Time for insurance sector change

Imagine a bank that was able to take your fixed deposits and charge a fee for doing so, as well as for keeping the money, without disclosing these fees to you. If you invested R10 000, and you changed your mind regarding your investment and wanted at any time to gain access to your capital, or the associated interest (if there was any), you`d be levied with a hefty penalty.

And, at the end of the term the bank had specified, you might get back less than you put in. You would enjoy less interest than if you had played with your capital on the money market, or invested it in high-performance unit trusts.

Not a particularly attractive prospect, or a good business model, is it? Yet that is precisely what the insurance industry has been doing.

In a series of highly publicised rulings, the pension fund adjudicator, Vuyani Ngalwana, has ruled against insurance companies more than 30 times since January. He has said, in effect, that the way insurance companies go about their business is not in the best interests of investors and policyholders.

For, despite their objections to the contrary, insurance companies have created a business model that often leaves their customers poorer than had they not entrusted their money to them.

What this means, in effect, is that instruments such as retirement annuities and pension funds have lost their sheen for investors, who are now looking elsewhere to obtain real and meaningful returns on their hard earned cash.

Apart from the obvious risks - loss of revenue, the embarrassment of being named and shamed in the media - the entire insurance sector is at risk of being marginalised by these recent rulings; and, as one of the largest employment sectors, and one which makes a huge contribution to South African society, this is something the country can ill afford.

Technology enablers have been used to automate existing manual processes and not as a catalyst to changing and rethinking the way in which they do business.

Freda du Toit, Director, SDT Financial Software Solutions.

All of this is eminently avoidable and preventable. The reason the insurance sector is in this mess is that it has simply failed to move with the times over the last two centuries.

Processes introduced in the 1700s-1800s have remained more or less intact since then. Technology enablers have been used to automate existing manual processes and not as a catalyst to changing and rethinking the way in which they do business.

For instance, in today`s Internet-centric world, insurers have had many of the opportunities to make service cheaper, information accessible and open to clients - in effect, allowing insurers to deal directly with their policyholders - but with few exceptions the industry has not been able to embrace them.

Rather, the industry has chosen to remain locked in the past. And investors have been the losers.

It goes much deeper, the consequences much further. By way of example, look at the size of the buildings you drive past when you visit an insurer`s headquarters. Your policies are paying for them.

Should they be paying for them? Under current circumstances, there`s no other way. The same processes devised years ago are being applied in the brick-and-mortar edifices within which insurance giants reside. By their very nature, they are labour-intensive; they have never embraced the need for removal of redundancies and bottlenecks and automation of recurring, rules-based processes.

These processes are eating up profits, both for the insurers as well as the policyholders, and no one is holding management to book. It is business as usual, even though business as usual is not doing it for investors.

We often hear about legacy systems and product innovation as reasons for expensive and elaborate processes. This is, however, no longer a good enough reason not to address the real issue at hand - the cost of administration.

The current crisis facing the insurance sector surely represents the best opportunity ever to reconsider and reform the way insurers go to market on behalf of their clients and investors.

If they don`t grasp this nettle now, it might just come back to sting them with a vengeance in the next few years.

In this series, going forward, I`ll look at the historical factors that got the insurance industry into this tight spot; the best-practice processes that can be applied to forward-thinking, progressive companies; how technology can be an enabler for these processes, without ever supplanting them; the role of the broker in this new, process-enabled world; and the way forward for any insurance company wishing to lower its costs and improve returns to investors.