Earlier this week FAnews Online reported on Discovery's full year results. We did not dwell too long on the financials, preferring to speculate on the future of the group's US operation, Destiny Health. What we did reveal was that local operations Discove
Discovery Life was not far behind, contributing R707 million, with Vitality providing R43 million despite incurring costs in launching its Wellness initiative. The real star in the stable is Discovery Life which managed a 29% improvement on the previous year.
In this article we look at various factors at play in the life and health businesses in the group's domestic and offshore markets.
Life business picks up speed
What is clear from the results is that market conditions favour the life industry going forward. Discovery Life grew annualised recurring business by 23% in the year under review, while Discovery Health managed a mere 3%. At the same time, Destiny Health is struggling in the US and PruHealth remains in a start-up phase.
Life's advantage over health can be partly ascribed to differences in market saturation in the respective industries. Discovery Health is a giant in the local market for private healthcare and already covers more than two million lives. The scheme is under pressure to continue growing membership given that the market for private healthcare in South Africa is likely to remain stagnant in coming years. Discovery chief executive, Adrian Gore, also points out that Discovery Health's lapse rate of 3.96% requires the scheme to sign on close to a thousand new members every day just to maintain its membership.
In contrast, the life industry is far from saturated. Discovery Life already enjoys a leading position in the market for risk-only business and Gore believes the group is poised to strengthen this position without "compromising the quality of business written." The group will continue to benefit from its risk product offering through a focus on distribution strength. "The ability to offer people better life insurance at a cheaper price," remains a key factor in the success of the life business, says Gore.
Both independent and tied agents drive business forward
Gore provided some interesting comment on Discovery Life's distribution channel. A slide titled "Independent broker production analysis" provided a comparison of year-on-year production for independent financial analysts. "There are about five thousand brokers who wrote for Discovery Life over the last year. If you look at the numbers they are putting out there, nearly seventy five percent of those broker increased their numbers," said Gore.
In the same period Discovery continued training agents to join its own specialised agency advisor pool. These agents should number 120 by the end of 2007 and are generating substantial business for the group. The business model is obviously working with tied agents contributing almost 8% of total new business in August this year.
Commission contributions from the tied agents were significantly higher than the market average. Gore confirmed this by saying that "the average agent generates around 10, 000 in commission a month... [Tied agents] are actually producing five to six times the market average."
PruProtect faces tougher competition
Discovery remains intent on replicating the local life and healthcare models in the United Kingdom. To facilitate the groups entry to the UK life industry, the structure of the joint venture with Prudential will be slightly altered. A new holding company called PruProtection has been established to house PruHealth and PruProtect. "PruProtection is the vehicle through which Discovery and Prudential will attack the UK life and health insurance market," said Gore. He believes that Discovery is well positioned to reap the benefits from a new premium market which is three times larger than South Africa's four billion rand per annum.
The only concern is the competitive nature of the UK life assurance industry. Gore demonstrated the tough conditions with a slide comparing like-for-like premiums across a number of UK life assurance companies. "Literally a pound per month separates the firms in the top ten," said Gore.
Only time will tell if PruProtection is able to produce similar successes in the UK market to those achieved by Discovery in South Africa. Local shareholders will continue to watch offshore developments with interest. They will be wondering when PruHealth will show its first profit and desperately hoping that Discovery drops Destiny Health. And of course they will hope that PruProtect can emulate Discovery Life's local success.
Editor's thoughts:
Although PruHealth has posted losses in each of the years since its launch, the business looks poised for big things in the UK healthcare market. Given the competitive nature of the life insurance business in the UK, does Discovery's new venture with Prudential stand a chance? Send your comments to gareth@fanews.co.za
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