For example:

📊 Having fewer children has a temporary impact to boost productivity as resources aren’t spent on child rearing and more time is available for labour force participation. (This will have contributed to China’s decades-long GDP growth.)

👥 Longer term, fewer children results in a reduction in the working age population. This can result in higher unit labour costs. (Mismatch of education and skills to available jobs can still cause unemployment, as it does in China.)

💹 Relatively large retiring populations and retired populations can skew capital markets and interest rates as they sell assets to consume. With fewer new savers and investors available, these asset prices will likely decrease. Production constraints through lower working age populations will increase the cost of goods and services, requiring further sales of assets. The impact on bonds and interest rates is more complex given the move from equities to bonds before selling even bonds. At some periods, interest rates may decline as consumption slows while there is still plenty of capital. In time, interest rates will likely rise as surplus capital decreases.

🏘️ Population declines may decrease housing demand overall. However, not all housing is created equal, and pockets of demand outstripping supply will continue for much longer than the total measures suggest.

🏗️ Large property supply overhangs (not only China, but yes China) can decimate confidence and savings if prices collapse.

📉 Decreasing populations make it much more difficult to grow nominal GDP, putting upwards pressure on Debt/GDP ratios. Inflation can do wonders here, so expect more inflation. Or defaults. Or both. And knock on impacts on interest rates and spreads.

🌍 Xenophobia, meet necessary global population migration. And this before we’ve introduced climate-forced migrations to the analysis. Countries with ageing populations (most countries) need young immigrants, but with that comes cultural clashes.

🌱 Reduction in resource and energy utilisation may have some offsetting impact on our planet and climate change

There’s much more to this story. But sometimes insurance execs want to know what the clear product demand change will be.

One answer could be pet insurance.

China is set to have more pets than children soon. Goldman Sachs says by 2030 there might be double the number of pets as children. Pet Insurance and Pet Food might be two big growth areas to pay attention to amongst the fundamental revision of society as we know it.

#demographics #demographicshifts #populationtrends #longterm #petinsurance #insurance #trends #petfood

Nudge Theory

• Concept: Small changes in choice presentation can significantly influence decisions.
• Application: Using social comparison feedback (e.g., “80% of homeowners in your area have flood insurance”) to encourage consideration of additional coverage. Also, implementing gamification elements in health insurance apps to promote healthier lifestyles, potentially reducing health-related claims.
• Replicability: Consistently strong results across various domains, making it a robust finding.

The Watching Eyes Effect

• Concept: Displaying images of eyes or a face can encourage honest behavior.
• Application: Used in various settings, including online insurance, to promote truthfulness.
• Replicability: Mixed results, with effectiveness varying by context.

Default Options

• Concept: Setting beneficial default choices (e.g., higher insurance coverage) can lead to better outcomes.
• Application: Widely implemented in insurance and savings products.
• Replicability: Generally reliable, though effect sizes can vary.

More on this in the excellent Freakonomics podcast episode 572

That’s the ballpark figure I usually work with as the minimum number of micro insurance policies required for scale. The expenses of running even a micro insurer are not that trivial.

For underwritten products within a full life licence? Larger premiums per policy but definitely more complexity. Competition is tougher too. Hyper local brands don’t translate into trust at this level. Viable niches may exist, but at what volumes?

You might wonder if there is scope to sell greater value products at higher premiums that can bring that number down in some contexts?

The rise of embedded insurance

Turns out this has been given plenty of thought already – “micro” insurance is the less popular name these days from a product and provider perspective. Inclusive Insurance certainly sounds better and more inclusive (!)

I think part of that push though was recognising the challenges and limits of truly “micro” insurance, at least at an individual level in providing commercially viable options that meet needs at the scale necessary.

Inclusive Insurance has been eclipsed in some words for “embedded insurance”, a term that talks less to the needs and objectives for society, and more to one that is practical and viable commercially. Embedding insurance in other products are services can drive down some of the costs, but then by virtue of being embedded, the absolute amount of premium is even further limited. Volumes may go up – and there have been some success stories here – but margins typically remain fine so I’m going to guess that my 40,000 may be too low in these instances. The success stories are in the 6- and 7-digit volume space.

