A few years ago, one of the buzz words in financial services was "disintermediation". In the Internet age, the sales model that had served the life insurance industry so well - of one-on-one sales by intermediaries who earned commission - seemed under threat.
Surely the new Internet-enabled client would be able to gather information and then shop around for financial products?
Yet initiatives designed to capture these enabled clients, such as Liberty's MyLife and Old Mutual Direct, have been closed or scaled back and sales forces scaled up. Old Mutual, for instance, has increased its sales force by 12% to 2 400 and Liberty continues to expand .
Sanlam MD Leon Vermaak says global statistics show that direct marketing can account for 20% of policy sales, but in SA it is far lower . Other than the specialist direct offices such as Clientele and Hollard Life, only Metropolitan has made inroads through direct marketing. Hollard is also moving in the opposite direction, moving into the intermediary market.
Metropolitan Direct increased its share of total new-business premiums from 2% in 2000 to 7% in 2001 and its share of new recurring-premium income from 12% to 19%. Metropolitan MD Peter Doyle describes the direct products as low-premium, high-value, needs-specific products.
Not everyone is a fan of the commission-driven sales model. Capital Alliance MD Ian Kirk says its cost means consumers don't get value for money. Capital Alliance distributes primarily through a salary-based workplace marketing unit, CAL Commercial, as well as through banks (with the FNB funeral plan) and distributors in other sectors . Kirk says these delivery channels are far more cost-effective than one-to-one commission-based sales.
The value for money in life products is set to come under scrutiny. Under the Policyholder Protection Rules (PPR), introduced on July 1 2001, each intermediary has to disclose commission and declare their status as agents or independent brokers. Each life office has to accredit brokers to sell their products.
African Life MD Jeremy Rowse says there were fears that once commission was disclosed it would lead to a decline in sales, but these have proved to be exaggerated. "Perhaps when too much is disclosed to customers, they just get confused," he says.
Liberty executive director Mike Jackson says the work on the systems to comply with PPR was demanding . But now that the PPR system has been loaded, sales growth has resumed.
Life Offices Association chairman Niel Krige says PPR has made some impact among marginal intermediaries, who do not think it is worth the trouble involved to keep selling policies. But he expects far more of a shake-out with the Financial Advisors & Intermediary Services (FAIS) legislation. This will require brokers to produce audited financial statements and keep records on policy sales for five years. Complaints about brokers will now fall under the ambit of the ombudsman.
Many independent brokers will either leave the industry or join a network of independent financial advisers such as IFANet, Navigator or Tradewinds. These networks take care of legal and compliance issues. And tied agents may now think twice about leaving the fold . But established brokers are now more valuable.
Liberty, in particular, has turned its agents into a hugely valuable asset. Because of its proven skills at managing a sales force, it recently took over management of SBFC (formerly Stanfin), the Standard Bank broker network. The back-up from Liberty will be especially helpful in the new regulatory environment. Jackson says SBFC has remained static at 350 brokers for 10 years. Under Liberty management it would have grown to 700, he argues.
A similar relationship is evolving between Old Mutual and Nedcor's bank brokers, Nedcor Personal Financial Planning (PFP).
While bancassurance accounts for about 16% of Liberty's premium income, it accounts for just 4% of Old Mutual SA's - though banks are a major sales channel for Mutual's recently acquired US life office, F&G Life.
But Old Mutual SA MD Roddy Sparks expects bancassurance to become more important. The PFP relationship is already strengthening and its recurring-premium sales for Old Mutual were up 153% from 2000 to 2001.
Perhaps the most significant initiative for the long term is the alliance between Old Mutual group schemes and Peoples Bank. There are now 100 group schemes consultants in branches .
Though FirstRand has wholly owned banking and insurance businesses, its bancassurance initiative has only recently been given priority - in fact Absa remains a far more valuable sales channel for Momentum than First National Bank.
But Momentum MD Hillie Meyer says there is a section of the middle market that wants a straightforward savings product and not a financial adviser offering 400 options. These clients get great comfort from the FNB brand, which will be used to reach this market.
Southern Distribution Services (SDS) is a textbook case of a badly managed sales force destroying value. Momentum tried to revive it by setting up a joint venture with Capital Alliance. Capital Alliance bought out Momentum's share in November 2000. It was soon apparent that running a distribution force was not one of Capital Alliance's strengths. Kirk says Capital Alliance now sees itself as a wholesaler integrator, rather than a distributor.
But he says that if it had not gone through the SDS experience it might have been tempted to take on the Fedsure sales force when it took the Fedsure individual life business on to its books.
Capital Alliance did ensure that Fedsure individual policyholders were not prejudiced by the Fedsure disintegration as it insisted on taking balanced assets into its funds when it took over the individual life book from Investec. These had minimal exposure to the troublesome strategic assets, such as Saambou.
Momentum's Meyer says his office would have enjoyed even higher growth if it had not run out of offshore investment capacity. "If we had had our own sales force, they would have been out in the field selling our local products. There is a downside to being dependent on brokers."
