Discovery Ltd: entrepreneurship in its DNA
Claire Beswick and Boris Urban
Claire Beswick is Head of
the Case Centre and
Boris Urban is Full Professor
of Entrepreneurship and the
incumbent Chair in
Entrepreneurship
(Lamberti Foundation),
both at Wits Business
School, Johannesburg,
South Africa.
On 1 September 2009, as financial services firm Discovery Ltd was about to release its
annual results for 2008/2009, its chief executive officer (CEO) and founder, Adrian Gore, took
some time to consider the company’s trajectory since its inception 16 years ago. Discovery
was now in the top 40 on the Johannesburg Stock Exchange (JSE). That year’s results
were excellent: in the context of the global economic crisis, operating profit had grown by
32 per cent. Still, Gore was not one to remain satisfied with these achievements. He had
worked hard to instil an ethos of entrepreneurship and innovation in the organisation. Now he
wondered whether he had done enough to sustain that into the future, and what the next
opportunity would be.
1. Discovery in 2009
Gore started Discovery in 1992 with seed funding of R10 million from merchant banking
group Rand Merchant Bank (RMB)[1], as a health insurance company within the RMB
stable. By 2009, Discovery had become a large, listed, financial services institution
employing more than 5,000 people and comprising not only Discovery Health (DH), but also
Discovery Life (DL), Discovery Invest (DI) and Discovery Vitality (a wellness programme). In
addition, it had operations in the USA, where it licensed Vitality for use by employers and
other health insurers, and in the UK, where it operated two joint ventures (JVs) with The
Prudential plc – PruHealth and Prulife (See Exhibit 1 for details of Discovery’s structure).
The group defined its core purpose as ‘‘to make people healthier, and enhance and protect
their lives’’ (Discovery, 2009b, p. 6). It described its values as: ‘‘innovation and optimism;
business astuteness and prudence; great people; liberating the best in our people; integrity,
honesty and fairness; intellectual leadership; tenacity, urgency and drive; and dazzle
clients’’ (Discovery, 2009b).
‘‘The values of innovation and prudence are so important in our positioning,’’ said Gore.
‘‘The top-of-mind perception about innovation is that it is about being cavalier, and the
top-of-mind perception of prudence is that it is about being boring and missing exciting
opportunities. In the case of Discovery, however, it has been the opposite – we have consistently
applied an ethos of innovation to ensuring our products are sustainable and generate superior
performance for our clients and stakeholders [. . .]. Ironically, our innovations have been about
achieving prudence’’ (Discovery, 2008).
Disclaimer. This case is written
solely for educational purposes
and is not intended to represent
successful or unsuccessful
managerial decision making.
The author/s may have
disguised names; financial and
other recognizable information
to protect confidentiality.
DOI 10.1108/20450621211214487
The company’s achievements over the years reflected these values. DH was the first
company in South Africa to offer a medical savings account. This product later became
standard practice in the industry[2]. By 2009, it was the largest manager of private
healthcare funds in the country. It managed 13 schemes, including the country’s largest
open[3] medical scheme, DH Medical Scheme. With a market share of 40 per cent, this
scheme covered more than two million lives (more than any other private healthcare funder
in the country) and enjoyed an AA þ rating for its claims paying ability from the international
VOL. 2 NO. 1 2012, pp. 1-, Q Emerald Group Publishing Limited, ISSN 2045-0621
j
EMERALD EMERGING MARKETS CASE STUDIES
j
PAGE 1
ratings agency, Global Credit Ratings (Discovery, 2009b). Its next closest competitor in the
open schemes market, Medscheme, held only 15 per cent of that market.
Vitality was launched in 1997 and was the largest programme of its kind in the world,
providing wellness benefits to more than 1.4 million people worldwide. In September 1999,
DH became the first company focused solely on health insurance to list on the JSE.
DL, established in 2000, was the first company to introduce pure risk[4] life assurance to the
South African market. In 2009, it covered 640,000 lives, commanding (by its own estimates)
about 40 per cent of the risk-only independent broker market. The value of new business
written in 2008 exceeded R1.3 billion which, said the company, placed it ‘‘firmly ahead of
even the most well-established competitors in this market’’ (Discovery, 2009b, p. 7). DI’s
launch in 2007 had coincided with the start of the global economic downturn that took full
effect in 2008, but it reached R1.2 billion in assets under management in its first six months
and had support from more than 1,600 brokers (Discovery, 2009a).
The company recorded gross revenue of R35,591 million in the year ending on 30 June
2009, up from R28,006 million the year before. Operating profit amounted to R1.7 billion – an
increase of 32 per cent on the year before (See Exhibit 2 for Discovery financials).
The company had no debt and cash of more than R1.7 billion (Discovery, 2009a). A company
statement on the 2009 results noted, ‘‘Discovery’s methodology of organic growth through
innovation to meet our clients’ needs has proved successful in negating the impact of
adverse market conditions [. . .]’’ (CNBC Africa, 2009). By contrast, a major financial
services competitor, Liberty Holdings, reported a loss for the first half of 2009 and the
Metropolitan Group’s profits dropped in the first half of the year as more customers stopped
paying for or cancelled their life insurance policies (Reuters, 2009a).
2. Gore’s background[5]
Gore did not believe that he fitted the mould of a ‘‘typical entrepreneur’’. In fact, he did not
see entrepreneurs as necessarily belonging to a different category of people. Neither did he
believe that he’d always had entrepreneurial instincts. ‘‘Most people want to be involved in
something that reflects their dreams,’’ he said, ‘‘and if they get the chance, they’ll do it.’’
He grew up in a family that valued academics over money and ran small businesses. In that
respect, he reckoned that he was programmed against being a corporate executive.
He studied actuarial science because he was intrigued by the possibilities that studying
something at the top of the pyramid would open up to him.
More than making money, his desire was to make a positive impact on society. ‘‘Don’t get me
wrong,’’ he explained, ‘‘I’ve made a lot of money and I’m happy about it. But it wasn’t about
the money. It was about making a difference.’’ He emphasised that this desire to make a
difference was not altruistic either. It was just something that motivated him personally. ‘‘If I’d
never done this, I would have been an academic,’’ he said. Gore’s first job was with the
insurance division of Liberty Holdings, Liberty Life (Liberty) and while there he saw how a
large, well-run institution could have a massive, positive impact on society. He was excited
by this possibility and started thinking that he would like to build such an organisation.
‘‘I was taken in by the immense power that a well-run organisation can have in society,’’
he explained.
So when Gore started Discovery, he had building an empire in mind. ‘‘I was never a trader.
I’m an institutional entrepreneur,’’ he said. ‘‘I had a clear view when Discovery started that I
wanted to build the kind of company that I grew up in.’’
3. The beginnings
In 1989, the medical schemes environment was substantially deregulated with the amendment
of the Medical Schemes Act. This allowed medical aids to determine premiums based on more
than just the members’ income and number of dependants, but also on actuarially-based
principles such as age, geographic area, actual claims history and the size of the group to
which the member belonged (Department of Health, 2002). This paved the way for medical
j
j
PAGE 2 EMERALD EMERGING MARKETS CASE STUDIES VOL. 2 NO. 1 2012
schemes to use risk rating as a management tool and thereby to eliminate cross-subsidies
within schemes. Although the amendment did not immediately impact the closed scheme
market, it did affect open schemes[6].