Microinsurance licence restrictions

Back to “microinsurance” and the regulatory restrictions that apply in South Africa:

• Savings elements might seem attractive to increase premium size and provide “value” rather than a set price point. But savings elements are not permitted in microinsurance policies in South Africa.
• Loyalty schemes or cash back may be a way to attach greater value to a product, but again are not permitted in the microinsurance framework.
• Fairly large sums assured are possible within microinsurance – often attracting increased adverse selection or outright fraud.

Can product tailoring increase average premium?

Product tailoring can be expensive and can counter plans for
economies of scale while simultaneously targeting a smaller market. I’d still like to see more of this rather than pure commodity products. I’d be happy to be wrong if this approach meant a viable micro insurer could provide genuine value, see strong demand, and require fewer than 40,000 policyholders or comfortably sell more than that.

Microinsurance pros and cons – an important choice

A key point here is whether a standalone microinsurer is the right vehicle for a truly niche insurer? The increased governance and compliance policies effected by the major cell providers have frustrated cell owners and entrepreneurs, slowed down innovation and led them to look elsewhere. A microinsurance licence is a great option for some, but not a panacea for everyone.

I’ve helped insurers apply for licences, buy licences, consider alternative arrangements, and I’m sure at some point I’ll be working with micro insurers to transfers portfolios to other insurers and close down licences.

There is also opportunity to apply to the Prudential Authority for scope to do more with the licence, with careful consideration of the risks and capital.

Does digital fix everything?

Digital sales is a complex area. Some insurers have had some success with purely digital sales. But when these distribution channels are owned by someone else, the costs are not as low as “digital† might make you think. If NTUs are high, and premium collections are low, it can quickly become expensive. There’s a fine line between removing friction from a sales and underwriting process (which definitely improves sales) and making it so easy to “sell† that the customers haven’t really decided that they want what they’ve bought.

Parametric insurance – watch this space!

We should be doing far more with parametric insurance in South Africa. Thinking around climate risk and the positive role insurers can provide in this space (rather than only worrying about the risks it poses to them) may present some new opportunities. Insurers can apply their expertise in understanding and pricing risk, while providing a socially and economically beneficial product at a price that shows value and profit.

Queue management at the motor vehicle licence renewal office offers a window into a realm of complexity that extends far beyond the waiting room. Exploring priority queuing and weighted fair queuing (WFQ), we uncover a world of probabilistic models, dynamic rules, and real-world applications that challenge conventional wisdom.

Upon arrival, patrons encounter priority queuing, where elderly individuals receive absolute precedence to accommodate potential mobility challenges. While this prioritisation addresses (quite reasonably!) the needs of a vulnerable group, it can lead to excessively prolonged waits for others, depending on the arrival rate of elderly patrons and the dynamics of the queue. Consideration of different objective functions for various demographics, including the young and old, could unveil alternative optimal solutions.

Actuaries are used to implicitly allowing for objective functions that aim to minimise mean squared errors, but this isn’t the only possibility. Aside from different penalties for waiting times for all participants, explicitly considering different costs to different groups of individuals makes it more interesting.

In contrast to absolute priority queuing, WFQ introduces a probabilistic element, ensuring that even low-priority individuals have a chance of being served at every point in time. The weights can be tuned for those different groups, still achieving prioritisation for the elderly. While wait times for low-priority customers will still be longer than priority customers, they remain finite, underscoring the equitable nature of this approach. I can imagine an algorithm where the weight depends on the wait – the longer the duration of the existing wait the more an individual is prioritised.

The network packets to which WFQ most commonly applies probability aren’t conscious, and therefore their experience of the wait isn’t important. For humans, the conscious experience of knowing that you don’t have to wait until every individual in a priority group is served before you might make the wait more palatable. I’m not a fan of gamification; overall this seems to have result in evil outcomes, greedily addictive algorithms and a worse society overall. However, the introduction of a little randomness and the possibility of a serendipitous early shot at renewing a licence might be a net positive.

Beyond the motor vehicle licence renewal office, the principles of queue management find relevance in diverse fields, including insurance companies. By leveraging similar concepts, insurers can prioritise claims payment or customer service based on factors like severity or urgency, but also explicit objective functions to optimise for target response times within particular bands, aiming for prompt resolution while maintaining fairness and efficiency. Sometimes the maths will demonstrate that based on demand and supply of support calls, failing these objectives is inevitable. Modelling can determine how often that may occur and then you can weigh up the costs of more call centre agents with the unappealing customer experiences.

