Changing insurance, for good

The week before I started Discovery, I’d left my job and was at the beach at Plettenberg Bay holding my new-born daughter. I’m not someone who usually has doubts. But I remember standing there looking at her thinking, am I really sure I’m doing the right thing?

Now more than two decades later, the approach and model pioneered at Discovery have proved remarkably robust, and give us confidence as we pursue significant new opportunities. I remember the criticism we received when we introduced Vitality in South Africa 21 years ago. Spending money on incentivising exercise was considered pointless, if not downright frivolous.

Our global data platform today – spanning 40 million life years of morbidity and mortality data – proves our approach was anything but flippant. All other things being equal, for someone who exercises versus someone who doesn’t, you can expect 11 years more life. You can expect to spend six fewer years ill. Your total life healthcare costs will be 21% lower. That translates into a better quality of life every day. Helping people live longer in better health and wealth leaves no place for cynicism.

We make profound cognitive errors about how long we will live, how healthy we are and what will kill us. It turns out that just four risk factors (poor diet, physical inactivity, tobacco use, and excess alcohol intake) lead to four chronic diseases (cardiovascular disease, diabetes, chronic lung disease, and various cancers) that contribute to 60% of deaths worldwide and 80% of the disease burden. And while most of us seek better health, the majority of us do not act accordingly.

The question is: why? 

The answer lies in a simple paradox: we over-consume healthcare but under-consume prevention. This is because at the point of care (through insurance or single payer systems), the total cost of healthcare is hidden, while many of the benefits are immediate and evident. This leads to over-consumption. On the other hand, with prevention, the cost is immediate and evident (go for that dreaded run, avoid that desirable food), whereas the benefits are only evident in years to come. And this leads to under-consumption.

Behavioural economists know full well the power of instant gratification and our inherent over-optimism. We tend to be our own worst enemies when it comes to decisions about our health, with significant implications for the societal cost of healthcare.

When my colleagues and I started out, we knew that the case for disruption was strong. Insurance models at the time did little to recognise the behavioural nature of risk, let alone actively promote and incentivise better health. Life insurance systems were based on the idea that risk is static, with underwriting taking place once, at policy inception. It made no sense as an approach. In fact, it was predicated on death, and not – ironically – on life.

That’s how the Vitality business model was born. We knew we could harness the behavioural biases and heuristics that typically conspired against health improvement to help nudge people in the right direction – making healthier choices the easier choices. We also knew if our core purpose was to make people healthier and enhance and protect their lives – the same core purpose that governs us today – we could align our commercial interests with making society healthier. That is a profound opportunity.

After all, insurers, along with government, are the only stakeholders that directly "monetise" better health, and less sickness and death, because less of these translate into higher profits. So it made sense to make people healthier, and since this leads to increased profits, some of these profits could be used to provide incentives to customers to make healthier choices. This has fueled a virtuous cycle of value creation and health improvement.

Vitality Shared-Value Insurance, now used by a network of leading insurers across the globe, was our attempt at an articulate and sophisticated answer to the call for a new way of insuring value. Vitality Shared-Value Insurance supports, incentivises and rewards people for improving their health and prices insurance risk dynamically over the course of the policy, which results in material benefits that are shared between members, insurers and society.

What makes the model unique is that there are no trade-offs. The result is a structural transformation of insurance – additional economic value is unlocked, creating benefits for the member (less risk, more years of life), the insurer (reduced claims over time) and society (healthier, more productive citizens). This form of insurance subsequently became accepted as an exemplar of what Harvard management guru Michael Porter coins a “shared-value” business model – addressing social needs, profitably. Porter argues that business models such as these are less a “nice to have” than they are an imperative for long-term growth.

Is the business model still compelling today – more than 20 years after I stood on the beach? I would argue, more than ever.

Insurance faces new opportunities in the form of disruptive technologies and increased customer expectations of the role of institutions in society. New technologies are emerging with potential to enable individuals to live longer, healthier, and more independent lives. Just look around at the smart watch proliferation and the quantified-self movement. In addition, social expectations of institutions have increased: the millennial generation demands that organisations act not only as profitable entities, but purpose-driven ones too. Innovative approaches are required to take advantage of the emerging technologies and to build businesses with social impact. Vitality Shared-Value Insurance addresses this.

And we can go further: the behavioural nature of risk is proving its dynamics in other sectors as well, from motor insurance, to long-term investments and savings. When it comes to our driving, for example, five behaviours (excessive drinking, cellphone use while driving, excessive speeding, harsh braking and tailgating), cause three driving conditions (aggressive driving, driver distraction, and loss of vehicle control) which account for over 90% of fatal vehicle accidents.

My point is that risk is not pre-determined. It is pervasively and persistently behavioural. Changing the financial services paradigm in all applications, therefore, holds tremendous latent value.

As the founder and CEO of Discovery, I am incredibly proud of how a South African innovation is serving to transform the global insurance industry – and hope to share this journey with you over the coming months. We are establishing a new financial services paradigm that meets 21st century challenges and expectations, changing insurance for good. It really is just the beginning.