Globally, insurers are embracing digital-first business models with insurtechs and looking at ways to partner to expand revenue streams, reduce operational costs, and deliver higher profitability. Jaco Swanepoel, CEO of SilverBridge Holdings, discusses the importance of this in the local environment.
“Traditionally, life assurers competed mainly through product differentiation, distribution channels, and brand awareness. This business model generated income from risk, administration, and investment fees. A large part of the expenses was used to encourage intermediaries to write new business, service was average at best, and the customer was locked in when they signed on the dotted line.”
Insurers rely on well-established business policies and processes. Over the years, they have made sizeable investments in these practices and the support systems required. Furthermore, staff have been trained to intuitively understand the underwriting tricks required for new business and claims.
Actuarial practices to manage the risk of insurance companies are based on the average historical experience of past policyholders or other populations. This historical data is used to predict future outcomes that are expected to be better or the same as those of the past.
“However, these outcomes are a result of the actual behaviour of policyholders during the term of the contract. Until recently, it was not possible to monitor actual behaviour of an individual in a practical manner. Since the organisation has no information on the actual behaviour of their policyholders, it cannot help its policyholders to adjust risky behaviour to remain within the terms of policy contracts.”
He says that this behaviour is uncovered at claim stage and the claims then repudiated on valid legal grounds, resulting in significant brand damage to the insurer.
More recently, insurtechs have arrived on the scene with three clear messages: disruption; efficiency of processes; and customisation based on individual behaviour.
“With the existing insurance business based on well-established processes, the average experience of all policyholders, and prudent risk management, it should hardly come as a surprise that not everyone has embraced these start-ups with open arms.”
A vital problem is customers’ lack of confidence in insurtechs being able to pay out claims. An example would be a peer-to-peer start-up.
“People are insuring risk and not likely to opt for disrupters that might not be able to pay claims. They look at established brands to make them feel secure. The slick digital processes of insurtechs are not familiar to them and they feel suspicious about such a significant change to what they have grown used to.”
Swanepoel believes that despite huge investment, insurtechs are not making much progress to replace traditional insurers.
“It seems as if a logical next step is cooperation. There is no doubt that insurtechs will benefit the customers of traditional insurers by improving service and customisation of products. The success of Vitality demonstrates that there are segments of the market that is ready for change.”
For insurtechs to be successful in the traditional domain, it will have to address the concerns of employees that might fear the consequences of the efficiencies of digital processes and artificial intelligence.
“However, by working together and offering the best of both worlds (solid brand reputation with digital innovation), insurers and insurtechs can drive business growth in the connected landscape servicing both established customer segments as well as new ones,” he concludes.