed to:

  • The very high expectations of members of the public of insurers.
  • Greater awareness of how insurance operates elsewhere in the world;
  • The increasing level of education with its associated awareness of legal rights.
  • Bad claims experiences encountered by policyholders;
  • Lack of clarity of insurance policy documents,

The above issues provide a perfect environment for breeding suspicion in the minds of clients.

There are two fundamental questions that if properly addressed will help minimize the erroneous public impressions about the insurance industry.

These are:

  • Can insurance companies live by their promises to pay genuine claims promptly?
  • If a policyholder or claimant is aggrieved, are there provisions or avenues for redress without the need to go through cumbersome legal processes?

The answer is “YES”. That being so, what then is the problem as insurers? Putting the question the other way round “What then is the public’s problem of insurers?

It is a common knowledge that majority of those who purchase insurance products do so either because they:

–   require some form of protection, or.

–   are compelled (either by law or other contractual provisions/conditions) to buy insurance.

This form of involuntary buying of a product is what I would like to refer to as “grudge purchase” that is, buying when you would have wished not to buy. By that I mean all things being equal, people would wish they do not have to purchase insurance, except that they feel compelled by circumstance to act against their wishes, and so they grudgingly purchase insurance for say contractual or to meet regulatory requirements.

So when their expectations are not met, their level of frustration goes up through the roof. They bad-mouth all insurers and so provide more fuel to public mistrust of insurance.

What Is The Level Of Mistrust?

On the part of the insuring public, the level of mistrust is best measured when you sample opinions randomly.

Comments you hear are like;

  • Insurance people are quick to take the premiums but when it comes to paying claims they keep dragging their feet, and sometimes even refuse to pay.
  • Insurance people charge huge premiums and only reduce it when another company offers a lower premium for “the same risk”.
  • Without a solicitor, you cannot make an insurance claim.
  • Once the premium is taken, you do not see them until renewal is due.

From the insurers point, at certain times, we tend to be very rigid with the claims because we suspect the client has likely exaggerated the claim quantum or has faked the entire claim altogether.

How To Promote Public Trust In The Insurance Industry?

Promoting public trust is a herculean task but not insurmountable.  An effective promotion of the following will be a sure step in the right direction in addressing this critical issue:

  • Effective communication at the point of selling and at the time of claim.
  • Professionalism in handling clients at both underwriting and especially claims handling stages.
  • Changing the attitude of our front line staff,
  • Being innovative in our approach to business by embracing technology to enhance service delivery
  • An effective and robust Regulator to ensure and monitor standardization across the industry as well as create awareness to the public.

Building Adequate Human Resource Capacity

There could be no other effective approach to tackling issues of the industry than building adequate human capacity. A systematic attempt at training and retraining the human resource base across the industry is key to promoting the insurance industry.

This industry approach should cut across the operational triangle of the industry.

The three [3] stakeholders are:

  • Insurers
  • Intermediaries
  • Regulators

The approach must be holistic and most importantly be on a sustained basis to ensure that technology does not overtake our industry.

It is very critical that the Human Resource base of the insurance industry is well motivated, adequately resourced in terms of job tools and competitively remunerated to ensure they acquire the inner drive to deliver effectively and efficiently.

The doctrine of UTMOST GOOD FAITH which is the operational pillar of insurance must be emphasized at all levels of training.

Need For Financial Capacity Building

In the absence of an adequate and self-sustaining Financial Capacity, no insurance company is able to fulfill its mission for being in business and also to motivate the Human Resource base.

Financial Capacity building for an insurance company implies that the necessary steps that insurers need to undertake in order to have a stronger ability to appropriately manage the expenditure items that befall them.

Of particular interest is the organization’s ability to manage its claims and management expenses – especially staff cost, within its own resources without recourse to loans and overdrafts.

Building financial capacity would involve, among others the following:

  • Growing premium income,
  • Taking concrete steps to reduce cash flow-out (e.g. claims payout, management expenses, etc.)
  • An investment regime that targets putting funds in solid financial systems within the ambit of the regulatory regime.
  • Effective Executive leadership
  • Strategic Board Governance.

The core strategy should involve:

  • Developing very realistic and accurate overall budget that involves all cost centers of the company to the extent that everyone makes an impact into revenue and expense projections.
  • Periodic financial updates to all parties showing expenses to date matched with actual revenue vis-à-vis the budgetary provisions.
  • Engagement of Management with staff who are already adequately briefed on the financial status so deliberations could bring up what needs to be done to keep the finances on course.

