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Nine out of every 10 insured consumers claim less than they will ever pay in short-term insurance premiums — effectively subsidising 10% of multi-claimants and leaving the 90% to lose out big. It’s a startling figure.
It’s this that SA startup Solvency, which recently clinched a multi-million rand investment, aims to tackle with a new product which it plans to launch on 1 January.
The startup links a client’s insurance premiums to a savings account, in their name, and allows complete control of what percentage of premium goes to risk and what goes into direct savings, with interest earned.
Behind the startup is Mutoda Mahamba (pictured above) — a former actuarial analyst, who has spent 10 years at Hannover Re, Absa Insurance and Momentum & Metropolitan Holdings.
I really see the savings product as a true disruptor in the literal sense, says Solvency CEO Mutoda Mahamba
He believes his startup will help those who take out short-term insurance to use their insurance premiums to create an investment — rather than letting their hard-earned cash go to subsidise multi-claimants and insurer profits (he points out that SA insurance companies currently generate annual returns of over 40% a year).
Solvency is underwritten by Genric Insurance. In June the underwriter invested an undisclosed amount in the startup.
While Mahamba declined to reveal the size of the round, he confirmed when questioned by Ventureburn, that the underwriter had taken a minority stake in the business and had invested below R10-million. He said the startup remained black-owned.
He said it had been a big challenge to secure an agreement with an underwriter. Initially the startup was looking to go with New York based AIG, but Mahamba said it had taken too long to tie-down an agreement with the underwriter.
Things were easier with Genric. Within a month of meeting, the startup — which currently has six employees — had signed an agreement with the company.
From Cascade Cover to Solvency
Mahamba founded the startup with Gavin Waldeck in 2016. Waldeck left the company in April, after receiving an offer from Amazon Web Services (AWS) to head up the company’s SA offices.
The startup had originally started as Cascade Cover, and in 2017 was one of eight black-owned startups that took home R1-million in business support from AlphaCode, a Rand Merchant Investment’s fintech accelerator (see this story), Merrill Lynch South Africa and Royal Bafokeng Holdings
Mahamba said he’d decided to change the name earlier this year, to avoid confusion with other financial products available currently that are named Cascade — and to ensure that his startup was able to better position itself in internet search marketing.
‘Replicates medical savings concept’
So, how does Solvency’s offering work?
Mutoda says Solvency basically replicates the medical savings concept, with some key enhancements.
“The client decides what percentage — up to a maximum of 25% (five percent of the premium goes into a client’s savings by default) — of their insurance premiums goes to savings based on what excess they are prepared and able to pay, should they ever need to claim,” he says, adding that savings earn money-market rates (currently about 6.5% to 7% a year).
This, he says, provides a savings solution that the client can use to partially or wholly fund their excess should they ever need to claim.
“If they don’t claim, they can choose to withdraw up to 50% of their savings in a 12-month period in cash for their own use, or better still, leave the money invested to grow and earn interest. The savings belong 100% to the client and not the insurer,” he says.
He adds that the 50% rule is to ensure that clients have enough savings to cover any big claims, should these arise.
In addition, clients would be covered for any act of God events and any riot damage (under short-term insurer Sasria).
As the savings amount increases, the excess increases in the event of a claim.
Mutoda points out that actuarial statistics show that the average insured person only claims once every four years, for an average amount of R18 000.
On an average insurance premium of R1000 per month without taking escalations into consideration, the insured would have paid almost R50 000 in premiums alone.
“If they don’t claim during this time, they will have paid R50 000 for no-return whatsoever. If they claimed for an average of R18 000, they would still have paid R32 000 that provides no dividends whatsoever,” he says.
1 January launched planned
Mahamba says the startup plans to launch the product to the public on 1 January. He said the startup hasn’t embarked on any social media marketing campaigns as yet but plans to do so as soon as it has published an explainer video of the product, on its website.
Currently those interested can sign up on Solvency’s website to get more information on how the product will benefit them.
There’s also a calculator on the site which allows one to do a projection to see what your own scenario would look like, including the potential savings you can make.
He points out that the product will also help promote better consumer behaviour. He estimates that about 30% to 45% of insurance claims have a “fraudulent element to them”.
But he says if any excess is funded from a user’s own savings, the user will be more careful over what they claim, as they have “skin in the game”.
Mahamba also claims his startup’s offering beats the recent trend by insurance firms for cash-back offers for consumers that don’t claim for certain periods.
He argues that such offers generally only allow clients to claim if they’ve been claim-free for three years, and then only allow them to claim up to 10% of the value they’ve spent on premiums in that period.
With Solvency’s product, the client controls how much they want to save or get back. “There’s an element of giving customers full control,” he adds.
Mahamba says the startup will need to sign up 3000 clients to ensure break even. He wants to have the startup sign up 10 000 clients in the first year of the product, then he plans to raise another round of funding.
Legal work around
It’s a bright idea. But currently unlike for life and health insurance, insurers offering short-term insurance are not permitted to allow their clients to use their premiums for investment.
For six months Mahamba lobbied the regulator, the Financial Sector Conduct Authority to change the regulations, before realising it would be a long and costly process. He then hit on a work around.
Through consultations with the regulator he has been able to get around this restriction by registering his company for both a short-term and life-insurance license. “I’ve had to merge those two licenses, which has caused complexity,” he admitted.
It’s smart thinking. The question now is, how will the market respond and how will the startup’s competition in traditional short-term insurance firms take it.
Mahamba isn’t quite saying. But he’s thinking big. Says Mahamba: “I really see it as a true disruptor in the literal sense”.
Featured image: Solvency CEO and co-founder Mutoda Mahamba (Supplied)