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MEDICAL SCHEMES – TO DO OR NOT TO DO. (Richer Life November 2004)

Since the changes introduced to broker commission on medical schemes in 2002, the number of financial advisors who offer advice on medical schemes has definitely dwindled. According to Warren Neale, FAIS Registration Manager of the FSB, 14 200 financial advisors have applied for FSP licenses to date. The Council for Medical Schemes (CMS) currently has 5 077 registered medical aid intermediaries. This alone indicates that less than 40% of financial advisors are active in the medical aid business. But, according to Discovery Health managing director Barry Swartzberg , even this ratio is very generous as many financial advisors have only licensed with the CMS in order to receive the trail fees on their existing books, and are not actively seeking new medical aid business.

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The reasons for broker lack of interest in medical schemes is obvious. Prior to the changes, commission on medical schemes was paid upfront in a similar manner to life policies. So a broker selling a family a medical scheme for R 1 500 per month could expect to earn an upfront commission of approx R 1 200. With today’s legislated as-and-when commission of 3% of premium per month, capped at a maximum of R 52 per scheme, that same scheme would earn the broker a commission of R 45 per month. This represents a huge dent in cashflow, especially for advisors that have built up their practices focusing on up-front commissions and are now sitting with overhead structures that require these large commissions to stay afloat. The annual license fee required by the CMS (R 1000 per broker and an additional R 1000 per broker house) has not encouraged brokers either.

Swartzberg believes that there is also a perception amongst brokers that medical schemes are very administration intensive. Families claiming every month from their scheme, could look to their broker to sort out any administrative hiccups and this could require significant resources in time and personnel. Contrast this to life and disability policies where claims occur few and far between, and an annual review between client and advisor is usually quite sufficient to keep the relationship going.

Despite these potential disadvantages, I believe that reasons abound for financial advisors to embrace medical schemes. As a starting point, medical aids are ubiquitous. Every family needs one. Indeed, if an advisor were to come across a middle-class South African family without any retirement, life or medical cover whatsoever, putting a medical scheme in place would arguably be the first priority. Coupled with this is the fact that due to medical inflation over the past years, the average family is spending close on 10% of their income on medical cover (a lot more than on life cover). Clearly there is a lot of money in the medical aid market.

Despite the government’s seeming intention to do away with the broker in the medical aid process, medical schemes themselves are becoming increasingly complex. Vast arrays of options are available to choose from and with all the legislative changes in chronic benefits and the like, selecting the appropriate cover (at an appropriate cost) for the client entails a customized and analytical approach. Ideally, the advisor needs to sit with each client, analyse the family’s health history and actually do the sums as to whether to go for a threshold plan or a hospital plan or a full-cover scheme. One-size-fits-all doesn’t work anymore.
As regards the pitfall of on-going administration, I believe it is a problem that can be cleared up with proper communication. Prior to FAIS there was always a lack of transparency in the advisor/client relationship. The advisor took the commission and was thereafter obligated to assist the client in their future financial matters in a murky sort of unspoken contract. Hopefully with FAIS now ensconced, a clearer mandate between advisor and client will be stipulated. Advisors need to spell out to clients upfront what can and can’t be expected of them regarding their medical aid. And if the advisor wishes to limit their assistance to comprehensively assist the client in selecting the right scheme and review plan options annually, then so be it. Given the bearing that this upfront advice will have on a client’s future health and wealth, many clients will still perceive value in this service.

Undoubtedly the best way for a broker to overcome the administration burden, is to recommend medical schemes that have smooth and efficient administrative back up. Indeed, a good scheme should ideally not necessitate any day-to-day involvement by broker after the inception of the scheme. And if it does require such, the advisor may agree to assist the client in future claims, but on an hourly or flat-rate fee basis, as the claims arise.

