Cutting out the middle man in buying insurance can cost you dearly
Recent press reports tend to give much attention to the activities of direct insurers, who claim "by cutting out the broker you can save up to 25 percent of the premium".
What are the facts when buying insurance through a broker versus buying it direct from an insurer? In South Africa, about 80 percent of short-term insurance is purchased through insurance brokers. Even though it has always been possible for consumers to buy directly from insurance companies, they prefer to purchase through brokers.
While South Africa has seen the emergence of new, high-profile, direct insurers such as Outsurance and Dial Direct, which aggressively advertise to the consumer market that they are cheaper, this has had very little effect on the percentage of business done through brokers.
Is it necessarily cheaper to buy from a direct insurer? There is ample evidence that insurance brokers are often able to put together a superior solution to the needs of a particular consumer at a cheaper premium than the "off-the-shelf" product sold by direct insurers.
How do product offerings compare? Direct insurers offer mostly standard products, while brokers are able to develop a tailor-made solution for their clients. In many respects the "off-the-shelf" product will be inferior to the tailor-made product, as those offered by direct insurers are often quite inflexible in their design. Direct insurers only offer you only their product; whether this is suitable or not for your needs, while brokers select the most suitable cover and cost-effective price.
Most lay people have little understanding of insurance jargon. A consumer is at a disadvantage when buying direct, as there is no one to interpret his or her specific needs and point out the different options and the consequences.
One of the main functions of an insurance broker is to understand the needs and circumstances of clients and to offer the most appropriate solution to their needs. An intermediary is obliged to ensure that the client is put in a position to make an informed decision.
When dealing directly with insurers, this necessary function is excluded and the consumer is left to his or her own devices in assessing the quality of the product. Few consumers are in a position to make an informed decision when they forsake the advice of intermediaries.
When do you need intermediaries most? A short-term insurance product lends itself to regular interaction between the client and the insurer. A consumer faced with dealing directly with an insurer in the event of a claim is always at a serious disadvantage. Consumers have little understanding of how claims are assessed and what the limitations are on their cover. They often feel helpless because they don't get what they expect.
A consumer who deals through an insurance intermediary has the advantage of dealing with someone who has a strong relationship with the insurer and who fully understands how claims need to be handled to ensure an efficient settlement of the claim. In addition, the broker seeks to retain and enhance relationships with clients, so will make every effort to ensure that valid claims are fairly met. Many brokers have claim-settling authority and deal with clients themselves.
The time a the consumer needs an intermediary most is when a claim arises. If clients had used an intermediary in the first instance they would be fully informed as to what cover they enjoyed and what conditions and exclusions existed.
We all know that insurance is a grudge purchase, but that it is about peace of mind and knowing that when something unforeseen happens, you will not suffer financial loss. What is peace of mind worth? Is it worth sacrificing certainty in exchange for something that is cheaper? Or are you better off in ensuring that peace of mind is achieved through understanding of your needs, proper solutions through good advice? And it might not be any more expensive.
The old adage that buying cheap can be expensive is particularly true in short-term insurance. Don't be misled by the lure of cheaper premiums by cutting out the middleman, it can cost you dearly.