With these strategies in place, it is important the companies put structures in place to check financial leakages in the system to ensure that capacity is sustained.

Issues to Note

Currently, there are some skills gap that needs to be bridged, hence the urgency in building our human resource capacity backed by sustainable financial capacity – a capacity level that can support the existing businesses and new opportunities that will be created.

It is therefore incumbent on the industry to find creative ways to build up financial capacities devoid of sole dependency on premium income.  Forming partnerships will help spread the cost of innovations and therefore help the bottom line.

On the human resource front, insurers need to do a better job in the area of customer-centered processes.

This will include the following:

  • Delivery and execution by exploring the process of “doing more with less”.
  • Close the skills gap through training and hiring “new generation” staff that understand this tech-generation.
  • Fully understand the customer journey – from information through purchase and claims.
  • Enhancing and understanding the human processes in commerce – this will enable us to travel with the client on his/her journey as a client.
  • Interconnecting the traditional way of doing insurance with digital models including taking advantage of current social media, etc.

It is unfortunate to say insurers have aided the development of mistrust for the industry from the insuring public. To stay relevant in the competitive environment, the insurance industry must discard the one way approach to issues and embark on multi-disciplinary approach.

This approach will greatly enhance the building of robust human resource capacity.  This approach brings a new perspective for the insurance industry in understanding the importance of investing in individuals and organizational human resources, and the implementation of capacity building strategies.

It is also essential to note that it is the responsibility of insurers to help educate the general public in order to improve upon the low awareness and understanding of insurance which has led to mistrust.

Also, insurers need to re-engineer the processes that will build a robust financial capacity to sustain the new opportunities.

Above all, insurance companies must also manage their operational risks within the framework of Enterprise Risk Management in order to be able to critique the risk areas relating to leakages, and non-performance. For insurers to see tomorrow, they must first survive today.

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Insurance

How Much Life Insurance Should an Individual Carry?

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Very few people enjoy thinking about the inevitability of death. Fewer yet take pleasure in the possibility of an accidental or early death. If there are people who depend on you and your income, however, it is one of those unpleasant things you have to consider. In this narrative, I’ll approach the topic of life insurance in two ways: First I’ll point out some of the misconceptions, then I’ll look at how to evaluate how much and what type of life insurance one needs.

 

Does Everyone Need Life Insurance?

Buying life insurance doesn’t make sense for everyone. If you have no dependents and enough assets to cover your debts and the cost of dying (funeral, estate lawyer’s fees, etc.), then it is an unnecessary cost for you. If you do have dependents and you have enough assets to provide for them after your death (investments, trusts, etc.), you still do not need life insurance.

However, if you have dependents (especially if you are the primary provider) or significant debts that outweigh your assets, you likely will need insurance to ensure your dependents are looked after if something happens to you.

 

Insurance and Age

One of the biggest myths aggressive life insurance agents perpetuate is “insurance is harder to qualify for as you age, so you better get it while you are young.” To put it bluntly, insurance companies make money by betting on how long you will live. When you are young, your premiums will be relatively cheap. If you die suddenly and the company has to pay out, you were a bad bet. Fortunately, many young people survive to old age, paying higher and higher premiums as they age (the increased risk of them dying makes the odds less attractive).

Insurance is cheaper when you are young, but it is no easier to qualify for. The simple fact is insurance companies will want higher premiums to cover the odds on older people, but it is a very rare that an insurance company will refuse coverage to someone who is willing to pay the premiums for their risk category. That said, get insurance if you need it and when you need it. Do not get insurance because you are scared of not qualifying later in life.

 

Is Life Insurance an Investment?

Many people see life insurance as an investment, but when compared to other investment vehicles, referring to insurance as an investment simply doesn’t make sense. Certain types of life insurance are touted as vehicles for saving or investing money for retirement, commonly called cash-value policies. These are insurance policies in which you build up a pool of capital that gains interest. This interest accrues because the insurance company is investing that money for their benefit, much like banks, and are paying you a percentage for the use of your money.

However, if you were to take the money from the forced savings program and invest it in an index fund, you would likely see much better returns. For people who lack the discipline to invest regularly, a cash-value insurance policy may be beneficial. A disciplined investor, on the other hand, has no need for scraps from an insurance company’s table.

