These narratives normally take the following form:
“The current players/industry have this big problem, which is detrimental to you, and through our clever tech or business model, we will solve it, and you will win.”
This is super cool. But only when two fundamentals are true: that the industry does in fact have a problem, and secondly, that their solution will solve it.
Unfortunately, we have seen a number of stories from new players which fail on one or both counts. And this is particularly problematic when the failures are nuanced and hard to spot.
We’ve noticed a trend locally, and internationally, around the concept of peer-to-peer insurance. (Peer-to-peer insurance is generally a system where you pool some of your premiums with people you know, like friends and family. Any claims arising in this group are paid from this pool. This differs from traditional insurance where the insurer takes the responsibility to pool the risk, amongst people you don’t necessarily know, and pays the claims.)
The fictional story typically has the following hallmarks
- When insurers don’t pay your claims, they profit (so their interests, and yours, are opposed).
- Very little of your premium actually gets spent paying claims, and the rest is therefore waste.
- There is a lot of insurance fraud out there, and insuring with your mates will reduce this.
And voila, insuring yourself with your buddies solves all of this. This story sounds super plausible, right? And it’s quite compelling, so it does do the job of getting the new guy’s attention.
The problem? It’s not true.
1. “When insurers don't pay your claims, they profit”
There are a number of issues with this statement, and while technically, from an accounting point of view, this is true — the reality is that South African insurers (at least) don’t behave like this. And this is because, we are in the business to pay claims. When the business is sold, money is put aside to pay expected claims, and then some. From an insurer’s point of view, the cost of claims is a given, and the money to pay them is already there.
Insurers set themselves up to be going concerns for decades into the future. It would be incredibly short-sighted to have a culture or strategy of not paying claims, if they want to survive for a long time.
In the age of social media, how long do you think an insurer would last if they routinely declined valid claims? Moreover, South Africa has a very active and powerful ombudsman, which serves the purpose of policing things like this.
So, perhaps I haven’t convinced you that the problem being solved isn’t a problem at all. And if not, then I’ll try to convince you that the peer-to-peer insurance model wouldn’t even help if it was a problem.
A pure peer-to-peer system says that your premiums are put together with your peers, and any claims from that peer group are paid from that pool. The problem is that a pure peer-to-peer system is impossible. And this is because there will be periods of time when claims are significantly higher than one expects.
For example, let’s assume that a bunch of Knysna residents decided to try P2P home insurance. For a few years, the system would’ve worked fine. Then the Knysna fires came along, devastating properties in the area. The people in this group would all try to claim, and surprise surprise; the money would run out, and not everyone would get paid.
So, how do the P2P guys try to get around this obvious shortcoming? Typically, they put a reinsurance arrangement in place (reinsurance is insurance that insurers buy for themselves to spread their risks — think of it as Inception — see what we did there?) This means that a portion of your premium goes to pay for reinsurance, and is going to be gone regardless of the claims that happen. And the reinsurer will stand in for the claims that exceed the money in the pool.
So, if you believe a problem is that insurers don’t pay claims to boost their bottom lines; then this criticism is necessarily also true of reinsurers. So P2P insurance is not solving this problem (which is a red herring anyway), but rather shifting the problem from one insurer to another insurer.
2. “Very little of your premium actually goes to paying claims”
Again, simply not true for mainstream insurance. One of the new kids on the local block claims that only R36 of every R100 in premiums pays for claims. Wow! Now that is a problem!
I did a fact check against a big general insurer, Santam, since these new kids were playing in their space. A quick look at their 2016 income statement showed Net Revenue of about R19bn and Net Claims and Benefits outflows of about R12bn (assuming I’m reading them correctly).
This gives a ratio of closer to R63 spent on claims per R100. I’m not sure if this is good value or not for general insurers, but it is certainly much better than R36 per R100.
This is not as nuanced as the first problem. It is downright false.
3. “Fraud is a problem in the industry, and peer-to-peer insurance can solve this”
Here, they may well be onto something. Fraud certainly is an issue in insurance, and more specifically with general insurance (home, contents and car insurance).
The argument goes that people will more easily try to screw over their insurer, than their mates. This is probably generally true, but it assumes that most insurance fraud has its roots in malice and greed, rather than necessity. For example, assume you insure your car on which you still owe some money, and you happen to write it off after you’ve had a couple of drinks. If your insurer knew about the drinking, they wouldn’t pay your claim, but you’re in a situation where not being paid out could ruin you financially. Although you may see yourself as an honest person, necessity may drive your willingness to mislead the insurer about the circumstances of the claim. In exactly the same situation, I’m not convinced P2P insurance would significantly reduce this type of dishonest behaviour.
Unfortunately for P2P players, the insurers are already pretty good at detecting and combatting fraud. And it’s this fact that could result in possibly more fraud with P2P than traditional insurance. Because the insurers have every incentive to actively look for and detect fraud, they make an enormous effort to do so. And I think they’re pretty good at it. The P2P insurer might think that the fact that the insurance is with peers, means that fraud will largely be taken care of, so they could be less rigorous in their fraud detection and prevention efforts. And if there are people in the system still behaving fraudulently, they may get away with more fraud than with traditional insurance. And this would mean that the honest people lose more in a P2P environment, than with traditional insurance.
And besides, fraud prevention is not going to be where the biggest gains come from.
I don’t like making predictions, but nevertheless in my opinion, the biggest improvement in general insurance in the medium term, will be through the use of technology, and in particular, the internet of things. Through this technology, I believe that insurers will be able to better prevent claims proactively, rather than police claims reactively.
Imagine for example, your geyser will one day have sensors which can detect that it’s going to burst, and your insurer can send someone out to have it replaced before the damage is done. Or when the world has more self-driving cars than ordinary cars, accidents and fender benders should happen far less frequently.
Things of this kind will have much more dramatic effects on general insurance and its prices. And like it or not, it’s much more likely to come from the big incumbents, than a small start-up.
So how is Sanlam Indie different?
We’re also keen to tell a compelling new story. But we’re even more keen that the story we tell is both true and actually solves real problems.
Unlike most “disruptors” in this space, we’re not looking to shake up the incumbents. We’re actually trying to do what they do, but much better, by returning to first principles. The very core concept of insurance is not broken, but the core of insurance has been perverted by complexity, obfuscation, and increasing inaccessibility.
The problem we are aiming to solve is that people not only don’t understand insurance, don’t want insurance, don’t understand why they need insurance and don’t really like insurers. And on top of all those huge hurdles, when someone has finally broken through and the finish line is in sight, insurers make it very, very difficult to actually buy life insurance in the end.
We believe that financial advice, when done properly, can empower people. And we also believe that fewer and fewer people have access to and can afford decent advice. So the people who probably need the advice and help the most, are finding it harder and harder to get it.
These are real problems the industry faces. And these are problems that, if solved, can make a positive change in the lives of real people out there.
Sanlam Indie believes that by going back to core principles, and designing everything again the way it should be, coupled with the fantastic enabler which is technology, we can make a real difference in both our business and in the lives of our clients.