At the time, Gore was head of research and development at Liberty, and responsible for
developing the company’s Medical Lifestyle product. This was a medical expenses top-up
scheme that had proven remarkably successful, selling 1,000 policies on its first day[7].
His experience in developing this product made him believe that there was opportunity to
start a company that would bring innovative health insurance products to the market, apply
actuarial principles of risk management to these products, tap into the consumerist spirit of
the times and employ bright and talented people. He did not have a product in mind: he
knew that if the organisation had the right culture and values, the product design would
follow (Discovery, 2009b).
He would need a licence to operate and so, in 1991, he approached RMB with his idea,
because he had heard that the company owned a dormant life insurance company. RMB’s
CEO, Laurie Dippenaar, was intrigued and, in 1992, he agreed to provide the necessary
start-up capital and to employ Gore for a few months while he put together a plan for the
business[8].
Gore described how he had started with nothing. ‘‘When you start an insurance company,
you need R10 million in capital and you need a licence. So there’s a hurdle that puts you
above a small business. But once you get over that hurdle and you have the licence and the
money in the bank, all you’ve got is an exam pad and a pen,’’ he said[8].
An important first step for Gore – and one which he had subsequently taken for all of
Discovery’s businesses – was to form an executive committee. The committee, which included
Dippenaar and consisted of people whom Gore described as ‘‘hugely experienced’’, met once
a week to discuss the business. Gore found this to be highly beneficial. ‘‘I was only in my
mid-20s at that stage,’’ he pointed out, ‘‘and being able to draw on the experience of people
who had been in business for years was invaluable’’[8].
He then identified a few people to be part of the new company’s management team, and
although it took some persuasion to get them to leave their jobs, Gore did not find the task
too difficult, because the business concept had an appeal of its own. ‘‘There is no cynicism
in our vision. It’s an idealistic dream,’’ he explained. ‘‘Businesses are built on an intangible
dream. That’s what inspires people: not LIBOR[9] plus three’’[8]. Thus, Barry Swartzberg,
John Robertson and Stewart Whyte all left their jobs and joined him[8].
By February 1993, they had come up with the new idea that would become the norm in the
industry in the future: the medical savings account. Medical aids had traditionally covered
clients using what the team described as a ‘‘use it or lose it’’ approach. Medical bills would
be paid up to a certain maximum in different categories and cover started from the first rand
that a client spent. Costs were controlled by imposing limits on expenses, particularly large
expenses like hospital bills. Gore and his team believed that such schemes created a
perverse incentive for clients to overspend on their day-to-day health costs (Discovery,
2009b).
The medical savings account was designed to encourage members to control their
day-to-day health expenses (usually under the members’ control) so that they would have
funds available to provide cover for large medical expenses (usually not under members’
control). The philosophy was that members should have extensive cover, with largely
unlimited benefits, when they were really ill, but that they should control their own expenses
when it came to day-to-day health issues. The sense behind this was that large expenses
affected only a small proportion of the membership base at any one time, whereas the
smaller expenses affected many more members at any one time. In turn, this would enable
the company to control its own expenses (Discovery, 2009b).
While Gore believed that one of the keys to Discovery’s success in the health insurance
market was its ability to price risk accurately and to assess future liability intelligently, he saw
the real breakthrough to be the medical savings account (Discovery, 2009b). A study by DH
j
j
VOL. 2 NO. 1 2012 EMERALD EMERGING MARKETS CASE STUDIES PAGE 3
in 2002 showed that people spent 49 per cent less on elective day-to-day care when they
spent their money through a medical savings account. At the same time, they did not give up
preventive care or experience worse health outcomes (Discovery, 2009b).
Having come up with this product, which they called Discovery, the next thing was to find
clients and set up the business in such a way that they could sell and distribute the product.
They were surprised at how difficult this proved to be. ‘‘We battled to find clients,’’ said Gore.
‘‘We thought it was going to be like the Liberty days. When we rolled out our products, we
didn’t realise that we would need things like supply lines and distribution channels. It was
amazing how tough it was’’[8].
Still, the products soon gained a momentum of their own in the market – largely, according to
Gore, because they were so innovative and disruptive. It did not take the team long to realise
that they would also have to be very good at marketing and that they required a sophisticated
distribution channel. Here, they were helped by the fact that RMB had bought an established
life insurance company, Momentum Life. Discovery became a division of Momentum and
used Momentum’s distribution channels, which Gore said gave them ‘‘a big leg-up’’[8].
Gore noted of this early period, ‘‘It was very, very hard work. Getting to the original product
was hard work, but we had brilliant guys – Laurie Dippenaar is an incredibly smart guy – we
had good guys interrogating what we did’’[8].
4. Growing the business
Commenting on the company’s growth since then, Gore said, ‘‘I think our company is entirely
focused on innovation. It’s not the kind of management team to just run a big organisation with
a 10% growth rate. There is a constant restlessness to grow and to innovate’’[8]. Alan Pollard,
MD of Vitality, pointed out that most of the senior management team had been with Discovery
since its inception, or had joined to start a new division. ‘‘We all came here with the vision that it
was going to be a big company,’’ he said. Almost echoing Gore’s sentiments, he added:
One wanted to do something that would have an impact on society and be relevant. As a small
player, even if you’re making lots of money, you’re just a niche operator. If you really want to
become a known entity and make an impact and be relevant to society, I think that does imply that
you’re going to be part of a big company[10].
Gore recognised that the quality of the team, and the experience its members had in the
industry (see Exhibit 3 for profiles of the team) had played a vital role in growing the
business. ‘‘This may sound a bit cavalier, but the truth is that we have an absolutely fantastic
team,’’ he said[8]. Herschel Mayers, MD of DL, Kenny Rabson, head of product
development at DL, Pollard and Swartzberg, group executive director of Discovery Holdings
and responsible for Discovery’s international operations in 2009, all believed that one of the
things that contributed to innovation in Discovery was the fact that most of the management
team had a research and development background. ‘‘So it’s what we’re good at and we’ve
nurtured it,’’ said Swartzberg. ‘‘Our natural calling card is R&D. It’s the thing we enjoy most
about the business’’[11].
‘‘But I do spend a lot of my time arguing for change,’’ said Gore. ‘‘The natural instinct of
people is for the status quo. ‘‘Opportunities are created, they are not discovered,’’ he added.
‘‘I’m not saying that there aren’t macro factors that influence what happens, but in any given
circumstance there are opportunities. The only time you can’t pursue them is if you’re in
financial difficulties. If you’ve got resources and time, any situation presents opportunities. I
think I am opportunity alert. I think I see things clearly. But they’re simple things. It’s not like
solving E ¼ MC2. These are pretty basic. I spend a lot of my time thinking about
opportunities. I don’t spend a lot of time worrying about day-to-day things.’’
