When Discovery launched its PruProtect life business in the UK in September 2007, its timing could hardly have been worse. The UK was entering its worst recession since the 1930s. In its first half of 2008, PruProtect - a joint venture with UK insurance giant Prudential - sold just £1m (R12m) of premiums.PruProtect does not operate in such an attractive operating environment as its sister company in the UK, PruHealth, which has only four large competitors (see graph). After five years, PruHealth covers 200 000 lives, which in SA terms would put it among the five largest medical aids.
PruHealth CEO Shaun Matisonn says there is plenty of leeway for health insurance, as people expect a decline in the quality of care from the National Health Service in the UK and look for private options.
The profit margins for private medical insurance in the corporate market (which accounts for the majority of sales) are considered attractive, and this has been an important source of new business for PruHealth.
But the prospects for group life cover in the UK are simply too dull to justify PruProtect investing capital into this sector. PruProtect rather is focused on the individual market, in life cover, critical illness cover and income protection.
PruProtect CEO Herschel Mayers (who is also CEO of Discovery Life) says the UK is a highly commoditised, price-driven market.
Though increased longevity has allowed life insurers to reduce premiums by about 30% for the same type of cover over the past 12 years, the number of policies sold continues to decline. Term life assurance sales fell by more than 12% to 1,44m policies from 2006 to 2008. Critical illness, which is PruProtect's core product, declined 13% over the same period to 511 000. It is only income protection sales that have kept up, but with 126 000 sales it remains a niche product.
Matt Morris of financial advisers LifeSearch says PruProtect has made some welcome changes to the concept of critical illness cover through the introduction of severity-based payouts.
But Morris says that PruProtect is by no means the only innovative newcomer on the block. For example, Fortis Life Real Life Cover pays out for virtually every eventuality that leads to loss of income except for pregnancy and jail. Kevin Carr, PruProtect's head of protection development, says, though, that no-one in the UK offers the same breadth of coverage as PruProtect. The comprehensive plan covers 154 conditions and the UK average is 27.
PruProtect was able to tap into the existing Vitality network set up by PruHealth. Along the lines of the SA model, once members have earned points for going to the gym, buying sporting goods on eBay or fruit at the Sainsbury's supermarket chain they can get discounts on their premiums.
So far, there are no cross-selling benefits for clients who belong to both PruHealth and PruProtect, as there are for members of both Discovery Health and Life, but Mayers says this is coming.
And in the UK, Vitality is embedded in the product, not an optional extra.
There is some scepticism about Vitality among intermediaries. Peter Chadborn of CBK, an award-winning life intermediary, calls Vitality a "nice to have". FundSearch's Morris, however, says that because of Vitality, PruProtect members are not likely to switch to another life office just to save a few pounds in premiums a month.
Chadborn argues that it will be difficult for the established businesses with their legacy systems to offer new-generation products.
Discovery CEO Adrian Gore says one of the reasons Prudential partnered Discovery was to build an operation that did not feel like a 150-year-old life company and that was hungry for new business. In effect, Discovery has operational control.
PruProtect cannot even piggyback off the Prudential distribution footprint. The tied agents, the famous men from the Pru, are long gone, and the intermediary world is highly segmented - there isn't even much overlap between brokers who sell health insurance and protection.
Much of the protection business is sold without advice as it is linked to mortgages and larger purchases (known in SA as credit life).
So most companies have scaled down their broker consulting forces in the protection market. Big companies such as Aviva and Legal & General, each of which wrote more than £120m of business last year, have just a handful of broker consultants meeting the top brokers face to face. The rest of the advisers must phone call centres to deal with queries. In contrast, PruProtect has 60 broker consultants in the field, plus a further 50 telephone-based support staff, some of whom are based at Discovery head office in Sandton.
PruProtect has replicated Discovery's model of franchises. The Consulting South franchise, for example, has 11 broker consultants, directly servicing 500 advisers across southern England and not just lavishing personal attention on large corporate brokers.
It is starting to help, as Discovery wrote £6m of new business in the six months to June 2009, giving it a market share of a little under 1%.
Risto Ketola of Ketola Research, a leading European life insurance analyst, says the protection market in the UK is not innovative, "but maybe the customers don't want innovation, they just want to keep it cheap and simple ".
He is not sure whether either PruHealth or PruProtect will provide a satisfactory return on capital, or necessarily more than marginal profitability.
"Even if they show good profits in accounting terms, that is a long way from providing good profits in cash-flow terms."
The unhappy experience in the US will count against Discovery, but Gore says its US business did not have a partner with the brand recognition of the Prudential in the US. It has been easier for Discovery to adapt its products for the UK market, where the business culture is a lot closer to SA's than it is in the US. But the UK is still a much more competitive market than SA's. The road will not get any easier.
- The journalist's trip to the Discovery operations in the UK was sponsored by the company
