On identifying the most effective business model to reach the foundation market

Prior market research indicates that both group and individual buying behavior exist within the foundation market. Both must be considered in order to effectively reach this market. As such, Old Mutual’s Foundation Market strategy takes into account group buying behavior through its affinity-based and community-based model, and individual buying behavior through its retail distribution.

On creating a Microinsurance Business Unit

Microinsurance activities require different processes than traditional business, both for product development and monitoring and evaluation. Creating a separate business unit can help to set different standards for microinsurance products, but the unit needs to have a clear mission/vision statement, define clear objective and develop an appropriate M&E framework (which can include both quantitative and qualitative objectives). Even if sharing resources with other departments can be a way to reduce administrative tasks, it increases the risk of applying the same standards for microinsurance as for other lines of business and may decrease reactivity. For example, for the BSSP product, quotes for large groups are done at head office, by the Retail Mass Market team, leading to a sales cycle of 2-3 months, which negatively impacts potential performance of the product.

On product design

A group product design with a flat rate enables inclusive coverage. The BSSP product is attractive for rural populations, as it mimics informal mechanism for funeral coverage, and is easy to understand for the target population thanks to its flat rate. There are neither age limits at registration nor exclusions, and no underwriting requirements, as adverse selection is limited thanks to the mandatory registration of all group members. But in a competitive market, flat rates are expensive for the younger part of the population and BSSP products starts attracting older membership (representing higher risk). The GFS product is more attractive for the younger groups, which may prefer price competitiveness to simplicity.

Enabling inclusive coverage, such as reducing or eliminating the waiting period improves sales. The waiver of the waiting periods for previously insured groups has created a significant increase in sales. However, the net effect of this may also be an increase in claims, which should be measured.

It is important to segment the market, as burial societies in South Africa are of two categories, smaller burial societies that are managed by the community, and larger groups that are managed by funeral parlours, each of which have different characteristics and needs for funeral product. The groups managed by funeral parlours have higher expectations of profits and will switch the business more frequently. In addition, the larger groups either provide some level of self-administration or use a third partner administrator, which requires specialized software and IT links to be provided by the insurer. OM first focused on addressing the needs of the smaller groups, but the Foundation Market is now trying to reach the funeral parlors, by launching the more price-competitive GFS product and developing software which will enable web-based administration.

Group product management requires a different system than individual products. As OM has always been in the business of individual policies, the administration for BSSP was originally set up on a system for individual insurance policies, customized to allow for some level of group billing and member data. OM is now developing a new system to suit the requirement for appropriate administration of group policies.

Too much flexibility in the product design can be simplicity’s enemy – especially in a retail distribution model where most sales are passive. The PWYC product is meant to address income irregularity by providing a top up option rather than requiring monthly premium payments. All top ups are for 14 month coverage, including a two month waiting period. While the design is flexible, it adds complexity as it is difficult to calculate the active coverage amount at different points in time. Pre-launch market research as well as low sales performance are showing that the market does still not fully understand the new concept, as it is the first of its kind and is not supported by adequate knowledge of the product by Shoprite staff. OM will work on increasing product knowledge among front line staff and enhance the benefits of the product.

On the importance of monitoring and evaluation

Regular monitoring of mortality experience and adjustments to rates and/or benefits has resulted in a significant improvement in claims ratios. Old Mutual initially experienced challenges with the claims ratio of its group funeral insurance product, with a ratio over 100 per cent in 2005 and 2006. This was partly due to the mortality experience, which was higher than expected based on data from other market segments, and partly because of a provision in the policy that allowed members to replace dependents. To monitor the mortality rate, Old Mutual instituted a review process whereby an automated report was generated when a group’s claims ratio exceeded 70 per cent and premiums for many high-risk groups were increased in 2008. This resulted in more lapsed policies, but improved the quality of the groups retained in Old Mutual’s portfolio. Old Mutual made another adjustment in 2009 to eliminate a policy provision that allowed a principal member to replace an insured adult dependent with another person upon the death of the original insured dependent, without any change in the premium. The above adjustments to process, product and pricing, made as a result of claims monitoring, have contributed to improvements in the claims ratio, with recent ratios being in the range of 63 to 68 per cent (at or near target).