Gore had a fundamental belief that the organisation should follow the path of ‘‘creative
destruction’’ as articulated by economist Schumpeter (1975). ‘‘Otherwise we are just
cost-cutters,’’ he said[8]. He believed in growing profits through organic growth based on
innovation and not simply by cutting costs. He and his team had put this philosophy into
practice in building the Discovery Group.
j
j
PAGE 4 EMERALD EMERGING MARKETS CASE STUDIES VOL. 2 NO. 1 2012
They put in place a time-based innovation cycle to ensure that every year each of the
divisions would come up with such ‘‘disruptive’’ innovations. They would book the date and
the venue, and invite brokers to attend (the launches would attract between 1,000 and 3,000
brokers at a time) a long time in advance, to create pressure for themselves to come up with
something new. Rabson said that when the Discovery team thought about innovation, it had
in mind something that was ‘‘not a minor shift here or there’’[12]. And as the company
developed a reputation for developing trend-setting products, so this created even greater
pressure to live up to this reputation. It was a pressure that Gore and his team thrived on.
He explained that the company then adopted a very disciplined approach to innovation and
would subject each new idea to intense discussion and debate. Swartzberg added, ‘‘Our
products are the result of debate. We don’t just throw them out there. They’ve been well
thought through. We’ve had some ideas that we’ve been talking about for years, but
nothing’s happened with them.’’ He went on to explain, ‘‘We make product development a
ceremony. We spend days brainstorming ideas. The main thing we discuss is product
development, not the business’’[11].
Before releasing a product to the market, they had to know that it would succeed. Gore said
that he did not encourage risk-taking, that he was risk-averse. ‘‘I want the innovation to be so
good there is no risk,’’ he maintained. ‘‘I don’t believe in giving the go-ahead if I don’t believe
that we have got something that is going to kill out there’’[8].
For him, the hurdles a new product had to pass through related to general reasoning. ‘‘If my
mother would be impressed with this product, it will sell,’’ he said, explaining:
When we developed Vitality, we didn’t have to go to market research to know that people would
like the idea. It was an epiphany. It was clear that it was going to sell. There is invention and there
is innovation: if you have an electric car that doesn’t need charging, you know it’s going to sell.
5. Discovery Health
By 2009, DH operated in both the open schemes market and the closed scheme
administration market. It had entered the closed scheme market in 1996, quickly signing up
three of the largest closed corporate schemes in the country. By 2008, it administered 12
such schemes, with a 5 per cent share of the market (Discovery, 2009b; Council for Medical
Schemes, n.d.).
The medical aid industry as a whole had been going through difficult times since at least 2000.
In the year ending December 2008, overall medical scheme contributions increased by
13.2 per cent the previous year to R740 billion, yet the industry experienced a net healthcare
deficit of R929 million. There were 77 schemes with operating deficits and 20 with operating
deficits of more than R20 million. Included among those schemes were a number of
Discovery’s open-scheme competitors, such as Bonitas (Council for Medical Schemes, n.d.).
By contrast, DH’s operating profit had grown by 21 per cent to R891 million in 2008
(Discovery, 2008), while new business grew by 11 per cent in 2009 to R3,039 million
(Discovery, 2009a). At the same time, its reserves had grown by R700 million, making it the
only scheme in the industry that had managed to grow its membership base at the same
time as growing its reserve margin.
5.1 Products
Since introducing the concept of a medical savings account in 1993, and as other health
insurers had started to follow suit, DH had to continue to find ways of doing things differently
to keep its competitive advantage. As a consequence, it continually sought to bring out
product innovations and, by 2009, it had 17 different medical scheme options from which
clients could choose.
However, DH CEO Neville Koopowitz pointed out that the regulatory environment
constrained the extent of product innovation at DH. It was an environment which Gore
described as ‘‘complex’’ and ‘‘marked by continuous regulatory and policy shifts’’ (CNBC
Africa, 2009), and it had changed completely from the deregulated arena that Discovery had
j
j
VOL. 2 NO. 1 2012 EMERALD EMERGING MARKETS CASE STUDIES PAGE 5
entered in the early 1990s. In 2000, the government promulgated far-reaching amendments
to the Medical Schemes Act, which re-regulated the industry, with the intent of returning to
the environment of community rating that had existed prior to 1989. The amendments
introduced a compulsory minimum benefits package for all schemes, prohibited
discriminatory acceptance into membership on the basis of age, medical history or health
status, and required contributions to be determined only on the basis of income and/or
number of dependants (Pearmain, 2000). This meant that medical schemes could no longer
price risk differently based on an individual’s health status or age, or turn potential members
away on the basis of factors such as a prior disease history.
All of these criteria had been fundamental to DH’s approach, and implementing the
requirements of the new act had demanded major re-engineering of its health plans. By its
own admission, DH was initially very apprehensive about whether it would be able to operate
profitably in this new environment. As a consequence, a prolonged and rather bitter debate
ensued between Discovery and the regulator (Discovery, 2009b). DH made three attempts
to redesign its products before the regulator was happy and the new products were
launched in February 2000. Since then, further regulations introduced in 2004 had placed
even tighter restrictions on benefit design (Discovery, 2009b).
One of other requirements of the amendments to the Medical Schemes Act in 2000 was for
medical aid companies to introduce a minimum package of benefits that targeted
lower-income groups (Ranchod et al., 2001). Medical schemes had started investigating
how to provide services to this market in the late 1990 s and, by 2001, there were at least 41
schemes targeting this sector of the market (Ranchod et al., 2001). Discovery took time to
conduct extensive research into lifestyle, medical claims patterns and choice of care in
this market and to design a scheme that structured the benefits and costs accordingly.
In October 2002, it launched the KeyCare plan, targeting individuals earning between
R3,500 and R6,500 a month. By 2008, KeyCare covered 200,000 lives and was the fastest
growing medical aid in that market (Discovery, 2009a).
5.2 Back office
Koopowitz believed that, with the health industry being so complex, key elements of the
innovation that allowed DH to keep ahead of its competitors took place in the back office.
He explained that one of the keys to success of any medical scheme was controlling the cost
of medical payouts. While savings plans could help to control the high-frequency,
low-impact medical expenses that were under the clients’ control, they could not control the
bigger, supply-side costs – such as hospital costs and doctors’ fees – over which clients
had little or no control. It was here where back-office innovation was so necessary.
Said Koopowitz, ‘‘In healthcare, there is an asymmetry of knowledge between the service
providers and the patient and funders. So the recipients are at a disadvantage. But we’ve
levelled the playing fields to a large degree. We’ve got the ability to analyse every line of
claim: to analyse data at patient level, at hospital level, at doctor level, at drug level.
That allows you, for example, to be able to go to a hospital and query why it’s charging more
in particular areas’’[13]. He believed that this ability had given Discovery a very substantial
advantage over its competitors. ‘‘Others aren’t doing this, because it takes incredible skill,
people, technology and brainpower,’’ he said. ‘‘We’ve got huge IP in this business. We’ve
invested millions and millions of rands on the best clinical, actuarial and technology brains
and systems. You put those three together and the output is unbelievably powerful’’[13].
Thus, for example, DH had been able to identify a hospital network that was more efficient
than others and it channelled clients to these hospitals, on the promise of better cover.
In turn, because of DH’s size, hospitals gave DH better tariffs and terms. Initially, the
hospitals had not accepted what DH had to say, but the company’s ability to produce data to
back up its arguments won through.
Koopowitz said that DH’s biggest challenge had been getting acceptance from the doctors,
because there was a history of antagonism between them and the medical schemes.