These waiting processes should ring bells from prior study of queuing processes, of exponential, poisson, negative binomial and gamma distributions. These provide a mathematical framework for understanding and optimising queue management, revealing the hidden complexities behind seemingly simple processes. While you may not think about claims processes as queuing processes, there are some surprising linkages there too.

For me, delving into the dynamics of network switching provided some fun insights. In network architecture, switches play a critical role in directing data packets efficiently across networks. However, the limited capacity of switches can lead to packet loss during times of congestion. Buffers within switches temporarily store packets to alleviate congestion, but if overwhelmed, they are forced to drop packets, resulting in packet loss and network underperformance.

A smarter (yet initially counterintuitive step) is to apply Random Early Detection (RED), a mechanism that deliberately drops packets in anticipation of the switch being overwhelmed. Under RED, these strategically dropped packets provide information to network endpoints to manage the speed of transmission to prevent larger problems down the line. To an extent, this can can be likened to passengers on an overbooked flight being paid to take a different flight. However, unlike RED, this approach does not alert endpoints or other passengers to slow transmission rates, highlighting the unique challenges and solutions in network management.

While queue management may appear remote from your regular work, some exploration might be worth the time spent. By embracing probabilistic models, dynamic rules, and real-world applications, we may see a way to apply our skills in new areas, or even learn from the significant advancements in network modelling in our financial services world.

A distribution channel that has never quite got off the ground is even more challenging. With confidence shaken, it’s easy to wonder whether success and scale will ever be possible.

Over the last couple of years, I haven’t engaged with a life insurer that hasn’t experienced some of this. You might be surprised by how ubiquitous this is:

• Yesteryear’s giants of funeral products struggling against the compelling advantage of bank branch, app and call centre distribution. This shakeout has probably benefitted customers with more attractive pricing at the cost of margin for providers.
• Organisations with strong brand and huge existing customer base struggling to generate meaningful volumes of commodity products, becoming reliant on expensive aggregators to achieve some amount of scale.
• Insurers seeing their market attacked by banking competitors investing significant sums into their banking operations – looking for a share of banking revenues and profit, but very much also looking to defend their insurance customers from extremely competitive banks. Some of the success of banks relates to their better digitalisation of distribution systems and related processes. Digitalisation is necessary but not sufficient – as evidenced by the banks slow progress in distributing complex underwritten products.
• Established insurers with success in non-underwritten products, and others with success in complex fully underwritten products, both struggling for scale, persistency and profitability in simplified issue / lightly underwritten products. Maybe it’s only a matter of time before someone cracks this, but for now I’m pretty wary of impressive sales volume projections.
• Insurers with impeccable track records of successful distribution feeling unfamiliar pressure on margins and volumes. (Increasing prices to improve margins can be self-defeating if volumes drop and fixed expenses burn margins further.)
• Life insurers urgently looking for new markets to expand to, including non-life, in order to keep growth going as their core market stagnates. (There are opportunities, but it’s not a simple transition. A key message is that what works for one market segment quite likely won’t work for another.)

I’ll be posting more on this theme in the coming weeks. If you have questions, post below and I’ll try to work them into future posts.

If you are a master of the dark arts of distribution, what do you see as the common or recent failings? What is the key to focus on? Is there just one?

I’ve had reasons to think about Nigeria recently, in general but also from an insurance market and acquisition environment. I’ve helped several investors looking at Nigerian insurers over the years. Familiarity with the market and the expectations of these investors has bred complexity rather than contempt. This isn’t an easy diagnosis of land of plenty or dystopian money pit.

Nigeria still presents a compelling opportunity with its expansive land, sizable population, youthful demographics, positive growth trajectory, and abundant natural resources. Beyond its renowned oil and agriculture sectors, Nigeria boasts a vibrant movie industry (Nollywood) and a robust financial services sector, albeit with banks making more headway than insurers. Wholesale and retail trade are the biggest contributors to economic growth. This dynamic mix showcases Nigeria’s diverse economic landscape and entrepreneurial spirit and an increased focus on the service sector over energy extraction and farming.

