Naked Insurance, a Hollard-backed start-up, has become SA’s first operative insurer to relinquish underwriting profits through a business model that co-founder Alex Thomson says solves the "conflict of interest" inherent in insurance firms.
Naked Insurance is one of a string of "insurtechs", the name given to insurance-related financial technology (fintech) companies hoping to disrupt SA’s insurance industry — in many cases funded by their traditional counterparts.
Speaking on Tuesday at the launch of Naked Insurance, underwritten by Hollard, Thomson, an actuary and former partner in EY’s insurance advisory business. said insurance companies were incentivised to minimise the cost of claims to maximise profit. This compromised claims handling and the fairness of premiums.
Naked Insurance would instead collect a fixed 20% of premium income to cover its costs, while money left over after paying claims, known as underwriting profit, would be donated to charity.
It may struggle to contain costs, however. Short-term insurers selling policies to the general public spend about 30% of their net written premiums (gross written premium minus reinsurance costs) on management expenses and commission, according to Financial Services Board figures. This does not include shareholder dividends or fraud costs.
Average costs for management, claims administration and commission/marketing at a well-run direct insurer would be about 20% of net written premiums, rising to 28% for large intermediated insurers, said Justin Floor, a portfolio manager at Kagiso Asset Management.
"A start-up would typically have a much higher cost ratio unless they were running with an extremely lean infrastructure," he said.
The total costs of Santam, SA’s largest insurer, were about 27% of net written premiums for the period from 2003 to 2016, said Alex Duys, head of equities at Umthombo Wealth.
Naked would contain costs using automation, said Thomson. Artificial intelligence-based fraud algorithms permitted instant approval of certain claims, while photos, videos and chat-bots were used for underwriting and claims.
Naked CoverPause allowed customers to pause accident cover if their cars were not used for a day or more, reducing the premium for that time.
Naked Insurance would offer car insurance only, adding home and contents at a later stage.
Investment in insurtechs globally jumped from $270m in 2013 to $2.7bn in 2015, according to McKinsey & Co.
In SA, Pineapple, a peer-to-peer insurer underwritten by Compass Insure, will also operate on a fixed-fee model, while life insurance start-up Indie, underwritten by Sanlam, will match customers’ monthly premiums with an investment into a money market account.