From DH’s perspective, it was important that when individual members visited a doctor they
j
j
PAGE 6 EMERALD EMERGING MARKETS CASE STUDIES VOL. 2 NO. 1 2012
should not have to make a co-payment because the doctor was charging above the
maximum that DH was prepared to pay. ‘‘The more a member has to make co-payments, the
less they feel they are getting value. And then they ask what their medical aid is for,’’ he said.
‘‘You’ve got to make sure they are feeling the value as they interact with the healthcare
system’’[13]. At the same time, the doctors had to feel as if they were being remunerated
adequately.
It was a tough process. ‘‘That was really block and tackle stuff,’’ said Koopowitz. ‘‘We went
on the road, we engaged and carried on engaging. We took the view: I’ll pay you more on the
promise that you save us money by looking at the way you practice medicine. We worked
together so that they would show us where there is wastage in the system. So you’re working
with the people who have the real power, by virtue of how pivotal they are in the whole
system. We have a whole team of professionals out there engaging with the medical
fraternity on these issues’’[13]. DH launched its GP network in 2007, giving members access
to GP services at half the cost to their medical savings account, with the rest being paid from
the risk pool. As a consequence, by 2009, 80 per cent of members’ visits to a GP were to
doctors who were part of this network and 85 per cent of visits to specialists were to those
with whom DH had payment arrangements (Discovery, 2009a).
Another innovation of which Koopowitz was particularly proud was the pathology test request
form that DH had developed for doctors to use instead of the laboratory-designed forms.
The laboratory forms had grouped tests together. ‘‘Our guys unbundled the tests, because
there’s a high probability that the doctor won’t want all of the tests that are in one group,’’ said
Koopowitz. ‘‘Then they put a price next to each test, so that the doctors know the cost of what
they are asking for’’[13]. These prices came as a real surprise to many of the doctors.
The laboratories were resisting this move, so Koopowitz had decided simply to use DH’s size
to push the change through. ‘‘I wanted to start softly,’’ he said, ‘‘but there’s too much of an old
boys club at work and all the labs resisted. So we made it a condition that, if a doctor wants to
be part of our network, he or she must use the form. And the benefit to the member is that if
they use this form, they will get better benefits’’[13]. All of the biggest pathology laboratories
then decided to use the form.
5.3 Service
Koopowitz was also proud of what DH had managed to achieve with its service levels, and
attributed this to technical and back-office innovation as well. The company developed a
proprietary claims system in 1995 and was able to pay its first claim in real time in 1997,
before any of its competitors. In 2003, it introduced daily claims payment runs, which meant
that claims could be paid on the day they were captured and processed – again in advance
of all of its competitors (Discovery, 2009b).
DH also used its actuaries to improve the processes in its call centre. In 2009, DH’s call
centre received about 30,000 calls a day. It operated on a triage system, where specialist
consultants and customer relationship managers could deal with the more complex calls
that ordinary consultants could not. Most calls were straightforward, and an ordinary
consultant could deal with up to 80 such calls each day. At the highest level of the hierarchy,
Koopowitz had empowered his customer relationship managers, whom he called his
‘‘moment-of-truth people’’, to do whatever necessary to sort out a customer’s problem. They
normally dealt with only ten escalated queries a day. Problems arose when ordinary
consultants received more complex calls that took longer to deal with and required rerouting
to people with greater levels of expertise and authority.
So DH used its actuaries to create a predictive routing system. Koopowitz explained:
‘‘Based on a client’s claims history, you can, with a fair degree of certainty, predict whether a
call will be complex or not. The actuaries created the algorithms that allow us to predict how
complex a call is likely to be and then to route calls directly to the appropriate person. Only if
this predictive routing fails, will an ordinary consultant have to refer a call upwards’’[13].
It was a model that Koopowitz called the ‘‘science of service’’ and the company had just
j
j
VOL. 2 NO. 1 2012 EMERALD EMERGING MARKETS CASE STUDIES PAGE 7
spent R30 million on installing new, more sophisticated call centre technology that would
facilitate this process.
DH’s customer service system also sought to ensure that clients needed only speak to one
person to get their queries sorted out. Thus, in 2004, it introduced an internal knowledge
management system, PinPoint, which made it possible for its call centre personnel to access
all the information they needed to assist a client immediately. The team also introduced a
gratuity-based remuneration system to encourage service staff to take individual
responsibility for the client’s entire service experience.
6. Discovery Vitality
Koopowitz believed that introducing Vitality in October 1997 had changed the direction of
the group as a whole. ‘‘The concept was so ahead of its time,’’ he said. ‘‘Everyone had tried
to encourage healthy behaviour in the past, but they hadn’t got it right. The key was to get the
incentives right. That was the breakthrough for Discovery. And that’s the genius of Adrian
[Gore]: the ability to have that vision and to change the rules of the game. It is the chassis of
the engine. It supercharges the other products. Our health products, without Vitality, would
look fairly commoditised on the face of it. Vitality allows us to differentiate’’[13].
The launch of Vitality came about largely as a result of a need to find a definitive competitive
differentiator for DH. At the time, most of DH’s competitors had introduced medical savings
plans. DH, therefore, needed something that would set it apart from the rest. It was during
this time that the Health and Racquet Club[14], a national gym chain, approached Gore with
a proposal to market DH plans to it members. As he thought about this proposal, Gore came
up with the idea for Vitality.
The concept behind Vitality was to reward DH members for living a healthy lifestyle. Gore
noted that this would fit with Discovery’s goal of moving ‘‘away from the old-style medical aid
scheme that paid for sickness towards a more holistic world of wellness’’ (Old Mutual, 1997).
But more than this, Gore and his team had a gut feeling that it would fit with trends that they
were seeing in the marketplace: people were becoming more health conscious, they were
going to gym, quitting smoking and switching to low-fat diets (Discovery, 2009b).
In addition to rewarding members for adopting a healthy lifestyle, one of the things that
Discovery wanted to achieve through Vitality was to remove cost as a barrier to a healthy
lifestyle. Discovery’s reasoning regarding gym membership, for example, was that its cost
made such membership inaccessible to a great number of people. The savings offered to
Vitality members would make gym membership, and its consequent health benefits,
possible for far more people.
Thus, Discovery started out by offering DH clients the opportunity of becoming members
of Vitality too (membership fees varied depending on family size, but in 2009 were R110
per month on average) and in return they would get free membership of Vitality’s health
partners – organisations aimed at promoting health and fitness, such as gyms, Run/Walk for
Life and SmokEnders – and earn Vitality points for engaging in healthy activities such as
working out, quitting smoking, attaining their goal weight and preventative care. These
Vitality points could then be translated into certain rewards such as savings on car hire
with Avis, domestic flights with British Airways and accommodation with Southern Sun and,
in 2002, Discovery added discounted movies at Ster Kinekor, the biggest chain of movie
houses in the country, to its list of Vitality benefits. In 2000, Vitality linked up with Body IQ and
the Sports Science Institute, so that members could earn points for visiting a biokineticist
to have their fitness level assessed (Discovery, 2009b).
In 2004, Vitality launched DiscoveryCard. ‘‘While one of our intentions was to offer a
powerful, new-generation credit card to consumers, the key rationale was to provide a
mechanism to incentivise better health among our members and create a payment platform
for our other businesses,’’ said Gore (Discovery, 2004). The card served to further enhance
the rewards that Vitality could offer, through retail discounts that improved with members’
Vitality status. While the DiscoveryCard was available to DL and DH members, they could
j
j
PAGE 8 EMERALD EMERGING MARKETS CASE STUDIES VOL. 2 NO. 1 2012
only access the rewards if they were a member of Vitality. By 2008, there were 300,000
DiscoveryCard holders.
