Are the traditional South African insurers about to disrupt the retail banking market?
By Matthew Pouncett
Bancassurance (where banks sell insurance products) has been around for decades. Banks are well positioned in this regard as they are often part of key life moments that catalyse such sales. Most notable is the purchase of a house and provision of a mortgage, providing the opportunity for banks to cross sell both life insurance and home and contents cover.
Banks also have insight as to the quantum of insurance premiums leaving their clients’ accounts every month and to whom these are paid. Established distribution channels – both bricks and mortar branches as well as digital channels such as apps - allow banks to sell insurance products at a low incremental cost.
Despite these advantages, however, most insurance products are still sold as opposed to bought and require intensive face to face advice, favouring the traditional life insurers who are adept at managing large forces of tied and independent financial advisers. These intermediaries though do lead to high distribution costs, which are largely passed onto clients via higher premiums.
However, this is changing, most notably in the funeral insurance market, where banks are finding that cheaper (sometimes up to 30%+) direct branch and digital sales are proving effective. The result now, according to Swiss Re, is that Capitec Bank has over 36% market share of funeral sales (measured by sum assured).
However, this blurring of the lines between banks and insurers is not one way traffic. In SA we are seeing the unique trend of insurers starting banking operations.
Discovery Bank: Disrupting the mortgage market with innovative pricing
The most pertinent example is Discovery Bank. Discovery is unique among insurers globally with high client engagement levels, driven by the Vitality Rewards programme with close to 3 million members. As a holistic financial services provider Discovery has gone one step further and started a full-service digital bank. Although the cost to build was substantial (north of R8 billion) progress thus far has been positive, with almost 1million clients holding 2.3 million accounts and with operational breakeven expected next year. Of most interest is that Discovery is looking to disrupt the most traditional of banking products – the mortgage.
Discovery’s view is that most mortgages in South Africa are mis-priced. The issuing bank measures the client’s risk at inception of the mortgage – considering the borrowers income levels and the loan to value at that point in time. However, as time progresses, the individual receives pay increases, house prices rise (hopefully), and principal is re-paid and thus the risk related to the mortgage reduces – yet the initial pricing struck at inception is unchanged. Furthermore, Discovery - just like traditional banks that do bancassurance - can then cross sell highly profitable insurance products around the home loan, enabling the company to further discount the mortgage pricing, as the transaction at an all-in level still makes strong returns.
Old Mutual and Sanlam’s bold banking moves
Old Mutual has also announced that it too will launch a bank. The insurer will be using the UK banking-as-a-service provider, 10x as the banking platform and aims to launch in the first quarter of 2025. The market is yet to see what the full offering entails, but many speculate the launch is largely a defensive move aimed at protecting Old Mutual’s lucrative funeral insurance business.
Furthermore, Sanlam announced a R3.9bn acquisition for 25% of ARC Financial Services Holdings – who in turn is a substantial shareholder in digital upstart Tyme Bank. Tyme recently hit the milestone of 10 million clients in South Africa and operating profit breakeven. Tyme has also entered the Philippines garnering 4 million clients and with plans to expand the offering to Vietnam and Indonesia. A natural extension of the shareholding will be for Sanlam to use Tyme as a distribution channel for insurance products.
Banks vs insurers: Who will win the financial services battle?
The thread throughout all of this – is that SA financial services companies are all vying to offer holistic financial services – looking after your money, your belongings, and your life. As companies invest in propositions and product rollouts, the client is the net beneficiary as pricing sharpens and innovation improves. What is clear now, is that banks and insurance are all in the same race. Time will tell who wins.
Matthew Pouncett is a portfolio Manager at Laurium Capital and part of the PPS Stable Growth Fund.
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