Innovative offshore products have driven growth for Sanlam and it now derives 26% of its new recurring-premium income from the Stratus International Endowment and the Stratus International RA.
Offshore products have also been an important source of growth for m Cubed Life's retail products. Because there is limited capacity for offshore products, life offices can charge higher fees and earn fatter margins on these products.
But now that offshore capacity is drying up, life offices will have to look at more sustainable income sources.
Spare capital in a life office used to be a source of comfort, but the market is beginning to take a use-it-or-lose-it approach. Liberty has gone furthest in trimming its capital base, returning about R10bn to shareholders . Metropolitan Life has bought 10% of the shares in its holding company, New Africa Capital, which has authority to buy a further 10% of its capital.
Capital Alliance's Kirk says there is too much administration capacity for the size of the market. Capital Alliance can administer 10m policies, but even after the Fedsure takeover it has just 1m on its books. It can easily offer its services internationally as an administrator; it can load policies at a cost of R100, compared with £30-£50 (R500-R800) in the UK.
Other offices have looked for growth either geographically or in different product lines. African Life, for example, recently opened an operation in Zambia, after replicating its formula in Botswana, Namibia, Kenya and Ghana. It has also moved into the managed-care business through Ingwe.
Sage's future hinges largely on the success of its Sage Life of America business. Breaking into the US market is a slow process.
The sheer logistics of registering intermediaries takes time. Sage MD Janssen Davies says that after more than two years, out of 15 000 brokers who have shown interest in selling the product, only 2 500 are registered.
But there is now scope for Sage US's volumes and profits to increase quite sharply as it has designed products for two huge distributors, JP Morgan Chase and FirstUnion.
When Old Mutual bought F&G Life a year ago it acquired a business that already had strong relationships with intermediaries. It specialises in low-risk, fixed-annuity products .
But Old Mutual's international fortunes still rely heavily on the success of its huge US asset management business, after it acquired United Asset Management in September 2000. It still derives 78% of its earnings in rand but the Old Mutual share price is now geared to international markets.
Choosing between the two largest life assurance shares, Old Mutual or Sanlam, now boils down to whether the JSE will outperform international markets.
Sanlam is exploring options for international expansion, but its main foreign assets are its multimanager business and the actuarial consultancy Punter Southall.
It falls short of its embedded value new-business margin of 15%, which it intends to reach through increased volumes, a reduction in acquisition costs, improved client relations and reduced administrative costs.
Liberty was a pioneer of offshore investment in the Seventies and Eighties, but its efforts have been low-key recently. Liberty CEO Roy Andersen says the group looked at 14 potential acquisitions, locally and internationally, but considered the asking prices too high.
Its only significant offshore business is Liberty Ermitage, which Andersen says was a perfect fit as the team was already well-known to Liberty and it meets a need for sophisticated offshore savings products such as hedge funds.
In the short term, Liberty's strategy of exploiting its relationship with Standard Bank more effectively should have a material impact on EPS and embedded value.
Apart from bancassurance, the main co-operative venture is the new Stanlib, which merges Standard's and Liberty's asset management and investment product businesses.
Liberty Asset Management is on a roll and it is top of the Alexander Forbes Large Manager Watch over one year. The combination of Libam's investment success and Standard Bank's distribution is a strong platform for Stanlib to increase its retail and institutional market share.
As Momentum is a wholly owned subsidiary of FirstRand, its excess capital can be and has been redeployed within the group, so it is under less pressure than its peers to keep growing assets.
But its strategy of becoming the preferred provider to the independent broker market has not yet run out of road.
Momentum has gone further than its peers in pulling down the barriers between life products, unit trust-based products and banking products.
Its future lies as the main component of the FirstRand wealth cluster and its overseas expansion has focused on wealth management products, through its UK linked-product and multimanager businesses and by providing products for the Ansbacher private banking group.
But FirstRand's internationalisation strategy should certainly move up a gear.
New Africa Capital (formerly Metropolitan) is arguably going through the most radical face-lift of all the larger life offices. With assets of R34bn it is too big to be a niche player. In its latest annual report it formally admitted that it was shifting its marketing focus from the lower-income market to the middle- and upper-middle income segment. The lower-income segment has been troublesome because of the inroads that unemployment and the microlenders have made into disposable income. But the middle market is the bedrock constituency of Old Mutual and Sanlam and the prime target of most bancassurance initiatives.
New Africa Capital and Old Mutual are the two life assurance sector counters that have been through the most change in recent years, and still have unproven strategies.
The Sanlam share price, though, will recover if it can prove that it has got to grips with the basics and it can drive its profitability levels to those of its peer group. Some decisive action on the relationship with Absa would also help (see profile of Sanlam on page 97).
Liberty, which is seeking to do more than before with its proven skills, looks a safer bet, with better-quality earnings, but its margins and returns on equity already look quite full.
At the other end of the market, African Life is also comfortable with its business model and reluctant to put its shareholders through the risk of reinventing itself.