‘‘What we’ve done well in Vitality is to blur boundaries,’’ said Gore. ‘‘The cleverness of Vitality
is that it is a health bank, where you save up for rewards, a bit like airmile rewards. We saw
the parallels in the airmiles industry. There are very few in our industry who do this – blur the
boundaries. That’s what excites me’’[8].
Vitality’s most recent concept, the HealthyFood initiative, allowed Vitality members a
discount of 25 per cent on a range of 6,000 ‘‘healthy foods’’ brought at Pick ’n Pay, one of
South Africa’s largest supermarket chains. Koopowitz and Hylton Kallner (Discovery’s
marketing director) had an idea that the existing relationship that Vitality had with Pick ’n Pay
could be turned into something far bigger, using the concept of healthy eating. Gore
immediately saw the potential of this and set a challenge to make this a business-changing
concept[8]. Gore, Koopowitz, Kallner and Pollard spent many meetings refining the idea and
Dr Craig Nossel, the clinical head of Vitality, came up with criteria against which to rate foods
and classify them as healthy. ‘‘Then,’’ noted Pollard, ‘‘there was the task of making it happen
operationally. This was a huge, huge thing’’[10].
Convincing Pick ’n Pay to take part was not that difficult. Vitality already had a partnership
with the company in terms of which DiscoveryCard holders could get between 5 and 10 per
cent cash back on purchases at Pick ’n Pay. The more difficult part related to the technology
implications for Pick ’n Pay. ‘‘This was a big hurdle for them,’’ said Pollard. ‘‘We had to know
more than just what our members were spending. We had to know exactly what they were
buying’’[10]. Having been conceived in June/July 2008, HealthyFood went live in February
2009. More than 112,000 members activated the benefit in the first four months, spending
more than R47.5 million on HealthyFood in that time and receiving discounts to the value of
more than R8.6 million.
6.1 Benefits to Discovery
Pollard said that one of the big benefits of Vitality was the way in which it served to enhance
the attractiveness of Discovery’s core products and to enhance persistency – that is, to
encourage people to retain their membership. ‘‘Vitality is a wellness programme that
generates loyalty as a by-product,’’ he said. Persistency rates on DH and DL products were
much better than in the rest of the market. ‘‘On Health, they are so far apart that you can’t
even do the comparison. We’re at a 3% lapse rate and the others are at 20% plus,’’ he said,
acknowledging that this could not all be attributed to Vitality and that DH itself was also
getting something right.
As to Vitality’s impact in encouraging members to live a healthy lifestyle, this was a little more
difficult to ascertain for certain. What had been shown unequivocally, in studies conducted
by the Sports Science Institute of South Africa, Wits University and the Harvard Medical
School, was that Vitality members who were leading a healthy lifestyle spent less on
healthcare: they had lower hospital admission rates, incurred lower costs in hospital and
spent less on chronic medicine for certain diseases than non-vitality members or vitality
members who were not managing their health[10].
In 2002, Discovery’s own statistical analysis showed that participation by Vitality members in
preventive care measures such as cholesterol screening and pap smears was 40 per cent
higher than that of non-Vitality members. Vitality members were also 20 per cent less likely to
be admitted to hospital than non-Vitality members. Between 2002 and 2004, US actuarial
firm Milliman explored the impact of Vitality on 423,000 DH members covered for this entire
period. The study showed that there were between 20 and 30 per cent fewer claims from
Vitality members, and that there was a significant decrease in claims from members in the
higher Vitality status levels (Discovery, 2009b).
It was not clear whether Vitality was succeeding in encouraging people to change from an
unhealthy lifestyle to a healthy one, or whether people who lived a healthy lifestyle already were
more inclined to sign up for Vitality. ‘‘Some people who are on Vitality are already living healthy
lifestyles. Some people move to healthy lifestyles as a result of being on Vitality,’’ said Pollard.
j
j
VOL. 2 NO. 1 2012 EMERALD EMERGING MARKETS CASE STUDIES PAGE 9
‘‘Some are attracted to Vitality because they are healthy. But that’s also good, because it means
we’re getting good lives coming in’’[10].
6.2 Vitality as an integrator
With the launch of DL in 2000, Discovery started to use Vitality as an integrator across the
different businesses, in terms of which Vitality and DH membership were linked to benefits
that policyholders could derive from DL and DI products. By 2009, Discovery regarded this
integration as a key differentiator for the company, saying that it created efficiency,
enhanced benefits and contributed to the profitability of the business. At the same time,
product integration blurred the traditional boundaries between industries and helped the
company to create the link between its products for clients, so that it could offer clients a
suite of products that spanned all the divisions within the group (Discovery, 2009b).
7. Discovery Life
With premium income of R253.7 billion in 2008 and benefits paid out of R267.3 billion
(Financial Services Board, 2008) the long-term insurance industry in South Africa was much
bigger than the health insurance industry and, within this, DL – still comparatively new to the
industry and with premium income in that year of R3 billion – was a relative minnow. Two of
the largest life insurance firms, Old Mutual and Liberty Life, made R21.6 billion[15] and R23
billion (Liberty Holdings Limited, 2008) in gross premium revenue, respectively, in 2008.
Nevertheless, DL was making an impact on the market. It had turned its first profit two years
after it was launched and, in 2009, with 550,000 lives covered, it was the fastest-growing life
assurer in the country. It had captured about one-third of the independent broker market, it
employed more than 700 people (excluding brokers) and it was the Discovery Group’s
biggest profit generator (with a profit of R1.2 billion in the year to the end of June 2009;
Discovery (2009a)).
The idea of starting a life insurance business in the Discovery stable originated in 1999 when
Gore and Mayers, an ex-colleague from Liberty, met up on holiday and started discussing
the South African life insurance industry. ‘‘As we sat talking,’’ said Gore, ‘‘it became clear to
us both that the intellectual cause behind building a life assurer that could redefine the
industry was compelling’’ (Discovery, 2009b, p. 61) Mayers explained: ‘‘The industry had a
very commoditised structure, with price being the biggest determinant. We believed we
could change the industry for the better by offering a better value proposition.’’
After a number of subsequent discussions, Mayers left Liberty in March 2000 to head up the
new venture and Rabson (also from Liberty) joined him a short while later. They set about
developing the product, although they did not, at that stage, have any idea of what it would
look like. Mayers explained that the two of them had many years of experience in the life
insurance industry (Mayers 18 years, and Rabson 10 years), and they, therefore, ‘‘knew what
didn’t work’’[16].
The product they came up with was pure-risk life assurance and DL launched with this
product in September 2000, becoming the first South African insurer to offer risk-only life
insurance policies. Up until then, South African life insurers had been offering ‘‘universal’’
policies, which combined an element of risk cover (in terms of which the policyholder would
get paid out in the event that they were injured or suffered a debilitating illness) with an
investment element (in terms of which beneficiaries would get paid out the greater of the sum
assured or the cash value of this investment in the event of a policyholders’ death). Rabson
pointed out: ‘‘In other words, the cash value needed to be huge to have any chance of
increasing the payout on death. Most people would have lost the cash value on death and
ironically, the only way to access it would have been through surrender of the policy’’[17].
