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If the model works, duplicate it – Discovery

Vitality goes global.

JOHANNESBURG – Chief executive of Discovery Holdings (DSY), Adrian Gore, said the six months to December 31 were a time of “frenetic activity”, as the group refined the “repeatability” of its insurance model across current and future businesses. 

Addressing analysts at its interim results presentation in Johannesburg on Thursday, Gore said that, at its core, Discovery’s purpose was to make people healthier. The insurer has used behavioural science to incentivise members to make better lifestyle choices and so created “next generation” insurance products, which allow for dynamic pricing and product integration.

Central to this business model is Discovery’s wellness programme, Vitality, which rewards members for getting healthier. “The ability to build superior insurance products on top of the Vitality chassis is powerful. It has underpinned everything we’ve done and it is important that we stick to this in future growth plans,” Gore said, emphasising that Discovery would mirror its established businesses when moving into new markets.

Gore said that the growth and profitability of Discovery Life, with earnings up 21% to R1.2 billion and new business up 11%, was a very good example of the Discovery model at work.

“Integrating the Vitality model into life insurance has been fundamental for us and led to a positive lapse and claims experience,” he noted. “The correlation is definitive. Those people who are more engaged in Vitality, claim less.” On top of submitting fewer claims, those customers who engage more, receive better value for money because Discovery’s dynamic pricing model means the healthier you are, the lower your life insurance premiums will be. This means they are less likely to go elsewhere. “This is reflected in low lapse rates among existing customers,” Gore said. 

Low lapses and a positive mortality and morbidity experience have contributed to quality of earnings, reflected in the group’s 19% growth in embedded value to R39.8 billion, Gore commented.

He described Discovery Life as a “benchmark” of what the company could do internationally by implementing a “repeatable model”. 

Taking Vitality to the world

“We want to globalise the Vitality capability, providing a chassis that other insurers can use, both in those markets where we operate and in markets where we don’t have an appetite to build our own insurance business,” Gore announced. 

Discovery invested a further $5 million into the Vitality Group at the beginning of 2014 and plans to build the Vitality brand globally through a network of international partners. “We are codifying this model to repeat it in other markets,” he said.

It has partnered with IBM and Accenture to roll the capability out across Asia and has signed a sponsorship deal with Sky News, where a short message from Vitality will be flighted before the sports bulletin – similar to how Qatar Airways sponsors the weather bulletin.

Gore said that Vitality has driven down lapses (clients stop paying premiums/forego cover) and claims across its UK businesses, PruHealth and PruProtect. The Vitality Optimiser product, which leverages the Discovery Life integrator methodology, accounted for 30% of sales in Q4 2013. Optimiser sales have been associated with higher sums assured, more ancillary benefits and higher severe illness cover take-up, resulting in a value of new business margin almost double that of the non-Optimiser range.   

Arguably one of Vitality’s most impressive success stories is the 2.9-million lives covered under Discovery Health Medical Scheme (DHMS), where the concept was first pioneered. This figure equates to one third of all South Africans accessing private healthcare services through a medical aid scheme.

In the period under review, membership of DHMS grew 4% off a high base, with declining loss ratios and low lapse rates and buy-downs in medical cover. Operating profit climbed 13% to R860 million, with solvency reserves of R9.7 billion at the end of the period.

The Discovery Group grew normalised profit from operations by 21% to R2.4 billion. Normalised headline earnings climbed 22% to R1.7 billion for the six months to December 31. 

In a SENS announcement issued on Thursday morning, Discovery noted that “the growth and quality of earnings reflect the efficacy of Discovery’s model, centered around making people healthier, and as a result, building superior insurance systems.”

At 16:15, Discovery’s share price was down 1.5% to R77.45.

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