Insurers plan for lapses in insurance policies, but in tough financial times, lapse rates tend to go up, writes J’Mari Kloppers, senior solutions engineer at Root platform.
Traditional insurance approaches to unpaid premiums rely on punitive measures: stern warnings, immediate policy cancellations, and complex reinstatement processes. But what if we could reimagine premium collection as a collaborative journey, where technology and empathy intersect to keep customers protected? And then build those solutions into insurance products from the get-go?
Insurance policies are lifelines of protection that millions of South Africans struggle to maintain. Every missed payment represents more than a number; it’s a potential loss of critical coverage that leaves families and individuals vulnerable, as the National Financial Ombud Scheme of South Africa recently warned.
With this approach, premium skipping is not a problem behaviour to be punished, but an opportunity for insurers to innovate. When insurers understand the nuanced reasons behind missed payments – from underbanked populations to complex salary cycles – they can design insurance products that adapt to real-world financial challenges.
Intelligent billing strategies, flexible technology environments, and human-centric communication are the cornerstones of this approach.
Intelligent billing strategies
Technology is built to deliver the product an insurer wants, so the first step is to strategically plan a billing system that delivers what the insurer wants. This is in contrast to the approach we often see, where billing is an afterthought, rather than a key component of the product under development.
Some strategies we have seen work very well include daily payment collection runs, customisable billing dates, and multiple retry attempts for payments (within the regulatory limits for retries).
We have also found that when insurers offer a range of payment options – such as credit card, debit card, debit order, stop order, mobile payment, or inclusion in the client’s existing retail credit product – they tend to have lower lapse rates. Also, on debit orders, verifying banking details through an account verification service limits not-taken-up (NTU) problems.
When it comes to NTU policies, the traditional approach is to assume that if the first premium isn’t collected, the client didn’t want the insurance. There are other reasons why the initial payment might fail, though. These include technical issues, miscapturing of bank account details, and even timing issues between the exact time a salary is paid into a bank account versus the time the premium is collected on the same day.
This is why some insurers are now moving to a more flexible approach. Instead of immediately cancelling the contract, they attempt to collect the initial premium a second time, all the while communicating with the client as required.
Another area to look at is more nuanced lapsing rules built into the billing system. Strategies include allowing for partial payment of a missed premium, offering extended grace periods and flexible reinstatement options, and even offsetting small arrears at claim stage.
Flexible technology
The next step is to build insurance on a technology platform that facilitates detailed tracking of collection rates, and then analysing the data regularly. This identifies payment patterns and trends, and can point to why payments have failed.
We’ve found that insurers who compare collection success rates across different payment methods and adjust their strategies based on the consumer behaviour in their particular market sector have more success. For instance, in some cases a stop order as part of a salary run is more effective than a debit order.
The key is to create a system that’s adaptable, data-driven, and customer-friendly. It should focus on understanding and supporting clients rather than strictly punishing missed payments.
Some insurers now only lapse a policy after, say, four consecutive missed payments. Others use a total number of missed payments across the policy’s life cycle before they cancel a policy.
Arrears management becomes important at this stage, and most insurers who use these strategies will limit the total amount of outstanding premiums that can accumulate. On a R100 premium, for instance, the insurer will limit outstanding premiums to R200. In line with this, insurers also limit the number of times a policy can be reinstated.
Human-centric communication
Communication should go beyond the traditional call centre approach. It should be built into the product from the start, across multiple channels, including WhatsApp, SMS and email.
This facilitates regulatory requirements around notifying policyholders about possible policy lapses, but also lets the insurer provide clear educational messages about policy maintenance. For instance, insurers can reach out to a lapsed client with a message saying, “If you reinstate your policy by the end of the month, you can keep your coverage.”
Communication strategies should also include proactive reminders about upcoming billing dates, updates on the payment status of the policy, and easy reinstatement options.
The future of insurance isn’t about defaulting to rescinding cover when customers fail to pay premiums, it’s about helping them stay securely covered.