The risk-only product was a response to the trends that Mayers and Rabson had seen in the
market. ‘‘Universal products may have worked in the old days, when our investment markets
were so much more isolated from the world, when markets were more predictable and
investment returns were consistently higher than inflation. But in the late 1990 s, markets had
j
j
PAGE 10 EMERALD EMERGING MARKETS CASE STUDIES VOL. 2 NO. 1 2012
become so volatile and investment returns diminished, so people started questioning why
they had the policy in the first place,’’ said Rabson[16].
Mayers added, ‘‘People also used to take a longer-term view of things but, because of
market volatility, they had started to think more short term. Also, it became an expensive way
to save. The cost structures within the investment component were high so, with greater
consumerism, people started to question the value from an investment point of view’’[16].
‘‘Aside from this,’’ continued Rabson, ‘‘investment houses had opened up and were offering
a range of different investment products, that were more efficient and cost less.’’
‘‘And with these products you could get your money out after five years,’’ noted Mayers. ‘‘But
with the universal products, because of the cost structures, if you cancelled the policy after
five years, you’d get nothing out. That caused a lot of unhappiness’’[16].
DL’s risk-only product gave policyholders the opportunity to buy insurance against the
hazards of life in the same way as they would buy insurance for their house or their car. It took
away the problems associated with the investment component of universal policies. It made
what policyholders would get in return for their premium much more defined, and it made the
grudge purchase of life insurance cheaper. So successful was the concept that other life
insurance companies started to develop similar products and, according to the Life Offices
Association, risk-only life insurance products had become the dominant long-term insurance
product sold on the market by 2005 (Discovery, 2009b).
Rabson pointed out, however, that it had still been a lot of hard work to get people to buy into
the products in the beginning. He and Mayers had put together impressive presentations and
gone out on the road to visit potential clients and brokers to explain the benefits of their
products, meeting with people at a very senior level. He and Mayers also acknowledged that,
although DL was established as a separate entity from DH, in the beginning the company had
piggybacked on the DH brand. Nevertheless, the suitability of its initial product and
subsequent innovations had ensured that DL soon developed its own reputation.
7.1 Integration with Vitality
At the outset, Discovery launched Vitality as part of the package for DL clients, and DL then
started thinking about how it could use the information that it had on DL members who were
also Vitality members to their mutual benefit. The result, in 2002, was a product that would
enable clients to boost the value of their DL Fund and obtain lower premiums ‘‘through a
unique system of annual health-indexing and dynamic underwriting’’ (Discovery, 2009b,
p. 42). Mayers explained: ‘‘In life insurance, because you go for a medical when you sign up,
you’re assumed to be a better health risk than the average person. So that’s priced into your
premium. But after five years, that benefit disappears, and they assume you’re the same as
the general population. During the first five years you’re in what is called a ‘select state’.
So we said, we’ve got all this information. We’re going to give clients a 20% discount if
they’re members of Discovery Health and Vitality, and assume that they’re in this select state
forever – so the 20% discount remains beyond the first five years. However, if they’re not in
a ‘select state’ – and we can see this by checking their Vitality status and health claims –
then the discount will start decreasing. That’s dynamic underwriting – because of this
massive amount of information, we can do this’’[16].
DL was realising a number of benefits from offering integrated products. Mortality and
morbidity had decreased among the company’s policyholders, thereby boosting the
organisation’s profits. Average policy size had increased to greater than that of its
competitors, because policyholders tended to increase cover and ancillary benefits rather
than pocket premium savings. Lapses on policies were also lower than average[16].
7.2 Scientific breakthrough
Commenting on what it was that gave DL’s products the edge, Rabson explained: ‘‘Some of it
is scientific breakthrough. For example, our methodology of thinking about dread disease and
disability insurance was a first’’[16]. DL’s breakthrough in this arena was to make it absolutely
clear to policyholders what becoming ‘‘disabled’’ would mean in terms of the policy.
j
j
VOL. 2 NO. 1 2012 EMERALD EMERGING MARKETS CASE STUDIES PAGE 11
Mayers explained that, in the past, the industry had defined ‘‘disability’’ as not being able to do
one’s own or a similar occupation, but the process of deciding whether this was the case was
subjective. As a consequence, claims were often declined when policyholders believed they
should be upheld, and this in turn led to a breakdown in the relationship between the insurer
and policyholders.
‘‘We reckoned that the best way was to define the benefit on objective criteria,’’ he said[16].
So DL chose to assess its claims based on categories of medical impairment and, if a claim
matched the criteria for a specific category, the company would make a predefined payout
based on how severe the impairment was. For DL, the real benefit was not in reduced
disability payouts, but in creating clarity for its clients about when and to what extent benefits
would be paid out, and thereby improving its relationship with them[16].
7.3 Retirement product
In June 2005, DL entered the retirement funding environment with its Retirement
Optimiser[18] – a product that had taken almost two years to develop. At the launch,
Gore said that the product aimed to address five main problems inherent in retirement
annuities (RAs) as they were at the time: that they were expensive to invest in; created
investment risk for policyholders at the time of retirement; had low surrender values; did not
meet policyholders’ expectations at the time of retirement; and provided inflexible income
during retirement, because they did not take into account changes in circumstances, such
as in one’s health (Candy, n.d.). The retirement optimiser guaranteed that the client’s return
on investment would be on average annual inflation plus two percentage points. It also
promised that, if the client wanted to cancel the plan, they would get back between 90 and
98 per cent of the value of their investment.
In addition, the DL team had found a way to allow policyholders to boost their retirement
income when they retired. Realising that the policyholder’s need for life assurance cover
reduced during retirement, DL offered Retirement Optimiser clients the option of allocating
unused and unneeded life cover to boost retirement income, thus allowing them to increase
their retirement income by as much as 75 per cent (Discovery, 2009b). Within a year, the
Retirement Optimiser had gained 17 per cent of the broker RA market and, by 2009, just
under 40,000 such policies had been taken out.
7.4 Distribution
DL’s innovation was not limited to its products. It also put in place an entirely new type of
distribution system – initially used only for DL products, but later for DH products too.
Mayers explained that DL initially chose to use independent brokers, because of the
advantages they offered a start-up company: they would be cheaper and costs would vary
according to sales. But DL still needed good-quality middlemen (broker consultants), who
would sell its products to these brokers. In most companies, such people were company
employees – salaried people at a fixed cost. Said Mayers: ‘‘We were asking, how do we
attract that kind of person – a good-quality person – when we’re a small company and can’t
afford to have them full time on our books?’’
The model they came up with was to create franchise/owner-managed broker consultant
businesses. ‘‘We give people the right to distribute products in a particular region, and we
pay them according to how effective they are,’’ said Mayers. ‘‘We said to them, ‘It’s your
business. The costs are yours. The more you sell, the more you get’’’[16]. DL believed that
this model had helped it to attract exceptional people to act as broker consultants. By 2009,
there were 28 such offices in South Africa, with 181 broker consultants calling on more than
3,800 brokers (Discovery, 2009b).
