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New insurance markets require new processes

Insurers' existing systems are too costly to support an incursion into the lower end of the market.
Freda du Toit
By Freda du Toit, Chairman and co-founder of Kgali Investment Holdings.
Johannesburg, 13 Feb 2008

Everyone in the insurance sector is looking to launch products into the lower end of the market. This is hardly surprising, given that the top end and middle of the market are both fiercely contested and therefore close to saturation, and finite.

People in these sectors have typically bought all the insurance they need and want - often compulsory instruments in support of regulatory compliance.

Given the aspirational nature of so many people in the lower end of the market, there is clearly scope for growth here. The problem for insurers, though, is that their existing systems are too costly to support an incursion into this space.

This is common cause in the market. You cannot target people with low discretionary income and then support them with mainframe legacy systems costing millions of rand a year to run. It just doesn't compute, and it never will.

Of course, it's not just the mainframe and other legacy systems which prevent entry into the low end. The major aspect that needs to change is the processes which are executed on the legacy systems. This is where the real problem lies. But more of that a little later. For now, let's look at the developments in this area of the market:

* Metropolitan Life has launched Cover2Go, which for R10 deducted off a cellphone's airtime provides six days' cover, with a R60 000 payout in the event of accidental death. This has been targeted initially at minibus taxi passengers. A similar service is being offered in the UK through Text2Insure.

You cannot target people with low discretionary income and then support them with mainframe legacy systems costing millions of rand a year to run.

Freda du Toit is executive director of SDT Financial Software Solutions.

* Insurers are also looking to sell their products through retailers, thereby using existing channels, and allowing people to buy insurance instruments at the same time they're buying their milk and bread. Retailers benefit through selling new products, and insurers benefit from a new channel. But a key issue has not been addressed here, as far as I have seen insurers are selling what they have rather than offering products people in this market sector need.

* Some insurance companies are looking to provide customised payment structures. In this area of the market, many people will default because they simply cannot maintain their payment schedules at certain times of the year - festive season, school fees - or because there has been a crisis in the family: loss of employment, bereavement, injury. In this case, insurers are looking to offer people a new instrument, a policy that requires only a limited number of monthly payments instead of the traditional 12. That's a wonderfully noble sentiment, but the big challenge insurers now have is how to administer and make money out of such instruments, given that their legacy administration systems were designed to prevent just such an eventuality. You need the ability to manage the defaults, which can occur in any month - but currently the only way to manage the sporadic defaults is through manual intervention, and that's prohibitively expensive. So, unless back-end systems are dramatically changed to reflect this new requirement, this new instrument won't make it in the market.

Two of the above market moves are cosmetic; the third impractical but a market need. Selling instruments through cellphones or retailers is simply introducing a new sales channel, it still requires a fundamental change in the way these instruments are devised, marketed and administered. Instruments which carry a measure of default, without new systems to manage these defaults, are going to be too costly to manage.

To sell into the lower end of the market, there has to be a fundamental change to the overall approach to administering systems.

And while they're at it, insurers have to tackle the issue of redesigning their processes, otherwise they're not going to be successful in this new market, or in their existing markets in the long term.

* Freda du Toit is executive director of SDT Financial Software Solutions.

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