While Nigeria’s potential has long been evident, ongoing challenges test that optimism. 

Inflation (29.9% annual for January 2024) and currency depreciation (74% down against USD since January 2022) have impacted individuals and businesses, amplifying economic strains. The local impact of foreign currency denominated debt has ballooned due to Naira depreciation. Ghana’s recent default weighs on everyone’s mind.

Food security for many is now a significant risk. Infrastructure limitations persist, impeding the full realization of economic growth. High unemployment rates, coupled with security challenges and governance issues, have eroded public and investor trust. In the insurance sector, while some have some growth and success with new product lines, overall insurance penetration remains modest. Insurance adoption has not accelerated as rapidly as envisioned over the past decade or two

While Nigeria stands to gain from ongoing disruptions in the Middle East and related waterways, the nation’s oil and gas sector remains a double-edged sword—both a source of revenue and trouble. Given the historical challenges of theft and attacks on infrastructure, Nigeria may not be able to maintain let alone increase production to meet an increased demand.

The recent decision by Shell to exit Nigeria’s onshore oil sector highlights the substantial risks involved, not only to infrastructure but also to human life. As a significant portion of Nigeria’s economy is still reliant on the oil and gas sector, these developments raise concerns about potential prolonged challenges, affecting the economy and therefore adding headwinds to insurers growth aspirations.

Insurers can’t fix these challenges directly. They need to focus on perception and reputation, on paying claims and improving operational efficiencies. Some insurers are excited about mandatory health and pensions, to go along with mandatory cover for motorists, but these compliance push factors do little to promote trust in insurance unless servicing and claim payment are slick and reliable too.

Most of the growth that insurers have managed over recent years has related to growth in GDP rather than an increase in penetration. The sorts of sustained 20%+ real growth that attracts investors and revolutionises a market will not come from economic and population growth alone.

There are opportunities for growth. When someone cracks microinsurance distribution and costs, and reaps the rewards of brand awareness, that can unlock massive growth and profits over time. There are many uninsured vehicles that could be bought into the insurance net. Smaller group policies covering household help could meet a needs of employers and employees. Annuities are a growing product for some insurers, and may present a further way to accumulate assets and also demonstrate trust worthiness to the market. (On the flip side, a single failure of a provider of annuities will crush this market for decades.)

Insurers need to have a strategic plan to manage their business within the turbulent environment. Some of what’s needed:

• A focus on consolidation around key products, unsentimental views of product profitability and underwriting performance.
• Allocation of capital to products to demonstrate return on capital, or at least incorporating an appropriate cost of capital into performance measures.
• Clear separation of investment returns generated on shareholder assets when understanding operating performance. (Warren Buffet’s words can be on “the float” misconstrued to destroy shareholder value.)
• (While you’re at it, it’s way past time to carefully segregate portfolios and match or at least hypothecate assets to specific purposes.)
• Clear-eyed evaluation of participating products. Customer expectations, levels of fees and charges. Fair investment returns and bonuses. The aim is to grow trust over time and wealth for your policyholders. Performance for shareholders will come.
• In general, a greater proportion of premiums must be used for benefit payments to policyholders, distribution costs must be contained, and expenses must be decreased. This is necessary to drive customer value and build trust, while leaving space for returns to shareholders.
• A better understanding of the role and benefit of reinsurance in life insurance. Different structures and different retentions may provide better results than rolling over similar structures indefinitely.
• A Digital Distribution and Servicing Strategy than recognises the trust deficit insurers have to work with and constantly pushes that flywheel to build trust rather than just drive the next sale. Customers want ready access to policy information and up-to-date account balances and policy status. On the back end, a single view of customer is required, giving customers and servicing agents the ability to update details once – and then use those details for effective, useful communication to policyholders. The more self-service possible the more empowered customers will feel.
• Recognition that driving down unit expenses (per policy expenses) is necessary for profitability and customer value. And decreasing unit expenses requires economies of scale. And that economies of scale requires BOTH scale and low variable costs – which is a function of automation, Straight Through Processing, Standard Operating Procedures and streamlined products.