8. Discovery invest
Discovery’s newest local business, DI, was barely two years old, having been launched in
October 2007, and having begun active trading during 2008. Operationally, it fell under DL:
it used DL’s life licence to operate and the two companies’ management teams were the same.
j
j
PAGE 12 EMERALD EMERGING MARKETS CASE STUDIES VOL. 2 NO. 1 2012
However, in terms of market perception, the two companies operated side by side[16]. By the
end of 2008, DI achieved R2 billion in assets under management (Discovery, 2009b), and this
grew quickly in the next six months to reach R4.2 billion (CNBC Africa, 2009) from 13,000
policyholders (Discovery, 2009a) by the end of June 2009.
DI was looking to get a bigger slice of the growing collective investment pie. Total assets
under management in the industry amounted to R801 billion in 2008. Stanlib Collective
Investments, the biggest player in the market, managed R96.5 billion, followed by Allan Gray
Unit Trust Management Ltd (R79.7 billion) and ABSA Fund Managers Ltd (R76.7 billion)
(Financial Services Board, 2008).
The nature of the investment industry was quite different from that of either the life or the
health insurance industry. Gore noted: ‘‘It’s an open architecture market. [Discovery] Invest
by definition is a conduit to other kinds of asset managers so, no matter who you play, you
are a cog in a very big, open architecture environment’’ (SAfm Market Update, 2009).
Moreover, Discovery believed that the industry was already largely efficient, because the
demands made by investors were ensuring greater choice, lower prices and greater
transparency about product costs and construction (Discovery, 2009b, p. 83). Margins were
lower (making innovation more difficult, said Rabson[16]) and it was more competitive[16].
At the end of 2008, the Financial Services Board, which regulated the industry, had
approved a total of 1,329 collective investment schemes: 939 of them local. Growth in the
industry over the past ten years had been substantial – in 1988, there were only 219 local
schemes from which investors could choose (Financial Services Board, 2008).
DI believed that it could create a space for itself in this market. The company maintained
that, aside from the positives of lower costs, greater choice and the emergence of specialist
asset managers, consumerism had also resulted in product commodisation and the transfer
of greater portions of investment risk to individual investors. Thus, DI decided to focus on
product differentiation and investment protection in its product design. Its range included
preservers[19], a retirement income plan, RAs, flexible investments and endowments. DI had
also partnered with local and global asset managers such as Deutsche Bank and Investec
Asset Management, to take advantage of their specialised asset management skills.
Integration with DL and Vitality was inherent to its approach. So, for example, endowments
had become increasingly unpopular in recent years, because of inefficiency, cost and tax
implications. But, by creating products that took advantage of the efficiencies of the DL plan
and by using integration with Vitality, DI had been able to reduce asset management and
administration fees. Likewise, investors could choose integrate their DI policy with their DL
plan and Vitality and save between 40 and 100 per cent on reduce administration, asset
management and advice fees.
DI had also introduced products that directly addressed policyholder concerns in the
context of the volatile stock market. Thus, the Rightchoicee Investment fund automatically
adjusted policyholders’ returns to provide the best return over five years, based on their risk
profile, should the fund they had chosen deliver lower returns than a comparable alternative
investment decision. The Escalator fund provided downside protection by guaranteeing that
returns would not drop below 80 per cent of the highest value ever reached. These funds
were a first in the South African investment landscape (Discovery, 2009b).
The directors had set about growing a customer base for DI in exactly the same way as they
had for DH and DL, and they had found that being under the Discovery brand gave them
some advantage. ‘‘But still,’’ said Rabson, ‘‘we are competing against some strong
companies out there’’[16]. So they were having to work hard to attract new business. At the
same time, added Mayers, one of the challenges they were facing was that of broadening
the thinking of their brokers, so that they would feel comfortable tackling an entirely different
market[16].
By the end of June 2009, DI had not yet broken even, but Gore expected the company to
reach profitability once its assets under management reached R10 billion, which he
anticipated would be by the end of 2010 (Reuters, 2009b).
j
j
VOL. 2 NO. 1 2012 EMERALD EMERGING MARKETS CASE STUDIES PAGE 13
9. International operations
By 2009, Discovery had made two forays into the international market: the first into the USA,
through a wholly-owned subsidiary, Destiny Health, which had also brought Vitality to that
market; the second in the UK, through a JV with a long-term insurance company of more than
150 years standing in the UK market, Prudential plc.
Making these operations work had proven to be more difficult than it had in South Africa.
According to Gore, this was in part because it had been harder to find people of the same
entrepreneurial mindset and calibre overseas, and in part because Discovery itself did not
have the same intuitive understanding of the markets in these countries. ‘‘I think we’ve
developed a hunch of the kind of things that will work here,’’ he said. ‘‘Our challenge
internationally is that we don’t have the same kind of hunch. The guys have to test things
continually. They’re doing very well, but they have to test things, and I respect that, because
we don’t know what society wants to the same extent. We haven’t had a focus group
in South Africa in all the years we’ve been operating. We have about five guys internally who
argue things in the minutest detail, but we very seldom go external with it. It’s not like that
in the UK.’’
9.1 US operations
Although Vitality was operating successfully in the USA, where Discovery was licensing it for
use by employers and health insurers, Discovery’s venture in the US health insurance market
through Destiny Health had not succeeded and, in February 2008, eight years after starting
the business, Discovery had decided to close Destiny down.
Discovery had seen an enormous potential in the USA for its consumer-driven approach to
healthcare and, because of regulatory concerns (which later changed), Destiny had based
itself in Chicago, Illinois. But the company had met very stiff competition from the market
leaders in that area, Blue Cross and Blue Shield, which had priced Destiny out of the market.
The company was paying more for healthcare than its larger competitors, but could not
charge accordingly higher premiums. In an attempt to get a better foothold in the market,
Destiny entered into JVs with two well-established healthcare organisations in the USA –
Guardian Life (the fourth biggest mutual insurance company in the USA) and Tufts Health
Plan (based in Massachusetts) in 2003. Destiny had hoped to open up opportunities for itself
by working with these organisations in other states such as Texas, Massachusetts and
Washington (Whitfield, 2006a, b).
But these JVs did not help to turn Destiny around. The company made a loss of R41 million in
the first six months of 2005 and, in the same period of 2006, the loss was almost double that
– R80 million. When operating losses for the year ending in June 2007 exceeded the
parameters set by the Discovery board, the company decided to close the business down,
but to keep Vitality running because of the interest that employers were showing in
purchasing it on a stand-alone basis (Business Report, 2008). The intention was that Vitality
in the USA would become the research and development, and clinical and scientific hub for
Vitality globally (Discovery, 2009a).
Gore was deeply disappointed that Destiny had not succeeded. ‘‘We were the leaders,’’
he said. ‘‘We just didn’t capitalise on it. We were disruptive, but we just didn’t know how to
get the scale. Frankly, we were like a fish out of water. We didn’t understand the market
dynamics. Could we have done it right? Yes. The failure was our own. We could not get the
business to scale’’[8].
9.2 UK operations
Discovery’s UK operations were proving more successful, as they found a niche for
themselves in the UK’s substantial insurance market. The UK insurance industry was the
largest in Europe and the second largest in the world after the USA. In 2008, it accounted for
11 per cent of all premium income worldwide (Association of British Insurers, 2009).
