DIRECT INSURANCE It’s good to be the King
The competition might dismiss it as King Pie — cheap and not very nutritious. But since its launch in June, King Price has recruited 10 000 clients. It has taken Discovery Insure two years to reach 23 000.
The King Price value proposition is all in the name. As well as aiming to undercut competitors on initial premiums, it promises to decrease premiums every month ( Fox June 8).
King Price has a cheeky positioning — it says its clients are under the protection of the king. It does not cap what it pays its sales agents — at Outsurance, for example, they cannot earn more than R50 000/month. And premium produced is measured on a giant board in which each agent is represented by a villain from movies, such as Darth Vader and Freddy Krueger.
There is undoubtedly a lot of margin in direct insurance — they are more likely to find reasons not to pay than pay. On average 50% of premium income is paid out in claims compared with 70% for broker-based insurers such as Santam and Mutual & Federal. King Price can cut premiums below competitors such as MiWay and Telesure and still have an acceptable return on capital. Clients need to be familiar with the terms and conditions of their policies — and with no broker to help out they need to be very careful. Hail damage, for example, is not covered in a standard policy and costs extra.
King Price is different from any of the recent direct insurance start-ups as it is not part of a larger financial institution. It works closely with Munich Re, which is its reinsurer, but the German giant does not have any equity in King Price.
It is a creature of raw entrepreneurial private capital, last seen when the maverick Douw Steyn started Auto & General in 1985.
The founder of King Price is Gideon Galloway, a former Steyn executive who helped launch the Hippo comparative quote site. King Price is owned about a third each by Galloway, Francois van Niekerk of Mertech (a large shareholder in the Atterbury property group) and Stefan van der Walt of Nikon SA — who are members of the same church as Galloway.
He says that for too long insurers have relied on the automatic increase in premiums model to cover other inefficiencies. Whether or not it was in reaction to King Price, market leader Santam has introduced a new system which will take account of the depreciated value of the vehicle.
Says Santam CEO Ian Kirk: “We have been criticised for inflating property values but not reducing motor values. But this will be just one factor that will be taken into account when premiums are adjusted.”
Kirk says that on average 70% of claims are for repairs, rather than for stolen or written-off vehicles.
“For repairs the main factor is not the retail value of the car itself but the costs of new parts and panel beating costs, both of which rise in line with inflation and sometimes faster.”
Galloway says the model works for King Price as he believes that repairs will account for 50% of claims, with the balance from stolen and written-off vehicles plus household claims.
This suggests that there will be a high level of repudiations on repairs.
Mutual & Federal CEO Peter Todd says there is room for innovation on the back of technology which allows for a more detailed understanding of risk.
Galloway says a major cost for direct insurers is churn, as clients will often switch carriers for a R40/month saving.
“If we can retain clients for just six months longer than average then we will have a very attractive business model.”
Outsurance MD Willem Roos says he welcomes innovative new players into the market. “I can’t fault that they don’t want to pay out a no-claims bonus. It is a cost which is built into every premium. If King Price thinks it can win clients who do not value an Outbonus then good luck, there will be some.”
Outsurance is due to launch its Australian brand Youi into the market soon, which will be more of a cheap and cheerful product, without the Outbonus.