 

Cash Value vs. Term

Insurance companies love cash-value policies and promote them heavily by giving commissions to agents who sell these policies. If you try to surrender the policy (demand your savings portion back and cancel the insurance), an insurance company will often suggest that you take a loan from your own savings to continue paying the premiums. Although this may seem like a simple solution, keep in mind that if the loan is not paid off by the time of your death, it will be subtracted from the death benefit.

Term insurance is insurance pure and simple. You buy a policy that pays out a set amount if you die during the period to which the policy applies. If you don’t die, you get nothing (don’t be disappointed, you are alive after all). The purpose of this insurance is to hold you over until you can become self-insured by your assets. Unfortunately, not all term insurance is equally desirable. Regardless of the specifics of a person’s situation (lifestyle, income, debts), most people are best served by renewable and convertible term insurance policies. They offer just as much coverage, are cheaper than cash-value policies, and, with the advent of internet comparisons driving down premiums for comparable policies, you can purchase them at competitive rates.

The renewable clause in a term life insurance policy allows you to renew your policy at a set rate without undergoing a medical exam. This means if an insured person is diagnosed with a fatal disease just as the term runs out, he or she will be able to renew the policy at a competitive rate despite the fact the insurance company is certain to have to pay a death benefit at some point.

The convertible insurance policy provides the option to change the face value of the policy into a cash-value policy offered by the insurer in case you reach 65 years of age and are not financially secured enough to go without insurance. Even if you are planning on having enough retirement income, it is better to be safe, and the premium is usually quite inexpensive.

 

Evaluating Your Insurance Needs

A large part of choosing a life insurance policy is determining how much money your dependents will need. Choosing the face value (the amount your policy pays if you die) depends on:

  • How much debt you have. All of your debts must be paid off in full, including car loans, mortgages, credit cards, loans, etc. If you have a $200,000 mortgage and a $4,000 car loan, you need at least $204,000 in your policy to cover your debts (and possibly a little more to take care of the interest as well).
  • Income replacement. One of the biggest factors for life insurance is for income replacement. If you are the only provider for your dependents and you bring in $40,000 a year, you will need a policy payout that is large enough to replace your income plus a little extra to guard against inflation. To err on the safe side, assume that the lump sum payout of your policy is invested at 8% (if you do not trust your dependents to invest, you can appoint a trustee or select a financial planner and calculate his or her cost as part of the payout). Just to replace your income, you will need a $500,000 policy. This is not a set rule, but adding your yearly income back into the policy (500,000 + 40,000 = 540,000 in this case) is a fairly good guard against inflation. Once you determine the required face value of your insurance policy, you can start shopping around. There are many online insurance estimators that can help you determine how much insurance you will need.
  • Insuring others. Obviously there are other people in your life who are important to you and you may wonder if you should insure them. As a rule, you should only insure people whose death would mean a financial loss to you. The death of a child, while emotionally devastating, does not constitute a financial loss because children cost money to raise. The death of an income-earning spouse, however, does create a situation with both emotional and financial losses. In that case, follow the income replacement calculation we went through earlier with his or her income. This also goes for any business partners with which you have a financial relationship (for example, shared responsibility for mortgage payments on a co-owned property).

 

Other Ways to Calculate Your Needs

Most insurance companies say a reasonable amount for life insurance is six to 10 times the amount of annual salary. Another way of calculating the amount of life insurance needed is to multiply your annual salary by the number of years left until retirement. For example, if a 40-year-old man currently makes $20,000 a year, under this approach, the man will need $400,000 (20 years x $20,000) in life insurance.

The standard of living method is based on the amount of money the survivors would need to maintain their standard of living if the insured died. You take that amount and multiply it by 20. The thought process here is the survivors can take a 5% withdrawal from the death benefit each year (which is equivalent to the standard of living amount) while investing the death benefit principal and earning 5% or better.

 

Alternatives to Life Insurance

If you are getting life insurance purely to cover debts and have no dependents, there is another way to go about it. Lending institutions have seen the profits of insurance companies and are getting in on the act. Credit card companies and banks offer insurance deductibles on your outstanding balances. Often this amounts to a few dollars a month and in the case of your death, the policy will pay that particular debt in full. If you opt for this coverage from a lending institution, make sure to subtract that debt from any calculations you are making for life insurance—being doubly insured is a needless cost.

 

 

 

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