With its basis in premium cost containment, South Africa's Vitality concept could become a global norm. Greg Becker explains
Insurance premiums need to cover distribution, administration and claims costs.
Much attention is focused on the different distribution channels and remuneration structures, while some firms focus on administrative efficiency and customer service.
Focusing on underwriting can be seen as a way to manage claims costs, although Discovery Health's Vitality initiative shows that there is another way to actively manage claims costs down.
Adrian Gore and Barry Swartzberg of the South African financial services firm Discovery, the majority shareholder of both PruProtect and PruHealth here in the U.K., founded Discovery Health 20 years ago.
Discovery's Vitality initiative - a wellness programme - has been core to their health insurance fund becoming the largest in South Africa.
The Vitality initiative is sold as an on-sell option to those with Discovery health fund membership.
The benefits of the programme can be immense for the devoted user, ranging from discounted flights and movie tickets to cash-back on the purchase of healthy foods, preventative health checks, gym memberships and more.
There is a clear link between many of the features and improved health, and this has been studied and documented in various medical journals.
Some argue that Discovery's core competencies are its ability to collect and utilise vast amounts of customer data at its disposal, the strong brand and loyal customer base - often as a result of Vitality - its innovative mindset and its willingness to disrupt.
Coupled with the buying power its users gives them, Discovery has been able to break out from health insurance into general insurance and related products.
Many aspects of the Discovery story are noteworthy and could be replicated, such as:
• Discovery's major investor was Rand Merchant Bank (RMB). RMB already owned Momentum Life when Discovery founders Adrian Gore and Barry Swartzberg came looking for capital. RMB chairman Laurie Dippenaar "...always believed in the value of having two horses in one race..." and backed them.
Another interpretation is that RMB liked the idea of having "horses for courses": Momentum is a more traditional life insurer known for administrative efficiency, and Discovery has been more innovative and ground-breaking, often leveraging off the foundation built to service its health division.
Discovery's foray into motor insurance via Discovery Drive is another example: it competes with Outsurance - another firm in the same stable.
• With the European Gender Directive preventing the use of gender as a rating factor, the case of the South African health fund industry is relevant. Premiums may not be differentiated based on either gender or age - and health costs vary by age far more than they do by gender.
The Vitality programme has benefits that are more attractive to young people (e.g., discounted movie tickets and gym memberships), and when they began, the profile of their customer base was materially different to that of their rivals.
Unfortunately, as Discovery is now the largest health insurance fund in South Africa, this advantage has diminished.
• Discovery may be only 20 years old, but it already has partnerships in major markets including the U.S. (Destiny Health), the U.K. (PruProtect and PruHealth) and China (Ping An). The private health care market in South Africa is a response to the public health service.
With national finances under pressure around the world, will we see more examples of companies from the developing world bringing their experience and expertise to the first world?
• HR managers will sometimes talk of the loyal Vitality users that champion the service, making it difficult for the organisation to switch health fund providers'.
When selling a service to a group scheme, having a differentiated offering that cannot be easily replicated can provide a sustainable advantage. Take-up rates of the benefits are key to the sustainability of the initiative.
While the Vitality programme of South Africa has had difficulty achieving the same levels of penetration in other markets (there are a variety of societal and cultural factors underlying this) Discovery has not been discouraged.
Instead, the company questions every assumption, and keeps looking for the optimal outcome. Its "nudge" approach has led to change, and supports the argument for private provision of health services.
With the social welfare net coming under pressure, private solutions will emerge.
Discovery's holistic approach to health care costs may be the way forward, and with an incentive to manage the health of members, may lead to improved health.
Discovery has demonstrated that risk costs can be managed - not at the claims stage but before claims materialise, by affecting lifestyle and behaviour.
As The Economist questioned in 2010, "Why is Discovery, a South Africa firm, paying its customers to get healthy while most Western insurance giants do not?"
Greg Becker is product development actuary at RGA