Nigeria presents an opportunity, but it’s not without risks. The time necessary to realise investment objectives may be longer than is palatable to many, and disinvesting in difficult times often leaves a bitter taste and a lightened pocket.

Focus areas will differ by entity, but based on my experience, the points above are a sensible starting point for most. Add the controversial elements of tax rule application consistency and greater market conduct regulation and Nigeria’s market could really begin to take off.

The larger insurance players seem reluctant to enter the market. Why do you think this market has been slow on the uptake? The regulatory barriers to entry certainly don’t appear to be that restrictive so either existing insurance companies are not flexible enough to offer the products required or it’s a poor business decision/larger risk that they’re unwilling to take on. Do you have an opinion on what is causing the low number of microinsurance players in the market?

So here goes. Certainly a far from complete or perfect answer, but a starting point based on my discussions with many people and entities actively interested in pursuing the market over the last few years.

What do we mean by micro insurance in the South African context?

The issue with micro insurance is scale, particularly of distribution and distribution costs. Okay, followed closely by premium collections (and that is about maintaining scale so that you don’t lose insurance policies as quickly as you sell them). These are the two issues that need to be solved for real success for any new micro insurer or a new platform for micro insurance.

Micro insurance and funeral insurance

Whether micro insurance is big in South Africa or not comes down to how one defines “micro insurance†.  There are major life insurance players that have funeral products with modest premiums, below R100 or even R50 per month. So those large insurers (major traditional insurers plus the bancassurers) are operating in this space already, but as “assistance business† as the current licence category is termed.

Under some definitions, South Africa is already one of the largest micro insurance markets in the world. On other measures, there are still plenty of excluded people who could benefit from appropriately priced, appropriate value insurance on a micro scale. I still hope to see viable products with premiums below R10 per month (and not on some misleading bundled basis) or even less on a micro-transaction basis.

These players are less interested in the particulars of a micro insurance licence because they have yet to see a material benefit. Product restrictions and the complexity of an additional licence don’t warrant lower capital since they aren’t actually constrained by regulatory capital but rather by their own view of economic capital.

Distribution innovation

Some of these players have tried innovative products (pre-paid funeral plans, allowing skipping premiums) with low, no or at best moderate success. The bancassurers push heavily into ATM, USSD and call centre sales rather than branch sales because they are lower cost, and sometimes lower risk of anti-selection. Getting life insurance via the banking apps is an easy step (and some have taken it) so probably the view is that a dedicated app just for insurance is unnecessary.  The banking brands (target of popular complaints as they sometimes are) are still generally well trusted.

The traditional insurers have invested in their own distribution channels, more typically broker- or agent-driven, for decades and this has carved them a good, profitable niche. Changing that for revolutionary distribution has risks.

Fraud and anti-selection are key concerns when you have the ability to turn coverage on and off.  I think many insurers are quite nervous about this. I’d love to see someone dedicating a small pot (R25m or something, so significant enough to do something with, but small enough for major players not to declare a national emergency if I doesn’t work) and experiment with something and see how it goes.

Micro insurance for assets

On the non-life side it’s more a definite gap. Acquisition costs, risk selection, differentiated pricing, claims underwriting and fraud risk (very serious fraud risk!) are non-trivial things to overcome.

Underwriting / risk assessment at policy inception is an expensive exercise. Claims stage underwriting can be problematic from a customer experience perspective if the policyholder genuinely expected to be covered and wasn’t (in which case even refund of premiums paid doesn’t help them, and with that the insurer has likely already incurred a loss based on the claims assessment and administration costs).

Credit insurance and micro insurance – but are we doing it right?

Credit insurance is the one area that sidesteps many of these issues. Clearly established need, assessment of ability to pay, distribution and lower fraud. It’s a pit this is also one of the areas that has achieved such a bad reputation (much of it deserved) for charging high premiums and making super profits based on the lack of a good market. It feels like we should be doing better here.

It would be amazing if someone could also consider what sort of loss they’d be prepared to take on a pilot programme to see if our worst fears are realized for asset insurance outside of the credit insurance space.

All the other hot trends

I’m staying close to developments on what I term “hyper selection† and also peer-to-peer insurance.  Some of this may present opportunities to unleash micro insurance from its current constraints.  I haven’t yet seen developments that seem ready for prime time and which solve what I view as the fundamental problems. Hopefully someone is already quietly working on something incredible in this space.

