The profitability model of traditional insurance business runs counter to the conception 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 insures. For example, a burnt production unit not replaced in time could cause loss of customers and market share to a business. Similarly, the owner of an accident vehicle cannot wait for a snail-paced claim process while she racks taxi fares.
From an insurer’s perspective, every cedi of a 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 the historically unyielding atrophied rate of insurance penetration and why most people will only insure under the force of law.
Insurance by the old playbook is giving up on incumbents around the world. 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 insurers that seek 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 with some 300 million of the world’s estimated 1.8 billion millennial population living on the continent. The bulging population of younger millennials and Gen Z-ers presents opportunities for growth but also threatens the traditional insurance model.
Young adults have recorded a higher propensity to urbanize than older populations in developing nations. Urbanization has been shown to be positively correlated with insurance consumption in many studies. A huge youthful population with the prospects of high urbanization, the generally increasing literacy across the continent, and improving economics, should 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 buying decisions and are generous to share their experiences as well. Ignoring negative online sentiments of this group could be perilous.
Quitting the games
Among the panoply of busybody doctrines and so-called principles with which insurers defend their bottom-lines against claims, wonderful faith and insurable interest have been the two most pernicious to policyholders.
Wonderful faith requires insureds to give voluntary disclosure about risks proposed for insurance, failing which an insurer may avoid the policy. Rather counterintuitively, breach of wonderful 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 a pecuniary or equitable interest in the subject 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.
Keeping the promise
Among the many snide jokes about insurance is one about it being a promise to pay which never gets fulfilled. 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.
Doing well by doing good
Funding social causes in tangible ways offer a proven avenue for insurance companies to gain some moral capital. I must add that 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 whom they perceive to be a good moral actor.
Technology first
Technology offers enormous opportunities for optimizing insurance operations and delivering unmatched convenience to policyholders. Many insurance processes do not need the faculties of human beings. I have been impressed by the recent adoption of chatbots by Hollard and Enterprise as well as the NIC’s MID. More scope exists for insurers to utilize technology in underwriting processes, policyholder engagement and retention, and claims processing. The market of the future is attuned to convenient technological processes.
Opening up the books
The negative public perceptions about insurers are stoked by inaccurate perceptions of their profitability. The emerging trend is for insurers to be transparent about how their premiums are spent. A typical transparent model discloses what percentage of premiums fund administration expenses and what goes towards paying claims. Unspent claims-provisioned funds are applied as policyholders choose. In other parts of the world, policyholders choose to have their funds spent on social causes they care about.
Research, Research, Research!
I cannot overemphasize the value of relevant research to an insurer’s sustainability. The impact of AfCFTA with the likely borderless trade in services, the behaviours of the Ghanaian and African youth which are relevant to understanding insurance demand patterns, and global trends have significance for Ghana and Africa should engage insurers’ research investment.
Unless you are investing in research, you will struggle to survive the coming wave.
The writer is Bernard Ohemeng-Baah, LLM (Insurance Law), Chartered Insurer. Email:[email protected]
The post The death of insurance as we know it [Article] appeared first on Citinewsroom - Comprehensive News in Ghana.
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