On sales management

Direct sales costs can be contained if the product is sold on a group basis. The BSSP/GFS design enable sales agents to manage, on average, 1500 principal members, or 6000 lives covered per agent. In 2011, the cost of the sales force represented 27 per cent of the premium collected, even for a product with monthly premium. OM’s objective is to decrease this ratio to 14 per cent through a better incentive structure and more efficient processes.

Recruiting sales agents from the local communities has proved successful to build trust among the population. OM recruits its agents from the community, which enable a better contact with the burial societies and a higher level of trust between the agent and the groups.

Incentive models need to be easy to understand and motivate the sales force. It is not worth developing a complex model that leads to no bonuses paid, and hence no change of behavior among the sales force. For OM, only 1/4^th of the sale agent are viable and only half were entitled to bonuses (as of June 2011), decreasing the impact of the model to reduce lapses. Moreover, the bonuses are rewarding new sales more than low lapses, and agents with stable and large portfolios may not be rewarded. This experience suggests that a different incentive structure recognizing the separate roles of sales and service functions might be more effective. A clear demarcation between sales and servicing roles, a more focused training program, and changes to the incentive structure are currently being considered in response to these issues. Sales Consultants could work in teams but specialize in either sales or servicing; once the sales cycle is completed the “service consultant” would step in and manage the client relationship. The bonus structure will have to be adapted accordingly, as both viability levels and performance bonuses will have to be customized to each type of role.

On the impact of competition and regulation

Competition leads to price pressure and greater efficiencies. If in 2003, OM was a pioneer in servicing the low-income market, competition is now high in this segment (especially from cell captives) and implies price pressure. OM had to review its pricing and offer to cope with the situation, including lower expense ratio assumptions. OM needs to find more efficient ways to sell the BSSP product and has introduced a new incentive model for the sales force. Competition may also explain a slightly higher lapse rate of the portfolio, from 35 per cent in a first year in 2003 to 45 per cent now.

Working in a highly regulated environment adds constraints to reach the market. The consumer protection and privacy regulations limit the effectiveness of a one-stop-shop model at Imbizo sites, as it prohibits companies, even related companies, from sharing client data that they have not collected themselves and subsequently are not able to cross-sell. It also prevents them from developing composite products for Imbizo clients that could provide protection or savings across traditional product lines (for example, an insurance policy that provides both property and funeral coverage).

On building effective partnerships

It is important to involve the distribution channel in the marketing campaign design, as it knows the market. In the case of PWYC, the marketing plan was developed jointly between Old Mutual and Shoprite: although led by the marketing team at Old Mutual, Shoprite had input into the marketing material and plans and insisted on having sign off authority on all the material to be displayed in Shoprite stores. It was a significant learning curve for Old Mutual to adapt its traditional approach to one that was more suited to the market it was trying to reach.

In a multi stakeholder partnership, such as the one for Imbizo, it takes considerable "central" management for the partnership to work. Having an external organization (Wiphold) coordinating the initiative has proven successful in the case of Imbizo. A key element is the shared project manager, who provides a united “face” to the community and is able to resolve issues quickly at ground level.

On comparing direct sales model vs retailer model

It is difficult to efficiently motivate and monitor the front line staff in the retail distribution model. First, the staff turnover is high and it is difficult for cashiers to know the PWYC processes. Moreover, in the Shoprite arrangement, several funeral products are available at the till, and cashiers often don’t know the specific registration process for each. In this set up, it is also difficult to set incentives for sales. At Shoprite for example, incentives for selling PWYC accrue to Shoprite at the corporate level rather than the store level, and there is no financial incentive for the store managers to attractively display or push the product.

Expense ratios for both models are comparable. With a 42 per cent expense ratio in the case of BSSP/GFS product and an estimated 50 per cent expense ratio (including marketing cost and commissions) for the PWYC product. Longer monitoring of expenses vs volume will need to be monitored to continue comparing the distribution models.