Preventing Over Insurance

FMI’s Business person Elect (BPE) product has recently undergone significant enhancements. These enhancements include the addition of a Capital Disability benefit to complement our existing temporary and permanent income protection offerings.

When considering product options to present to your client, it is important to take the aggregation rules that the insurer follows into account, as it ultimately affects your client’s claim payout amount.  At FMI we aim to be transparent in our approach.

FMI does not aggregate on BPE Temporary Income Protector (TIP) or Business Overhead Protector (BOP) claims.

• A TIP or BOP claim amount will never be reduced because of amounts received from other insurers.
• However, please remember that other insurers are likely to reduce their pay-outs in light of amounts received from FMI.
• We do, however, apply financial underwriting on both Permanent Income Protector (PIP) and Capital Disability benefits on BPE, at application stage.
• Capital Disability and PIP payments are aggregated at claims stage.

Financial underwriting at Application Stage

• Financial underwriting at application stage is done to reduce the risk that a Life Insured pays for cover which may be reduced at claims stage due to claim stage aggregation. (i.e. preventing over insurance)
• The maximum permanent disability cover that an individual is eligible for at application is related to their current income and their selected term to retirement. The longer the term to retirement and the higher the current level income, the greater the amount of future earnings that would be lost in the event of a permanent disability.
• In order to do financial underwriting calculations at application stage, we therefore need to introduce an age factor to help us determine the multiple of current monthly income that the applicant is eligible for.
• The age factor is linked to the term of the policy when it commences. So for an applicant that is 45 years old when their policy commences and who has selected a retirement age of 65, their policy term is (65 – 45) = 20 years and the relevant age factor would be 240.

On application we limit the total amount of PIP and Capital Disability cover that may be applied for. FMI’s benefit limitation rules are automatically applied in our quotation package to limit the total value of the PIP and Capital Disability that a quote may be drawn for. The total monthly PIP cover, plus the total Capital Disability cover divided by the age factor must not exceed the applicant’s current monthly earnings. In calculating the maximum level of capital disability permissible, an allowance equal to two times current annual salary is excluded from the calculation.

Age factors

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Note that the total PIP cover refers to both the PIP cover that the applicant is applying for, plus any other permanent disability income cover that the applicant already has in force with other insurers. The same applies to total Capital Disability cover.

EXAMPLE 1: Financial Underwriting at Application stage

• Jack earns R40000 per month (his salary and his portion of the profits of the business he owns and runs).
• He is 45 when he applies for a BPE policy with a cessation age of 60
• Age Factor: 180
• Lump sum cover with another Insurer: R2 million
• He applies for the following benefits:

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His total PIP cover plus his total Capital Disability cover divided by the age factor will be equal to R41 889

How is this calculated?

R25000 (total PIP cover) + (R4 million (total Capital Disability Cover) – R960000 (first two times annual salary)/180 = R41 889

Because the above calculation gives an amount greater than Jack’s current monthly earnings, we need to reduce the cover applied for upfront.

Jack could either:

• Apply for a reduced PIP cover of R23111;
• Apply for reduced Capital Disability cover of R1.66 million;
• Reduce both PIP and Capital Disability cover so that the above calculation does not exceed his monthly earnings

Aggregation at Claim Stage

• FMI try as far as possible to avoid having to aggregate at claim stage.
• This is done by ensuring that we conduct thorough financial underwriting when cover is applied for, as well as having aggregation rules at claim stage that are consistent with the financial underwriting rules applied upfront.
• Aggregation at claim stage is only done on PIP and Capital Disability payouts.

How is this aggregation done?

• We first determine the Life Insured’s monthly pre-disability earnings. This ignores any income that is earned passively, e.g. rental income.
• We calculate the total permanent income cover that the Life Insured has. This is the total amount of PIP cover with FMI added to any other permanent disability income cover that they have with other insurers. This also includes any other income that they may be earning actively, but ignores any passive income.
• We determine the total lump sum disability cover that the Life Insured has, which is the Capital Disability Cover that they have with FMI added to any lump sum disability cover they enjoy with any other insurer.

Once all these amounts have been determined we need to ensure that the sum of the following formula does not exceed the Life Insured’s pre disability earnings:

(Total Permanent Disability Income) + (Total Lump Sum Disability) / (Age factor)

• As is the case upfront, we ignore the first two times annual salary of lump sum disability payout when determining this amount; which in effect could mean more than 100% replacement ratio for your clients.

Important info:

• The age factor is based on the Life Insured’s original term of their policy, not their remaining policy term when they became disabled.
• In practice the other insurer will also likely aggregate their payout, which will affect how we aggregate our payout.

Aggregation at Claims Stage can be avoided if the policyholder (who has been Financially Underwritten at Application Stage) ensures:

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  1. They are not earning a significantly reduced salary at Claims Stage;
  2. They do not purchase cover with other insurers subsequent to purchasing cover with FMI

EXAMPLE 2: Aggregation at Claims Stage

• John took out a BPE Policy at Age 40
• Cessation Age 65
• He is Permanently Disabled at Age 57
• He has PIP cover of R20 000 with FMI
• R10 000 PHI Cover with his employer’s Provident Fund
• R3 million Capital Disability Cover with FMI
• His Age Factor is 240
• Before he was disabled, he was earning R32 000 per month.

John’s Total Permanent Disability Income plus his Total Lump Sum Disability divided by the age factor is equal to R39 300

R30 000 (total PIP cover) + (R3 million (Capital Disability cover) – 768 000 (first two times annual salary)) / 240 = R39 300

Note how we have ignored the first two times annual salary with regards to his Capital Disability cover (this is the amount of R768000).

We will reduce the Capital Disability amount from R3000000 to R1248000 so that the above calculation does not exceed R32000. This benefit payout was reduced because John was over insured, financial underwriting at application stage would significantly reduce the likelihood of this occurring.

FMI are transparent in the processes we follow and hope that this approach highlights that we have your clients’ best interests at the forefront of all that we do. Our philosophy is simple. We pay claims.