In this presentation, Discovery Insure Chief Executive Officer, Anton Ossip, discusses the beginnings of risk prevention, which can be traced as far back as 3000 BC when Chinese sea merchants would split their cargo across several vessels to reduce the risk of loss of good due to perils of the sea. Over time, this evolved into paying a fee to transfer risk to another party. It is well known that the origins of Lloyd’s and indeed the London market all started with the need for ship owners to spread the risk of their dangerous journeys with much of this happening at Edward Lloyd’s Coffee shop in around 1688.
To date traditional pricing models have relied mainly on demographic factors as a proxy for risk, he says. Primary inputs include age, geographic location, claims history and the gender of the policyholder, with some more progressive models allowing for other observable risk factors such as credit history. Further, retrospective data is used as a key predictor of future claims experience and, hence, setting premium rates. The result of this is cross subsidisation where good drivers overpay for insurance while poor drivers underpay.
Discovery Insure’s launch in 2011 was a significant development in introducing fairer and more accurate insurance pricing, says Ossip. This move away from traditional underwriting practices enabled Discovery to monitor how a client drives, such as their braking and speeding patterns; and use this data to more accurately price vehicle accident risk. Further, driving behaviour, which was previously not directly measurable, could now be incorporated into pricing models, thereby reducing the cost of insurance.
Behavioral-based models are applicable to other areas of insurance businesses, he adds, for example, fleet management, and vehicle warranty.
The next step in the evolution of insurance, Ossip adds, is encouraging behaviour change. Discovery Insure has shown success in applying a behavioural-based insurance model to the motor insurance industry, through the Shared-value Insurance model. Shared value in the short-term insurance industry is enabled by Vitality Drive, an incentive-based driver behaviour programme that rewards clients for driving well, he adds. Through extensive research, Discovery Insure has identified that 60% of South Africa’s reported fatal accidents are caused by distracted driving, loss of vehicle control and reduced safety of an actual vehicle.
In the future, Ossip posits that the short-term insurance market will adopt the Shared-value Insurance model across the board.