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Innovation nation

When it comes to innovation, South Africa takes the lead and the protection market is no exception

It is funny how places become synonymous with innovation and expertise. Japan in the 1980s for electrical goods, Silicon Valley in the 1990s with the relentlessly shrinking computer chip and Finland in the 2000s with the advances in mobile phone technology. For critical illness, for the last 20 years, the hub of activity has been in South Africa and that trend is not set to change.

Back in 1984, South Africa launched what was then an innovative solution to protection – the original intention was to cover people for life-threatening illnesses so the only conditions it covered were limited, namely heart attack, stroke, cancer and coronary bypass surgery. Although it was originally viewed with a degree of scepticism by some, it was endorsed by others and eventually became the norm.

Twenty years have gone by and we have seen the highs and lows of the proposition as it reaches the end of its natural product lifecycle. I say the end because consumer confidence is at an all-time low, complaints to the Ombudsman are at an all-time high and the industry is in danger of stagnating without more innovation to meet customers needs. Sales for the last two years have slowed right down and a high dependency on price has stifled the growth of what was once a very lucrative and growing business area.

Where will this innovation come from? South Africa again, this time with the introduction of severity-based payments and a new way of assessing disability.

So why aren’t other markets innovating? In fact, most other markets are lagging behind the UK, let alone South Africa, in terms of product benefits and features. That’s not to say that other countries are not trying to innovate. They have done, for instance, in the Australian, French and the Irish markets. However, most of these innovations were not lasting.

The UK market, with the exception of South Africa, has been right at the forefront of product design. Nowadays, the UK product covers more conditions. The UK also has standardised definitions for many benefits, which other markets don’t have although a number are keen to do this. The Australian market at one point covered the highest number of conditions but because these added conditions did not add any risk, they were not really adding any value and most of them have been trimmed back.

Guaranteed premiums are another feature of the English market that is slowly reaching other places, for instance, Asia. Over 90 per cent of the business written in the UK is on guaranteed rates. The Irish market also has guaranteed premiums but has not yet gone down the standardised definition route to date. Interestingly, guaranteed rates are not a feature of the South African market, where most business is still written on a whole of life basis.

However, that is one of the only developments that the UK has which South Africa does not. When it comes to innovation, South Africa takes the lead and the current protection market is no exception.

Today, South Africa is extending the lifecycle of the product they created 20 years ago by taking it in a new direction and redefining the propositions. One innovation that that moved the market forwards was the introduction of severity-based payments five years ago and most other companies in South Africa now offer severity-based premiums.

What the South African market has demonstrated is that protection need not be a commoditised product sold on price only. No matter how appealing a low premium may be, the product posing the worst value for money is the one that does not pay out when a customer expects it to. Using a severity model, which by definition covers more conditions (although some will not receive such a big payout), you are adding increased risk to the product, risk that customers value and which they are willing to pay for.

It is innovation that will grow the market and bring in new entrants. This innovation in turn will attract new customers and even bring back some advisers who have turned their back on this product.

Paul Cowman is head of proposition and market strategy for insurance at Prudential

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