Micro insurance – opportunity for society, opportunity for business or both?

But the real answer to your question is that the supposed huge potential of micro insurance is a little difficult to pin down in pure commercial terms. Most of the success stories of micro insurance in emerging markets and public-private partnerships, NGO programmes etc.  Many of these also fail even with an explicit return on capital requirement.  Solving these issues on acceptable commercial terms for insurers who already have a successful business is a big question mark.

So even with my belief that micro insurance and inclusive financial services is a good thing for society, it’s less clear to me that it’s an easy buck to make for insurers.

There have been plenty of debate around the regulations, in part because of the dramatic financial and operational impact they will have, and partly because of how imperfectly worded they are and the scope for interpretation.

I’ll be posting about this more in the coming days.

Basing the premium on initial or outstanding balance

First, a real anomaly is the ability for insurers  to charge the capped premium rate either on initial loan balance or on the declining outstanding balance.

There are good practical reasons to want to charge a single, known amount to policyholders. It is easier to administer and policyholders have greater clarity on what they are paying.

The actual premium charged over the lifetime of a loan can be substantially higher where it is based on the initial balance rather than the declining balance, particularly for longer term loans. How a cap designed to moderate profits and improve value for money can allow such disparity is bizarre.

There is an interesting quirk here, which I hope is exploited to drive value for money and increased competition in the market. The credit life regulations require lenders to permit substitute policies where the policy meets the minimum regulatory required benefits. Where an insurer (or in practical terms, usually the lender) is charging a premium based on the initial loan balance, it becomes easier for a third party insurance company to offer a substitute policy at a cheaper rate, based on the lower actual sum assured partway through the loan or policy term.

I am not a fan of outright caps, although I recognise there are times when it might be the least bad regulatory intervention. The holy grail is a competitive market where consumers have access to information and providers compete for the business.  This will drive profit margins down to reasonable returns for the risk and capital required, and drive business into the arms of the operational cost (and distribution cost) competitive providers.

Those entities still charging on initial balance will actually help to drive this competitive market.

As much as I believe in the right of businesses to make money and make good money, value for money will be driven by competition and more of it is still needed.

…is an arrangement in which a bank and an insurance company form a partnership so that the insurance company can sell its products to the bank’s client base. This partnership arrangement can be profitable for both companies. Banks can earn additional revenue by selling the insurance products, while insurance companies are able to expand their customer bases without having to expand their sales forces or pay commissions to insurance agents or brokers.

Bancassurance has been a major part of European and Asian insurance markets and, for a time, was presumed to be the future of insurance distribution in most countries around the world.

What happened was different. Bancassurance has not taken off in all markets the same as it did in the early success stories. Some of this has to do with the reversal of trust relationships between banking and insurance.

Bancassurance in South Africa

In South Africa, the major banks have continue to write mostly credit life and credit insurance, funeral policies and linked investments (often off the back of tax advantages arising through the sale of credit life and funeral policies.) Other products are also sold, including additional simple, non-underwritten products and some more complex risk products. With some exceptions though, the sale of more complex risk products by banks in South Africa has only been modestly successful.

Non-underwritten, low advice bancassurance in South AFrica

The sale of funeral policies to existing customers, leveraging the brand, customer relationships, administration capability and premium collection advantages is actually exactly what bancassurance is about.  It is a low-advice, non-underwritten product, but it has been a success.

Credit life products are a slightly different creature. Although they are insurance products sold to bank customers with many of the same advantages as funeral products, the reason for sale is usually quite different. This is generally not a product demanded by customers, but rather one used by the lender to improve revenues and manage risk. Although some bank literally refer to “credit life” only as bancassurance, I believe that is a distraction from the real model of bancassurance.

Investment products

There are two primary types of investment products offered by most South African banks.

1. Linked, where the product is effectively a life insurance tax wrapper for existing unit trusts.
2. Guaranteed, either lump sum or income, with the ALM work done by the insurer, the bank, or occasionally a third party derivative or structured product provider.

