The death of insurance as we know it

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The profitability model of traditional insurance business runs counter to the whole essence of insurance as a mechanism to compensate policyholders for losses.

Policyholders expect their claims paid, and quickly, when they suffer losses. Delays in claim settlement could lead to unimagined costs for insureds. If a burnt production unit is not replaced in time, a business could lose customers and market share, and ultimately go out of business.

A family whose house is burnt in an insured event cannot afford to wait for months for an insurer to settle. Similarly, the owner of an accident vehicle cannot wait for a snail-paced claim process while she racks us taxi fares.

From an insurer’s perspective, every Cedi of claim paid inversely impacts profits, holding other things constant. The default position of traditional claims processing is therefore to look for every excuse in the book to avoid payment, or to reduce the amount paid to the barest minimum.

Claims [mis]handling owing to the misaligned interests of parties lies at the heart of the rocky relationship between insurance companies and policyholders. It explains why most people will only ever insure under the force of law and haggle over premiums incessantly. Claims disputes is at the root of the historically unyielding atrophied rate of insurance penetration and is also suggested to partly fuel the incidence of moral hazard- the tendency for an insured to take less care of an insured subject matter or to even occasion a claim.

According to Dan Ariely, Professor of Psychology and Behavioural Economics at Duke University, people justify fraudulent claims and other dishonest and careless acts against insurance companies as merely beating the cheats to their game.

Insurance by the old playbook is giving up on incumbents. Thriving in the marketplace of the future requires insurers to rethink their business models in fundamental ways. The following thoughts should engage the attention of any insurer which seeks a stake in the future.

The Changing Phases

The UN estimates three fifths of Africa’s 1.35billion population to be below the age of 25. About 300 million of the world’s estimated 1.8 billion millennial population live in Africa. The bulging population of younger millennials and Gen Z-ers on the continent presents opportunities for growth but also threatens the traditional insurance model. Let me try to explain.

Young adults have recorded a higher propensity to urbanise than older populations especially in developing nations. Urbanisation has been shown to be positively correlated with insurance consumption in many studies. A huge youthful population with the prospects of high urbanisation, the generally increasing literacy across the continent and improving economics should thus signal good fortune for insurers. Unlocking the youthful market, however, requires insights into the behavioural patterns of these peculiar residents.

In general, younger Africans are less tolerant of mediocrity and mistreatment than the older cohort. They are more likely to check for online reviews about an insurer in their [insurance] buying decisions. In their world of fast information exchange, young adults are used to sharing their experiences of an insurer on the vast array of social media platforms. A claim gone bad is likely to be posted, shared and re-shared. Ignoring negative online sentiments of this group can be perilous. Remember that the digital natives, so-called, have successfully orchestrated revolutions and toppled governments right from their keyboards and their smartphones. Bringing a bad insurer to its knees is the least challenge [to them].

Quitting the games

Among the panoply of busybody doctrines and so-called principles with which insurers defend their bottom-lines against claims, utmost good faith and insurable interest have been the two most pernicious to policyholders.

Utmost good faith requires insureds to give voluntary disclosure about risks proposed for insurance, failing which an insurer may avoid the policy. Rather counterintuitively, breach of utmost good faith is proven to the standard of a hypothetical prudent underwriter. Satisfying the duty therefore requires an insured (with limited understanding of underwriting) to scan the brain of a [professional] prudent underwriter. That’s rigged!

Insurable interest on the other hand is generally held to mean that an insured must have pecuniary or equitable interest in the subject matter of an insurance contract. Depending on the type of insurance in question, insurable interest may be required either at contract formation or the point of claim. The absence of insurable interest (in the form required by the law) and changes mid-term could have undesirable consequences on insureds.

Aided by utmost good faith and insurable interest, an insurer could simply sit back, collect premiums, and engage in counterfactual underwriting at the claims stage.

In many advanced insurance markets, these doctrines have seen significant reforms towards fairness to policyholders. Insurers cannot fold their arms and only find their voices when they have to ante up. Forward-looking insurers can gain by staying ahead of the tide.

Keeping the promise

Among the many snide jokes about insurance is one about it being a promise to pay which never gets fulfilled. In plain terms, an insurer which fails to honour claims, and on time has no business staying in the market. Challenger insurer models are proving what should already be intuitive: paying claims fairly and speedily is the best sales strategy and a more sustainable profitability model.

The probabilistic nature of insurance profits from large numbers. Paying claims fairly and quickly is the surest way to grow market share and become more profitable sustainably.

Doing well by doing good

Funding social causes in tangible ways offers a proven avenue for insurance companies to gain some moral capital. Policyholders can tell superficial CSR schemes from genuine impactful social causes. Behavioural models implemented by Lemonade, the standard-bearer of the new-age insurance model, have shown so far that policyholders are less likely to engage in immoral conduct against their insurer when they are convinced that the insurer is moral itself. It will be great to see an insurer test the morality model in Ghana.

Technology first

Technology offers enormous opportunities for optimising insurance operations and delivering unmatched convenience to policyholders. Many insurance processes simply do not need the faculties of human beings to get done. I have been impressed by the recent adoption of chatbots by Hollard and Enterprise. The NIC’s MID is another timely and cost-saving initiative for insurance companies. More scope exists for insurers to utilise technology in underwriting processes, policyholder engagement and retention, and claims processing. The market of the future is attuned to technological processes and is more at home dealing conveniently through it.

Opening up the books

The negative perceptions about insurers is heavily stoked by perceptions of profitability which are often far from reality. The more policyholders know, the less likely they are to take to speculations. The emerging trend is for insurers to be transparent with policyholders about how their premiums are spent. A typical transparent model explains what percentage of premiums fund administration expenses and what goes towards paying claims. Unclaimed funds from the claims provision account do not add up to the insurer’s profits but are applied as policyholders choose. Interestingly, in other parts of the world, policyholders choose to have their unclaimed funds spent on causes they care about. I cannot tell what Ghanaian policyholders under a similar model would vote their funds towards.

Research, Research, Research!

I cannot overemphasize the value of relevant research to an insurer’s sustainability. Do insurers have teams thinking about what AfCFTA means for their business with the likely borderless trade in services that it might come with? What are the behaviours of the Ghanaian and African millennial and Gen Z-er which are relevant to understanding demand patterns and what it means for insurers? What are the global trends which have significance for Ghana and Africa?

Unless you are willing as an insurer to invest in research, you will struggle to break the cycle of cash-flow underwriting.

The writer has deep professional insights and experience in insurtech, insurance law, insurance finance and operations, and he researches global trends in insurance practice. He  is a Chartered Insurer. You can correspond with him through [email protected]

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