Momentum Health even facilitates an on-going fee arrangement with the option for the client to add a monthly broker administration fee over and above the medical scheme premium. According to Momentum Health’s Max Menzies, Business Development Manager for the Cape, 75% of their new business coming in includes this new broker administration fee. This facility will be particularly popular amongst brokers if the CMS scraps broker commission altogether, a concern that many industry participants harbour.

With the explosion of complexity in the whole spectrum of personal financial planning, advisors are also withdrawing from the medical aid market because they need to specialize and narrow down their ambit of expertise. I would agree with this sentiment wholeheartedly, but believe that the traditional groupings of areas of advice need re-considering. In the old days, life policies all had an investment element to them. As a result risk brokers were expected to be up on investment matters too. But in October 2000 Discovery Life pioneered ahead, offering risk-only life assurance. Consumers took to it, as it bought a hitherto unavailable transparency to the whole industry. Both risk products and investments could now be measured on their own costs and merits without being entangled in an indecipherable mish mash. The other major assurers have all been forced to follow, with Old Mutual offering risk-only products in 2001, Sanlam and Momentum in 2002, and Liberty in 2003.

Of course, Discovery Life had other very good reasons to separate investment from risk. At the end of the day, all of the assurers are faced with essentially the same mortality curves and the same costs. One of the few areas in which they can make themselves more competitive, is accurate underwriting. And who is in a better position to make accurate underwriting decisions than administrators of one of the country’s largest medical schemes? Rather than integrate life assurance with investment, Discovery recognized the synergy in integrating their health and wellness programes with their life products. Swartzberg is quick to point out that the health risks facing a medical scheme are often very different to those facing a life product, but Discovery’s competitive pricing in the market certainly points to more accurate life underwriting. Once again others are following, with indications that both Old Mutual and Momentum have plans to offer more integration between their medical schemes and life policies too. The upshot of all of this is that medical cover looks like it’s going to move closer and closer to life and disability assurance as time goes on, and just as the life assurance broker from ten years ago required some critical knowledge of investment portfolios, in the future they will require some critical knowledge of medical schemes.

As regards the commission flow from medical schemes, brokers who toss them out because they don’t pay upfront commissions are being short-sighted. Not only is up-front commission costly for the consumer – it is ultimately a trap for the broker too. Brokers need to ask themselves whether, in ten year’s time, they want to be looking for new clients at the start of every month or rather looking after their existing clients with a steady stream of annuity income. The upfront commission model does not make good long-term business sense. It’s a sort of get “paid now – service later” deal and from a pure resource point of view brokers who thrive on up-front commission better just hope that their clients don’t need too much service down the line which might not entail any new commission but nevertheless represent a cost to the broker. In fact, the whole upfront model breeds a type of “hit-and-run” mentality and has been the source of much bad press for the industry.

Investment brokers learnt long ago that building up ongoing trail fees is the more sustainable business option. Medical schemes represent a similar opportunity. And the 3% of premium is not out of line with what an investment broker would collect on a recurring unit trust investment. The cap of R 52 is really not as bad as it appears as it only kicks in at a monthly medical scheme premium of R 1 733, with the majority of premiums not affected at all.

But perhaps the greatest reason for offering medical aids is precisely because less and less brokers are in the market. Certainly this is what has prompted me to move my practice in this direction. Being unknown in my new homeground of Cape Town and building up a new client base, it is not easy to break into the over-serviced investment market. The boom in residential property is not helping, with cashflows being diverted from equity investments to bricks and mortar. But everywhere I go, and with most new clients that I meet, I am confronted with the same question: “Do you do medical aids? We need help on our medical aid.” And once you’ve helped with the medical aid you invariably get to help with the retirement planning and other needs too. As Warren Buffet once said: “It pays to explore unpopularity.”

 

Offering advice on Medical Schemes
PROS CONS
Everybody needs one Low as-and-when commission with capping
High average premiums Potential to be administration intensive
Little competition

Uncertainty about the future of commissions

Great “door opener” for other business  
Valuable integration with other risk business  

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