These products are successful through the tax advantages of the life wrapper, and the typical bancassurance advantages of brand, relationship and administration. Many of the sales will come through insurer- or bank- owned distribution channels of branch sales, call centres, tied agents, some online / direct and financial advisor divisions. However, there are also sales from true independent advisors, usually when sufficiently well informed to undertand the tax advantage of the expenses incurred within the life licence through the risk products.  (Since changes in life insurance tax rules and the introduction of the Risk Policyholder Fund, this advantage is rapidly disappearing.)

The tax advantage aside, this is probably another tick for bancassurance in South Africa.

There are many other investment products offered. There are still some with profits products, there are some property investments, hedge funds, fund of funds and private equity than fit better into a linekd life policy than into a unit trust.

Underwritten, complex “new generation” life products

The notably less successful element has been the higher permium, higher advice, higher income targeted, underwritten, complex life products. This is the sector that includes Discovery’s Life Plan, Old Mutual’s Greenlight, MMI’s Myriad and similar offerings from the major life insurers.

As a general rule, the insurance arms of South African banks have not been successful in this market.

Where bankassurance isn’t yet working

Bancassurance has yet to really crack the complex, underwritten life space.

Some of the major reasons include:

• These products are predominantly sold by independent advisors and agents. The agents of banks are more used to selling simpler products and do not always have the knowledge to see more complex products. Independent advisors are not as impressed by banks’ brands in the insurance space and break the link of customer relationship between the financial services “product provider” and the end customer.
• The major insurers, not all to the same degree, innovated in product design some time ago. Me-too products have less to differentiate themselves from the crowd and must compete on other measures to attract attention.
• The major life insurers have invested decades in building their credibility in this space, with end consumers and with brokers. I’m not convinced that banks always appreciate how much time is required to offset this and that a strong banking brand doesn’t automatically follow through to compete on the same level as a dedicated life insurer.
• Bancassurers have historically made significant profits with attractive margins selling in the less competitive space of their own customers, typically lower income and less financially sophisticated. There is therefore less incentive to grow into less well known markets where the same advantages don’t apply to the same degree.
• Low acquisition cost products (such as simple, non-underwritten ones) suit a cash-accounting basis more so than those with higher acquisition costs and longer payback periods. To some degree this is fixable with more appropriate accounting and reserving policies, but often times banks have moderate appetite for the complexity and volatility this can create.
• People love to hate insurers. This is also true for banks, even those that are generally well regarded and win awards! But as much as people don’t like insurers, they do have views on who is more or less likely to pay a claim. And, unlike the lending business where banks have to trust customers upfront and hope they repay, in insurance, customers have to pay first and trust the insurer to make good on their promise to pay claims. This reversal of the trust arrangement is a fundamental difference for insurance, and is dramatically more important for more educated consumers with longer term horizons.

What next for bancassurance?

Discovery, launching a bank, will further integrate its product offering and is expected (by fans and competitors alike) to successfully integrate a complex life insurance offering, a generally admired and trusted brand, and a slick legacy free banking platform. They will likely make mistakes in the banking space, but it’s hard not to see this as a success.

Investec is relaunching an old insurance licence acquired in the aftermath of Fedsure’s failure and will offer risk products to its private banking clients. However, Investec doesn’t have the same volume of customers as Discovery and this will likely be a different, smaller threat to established insurers.

FNB has made great strides recently with their refreshed, revised and new product offerings. They may make greater inroads into a full bancassurance model than others have in the past.

Absa sometimes feels hard-done by, with their technological innovations not receiving the same coverage as those of FNB. Standard Bank has a different relationship with Liberty and Standard Insurance than the other banks (especially now that MMI is not operationally linked to the FirstRand Group), but will surely be eyeing developments elsewhere with interest.

Capitec has been inching into the insurance space with caution. Their success and growth in the lending and more recently transactional banking space may be warning signs that more is planned. Their core target market is less of an immediate target for complex products, but that could still change.

Overall, tax reforms will make investment products by funeral- and credit-life- heavy bancassurers less attractive. New Policyholder Protection Rules may also disrupt the market.

These changes aside, banks maintain significant advantages in selling financial services products. The next few years in South Africa may see a little momentum move the way of bancassurance in South Africa.

I’m still working my way through the full report, but Kenya’s score is a significant jump above South Africa and the closely contested positions below it. Is Kenya genuinely making such inroads or is this a function of the measures used?