Credit Life regulations have been live for long enough now that insurers are starting to feel the impact and the shake-up of amongst industry players is starting to emerge.
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.
Insurance is misunderstood. Consumers ascribe malice where often practical restrictions are to blame.
Take deductibles for example. A deductible in an insurance claim decreases the number of claims an insurer has to deal with. More than that though, it reduces the claims where the administration costs of checking out the claim and paying it are large relative to the benefit to the policyholder. Sometimes these costs would have been larger than the claim itself.
In that case it does not make sense for the insurer to be processing and paying the claims – the increase in premiums required would be more than reasonable to policyholders.
Lemonade’s new “zero everything” removes the deductible and guarantees no premium increases for up to two claims per year. The reporting on this innovation has generally been silent on the practical reasons why this is hard for traditional insurers and easier for Lemonade.
Lemonade on the other hand explicitly recognise (or at least claim) that due to their AI-based claims underwriting process they can drive down costs and therefore manage small claims cost effectively.
This is important. Many complain about the lack of innovation in insurance. Removing deductibles isn’t innovation. Reducing costs to the extent it becomes viable is the step that enables differentiation and better value for customers.
Non-life claims reserves are regularly not discounted, for bad reasons and good. This part of the series looks at the related issue of inflation in claims reserving. (You’ll have to wait for part 3 for me to talk about the analysis that prompted this lengthy series.)
In many markets, inflation is low and stable. Until a decade ago, talk of inflation wouldn’t have raised much in the way of deflation either. That’s still sufficiently unusual to put to one side.
I’ve had the privilege to straddle life insurance and non-life insurance (P&C, general, short term insurance, take your pick of terms) in my career. On balance, I think having significant exposure to both has increased my knowledge in each rather than lessened the depth of my knowledge in either. I’ve been able to transport concepts and take learnings from one side to the other.
A recent example relates to the common non-life practice of not discounting claims reserves. Solvency II, SAM and IFRS17 moves to require discounting aside, it is still more a common GAAP approach to not discount than to discount claims reserves.
Discounting or fiddling with inflation has some obvious implications for analysing actual vs expected analysis, reserve run offs, and reserve adequacy analysis. That some non-life reserving actuaries trip over because it’s more natural in the life space.
Bancassurance, says the oracle or finance definitions online (aka Investopedia) is :
…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.
The Brookings Financial and Digital Inclusion Project measures South Africa one place behind Kenya in terms of financial inclusion.
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?