9.2.1 PruHealth. In 2004, Discovery and Prudential plc (the Pru) launched PruHealth, a JV in
the UK’s private medical insurance (PMI) market, after the Pru had approached Discovery
j
j
PAGE 14 EMERALD EMERGING MARKETS CASE STUDIES VOL. 2 NO. 1 2012
for assistance in revamping its health products. The Pru had been established more than
150 years previously in the UK. By 2004, it was listed on both the London and New York stock
exchanges, with operations in the USA and Asia. Surveys in 2002 and 2003 had indicated
that it was the most trusted insurance brand in the UK (Mitchell and Soicher, 2006).
The UK PMI market was very different from that in South Africa, by virtue of the fact that the
National Health Service (NHS) provided for more comprehensive medical cover than the
South African public health system. Demand for PMI had traditionally been low (only about
10 per cent of the population had PMI). Discovery and the Pru nevertheless believed that
demand would rise in the future. The NHS was under some strain, and waiting lists were
growing longer as the population made greater demands on the system. In addition,
demand for certain elective procedures that were not covered by the NHS had grown.
The two companies set up the JV so that Discovery provided product development and
innovation, as well as back-office service infrastructure from its offices in South Africa, while
the Pru provided marketing and distribution expertise in the UK. The products that PruHealth
provided mirrored those of DH, but Vitality played an even more central role. In the UK,
Vitality rewards were in the form of discounts on future premiums and, as a consequence,
there had been a 100 per cent uptake of Vitality in the UK. As in South Africa, Discovery saw
Vitality as a key differentiator for PruHealth, and believed that it had been central to keeping
lapse rates down and improving claims: loss ratios because of its impact in reducing
healthcare costs and improving customer retention (Discovery, 2009a).
They had found the challenges of building a business from scratch to be more difficult than
anticipated. Although the Pru had a good reputation in the long-term insurance market,
it had still had to establish itself in the PMI market. Since 2008, growth had also been
hindered by the effects of the global economic crisis. Thus, by 2009, PruHealth had still not
reached profitability.
Nevertheless, PruHealth covered 212,000 lives, an increase of 20 per cent over the year
before. It had captured 11 per cent of all new PMI business written in 2008 and had a market
share of 2.5 per cent. Likewise, its operating losses had been reducing steadily, and
dropped by a further 34 per cent in 2009, from £155 million the year before to £103 million.
New business written grew by 5 per cent to £559 million (Discovery, 2009a) (although the
effect of the recession was seen in the fact that the year before, new business had increased
by 28 per cent (Discovery, 2008)). Customer feedback had been excellent. Research had
shown that, where the average customer satisfaction score in the UK was between 65 and
70 per cent, PruHealth scored between 80 and 85 per cent. The company also won Health
Insurance Company of the Year 2008, the Individual PMI Provider of the Year and Group PMI
Provider of the Year at the 2007 and 2008 Cover Excellence Awards; and the 2007 AMII
Awards Insurer of the Year for Service to Intermediaries, among others (Discovery, 2009b).
9.2.2 PruProtect. In 2007, Discovery and the Pru entered into a broader JV called PruProtect
(into which PruHealth was incorporated) to develop and market life assurance products.
Despite the size of the UK’s long-term insurance industry, consumers did not have access to
the same kind of ‘‘consumer-engaged’’, pure-risk products that DL provided in SA, and Gore
described the market as ‘‘largely stagnant and commoditised’’ (Discovery, 2009a). Thus,
given the size and scale of the market in the UK, the platform provided by DL and the Pru’s
credibility, there seemed to be significant opportunity for the JV.
PruProtect got off to a slow start and Gore described PruProtect’s performance in its first
year as being ‘‘below expectations’’ (Discovery, 2008). The intention had been to deploy a
similar franchised distribution system to that which DL had developed in South Africa, but it
had proven more difficult than anticipated to transfer DL’s skills to the JV (Discovery, 2008).
By January 2009, after concerted efforts to remedy this situation, there were 12 franchises
with 91 account managers actively deployed in the UK, just nine less than the 100 that
PruProtect had said it hoped for the previous year (Discovery, 2009a).
The JV had initially set out to use Vitality to create a dynamic premium pricing model like that
which DL used in South Africa, but this had not worked in the UK, because of the entirely
different pricing dynamics in that market. ‘‘There, what you pay doesn’t go up every year,’’
j
j
VOL. 2 NO. 1 2012 EMERALD EMERGING MARKETS CASE STUDIES PAGE 15
explained Rabson. ‘‘You pay the same throughout the life of the policy’’[16]. As a
consequence, the market was not used to having any kind of increase on its premiums, and
there was a backlash against the possibility of premiums increasing when policyholders did
not engage with Vitality. Thus, PruProtect was relaunched in November 2008 with a different
product structure. This time, premium rates would start at a relatively higher level and then
decline if policyholders engaged with Vitality.
The new product structure was far better received and new business grew from R25 million
in 2008 to R105 million in 2009 (Discovery, 2009a). At the same time, because of the cost of
all the development that had taken place in the company’s funding and capital structures,
the operating loss had increased from R134 million to R156 million, but this, said Gore, was in
line with expectations (Discovery, 2009a).
He did not want to predict when the JVs with the Pru would start turning a profit. ‘‘I’m scared
of these timelines. We’ve done that before [with Destiny], and got ourselves into difficulty.
Businesses take time to build, especially in developed markets’’ (SAfm Market Update,
2009). With that said, he hoped that PruHealth would be profitable by the end of 2009, but
was less sure about PruProtect. He nevertheless believed that PruProtect had the potential
to be as disruptive in the UK market as DL had been in SA (SAfm Market Update, 2009).
10. Conclusion
As he considered all of these things, Gore was very proud of what Discovery had managed
to achieve. But, always with an eye for a new opportunity, Gore wondered whether the fire of
entrepreneurship was firmly enough entrenched in the company, and whether it might run
the risk of losing this fire as it got bigger and more mature. Did he need to do anything more
to ensure that that did not happen, he asked?
Notes
1. Later to become FirstRand, after a merger with retail bank First National Bank.
2. According to the Council for Medical Schemes, risk contributions and claims had increased by 39.5
and 31.2 per cent, respectively, since 1998, with figures adjusted for inflation, while medical savings
account contributions rose 63.7 per cent and claims rose 106 per cent (Source: Council for Medical
Schemes, n.d., p. 133).
3. An open medical scheme was one that anyone could join. Membership of closed medical schemes
was tied to membership of a particular group or employment at a particular company.
4. Pure risk life cover insured the policyholder against death and disability, unlike ‘‘universal’’ cover,
which contained an investment portion that matured at a particular point in time and was then paid
out to the policyholder.
5. Unless otherwise specified, all information in this section is taken from an interview with Adrian Gore,
CEO of Discovery, on 21 September 2009.
6. A further amendment in 1994 removed guaranteed minimum benefits and minimum payment from
the statute books, which allowed medical schemes to exclude or limit cover for procedures and to
use risk rating to a greater extent. It also gave medical schemes the ability to supply healthcare
services directly to their members. This allowed medical schemes to compete with insurance
products on the basis of risk rating and to control costs by controlling consumer behaviour, and also
to contain costs in the longer term by gaining greater control over the supply of medical services
(Source: Department of Health, 2002).
7. Interview with Adrian Gore, CEO of Discovery, 1 April 2003.
8. Interview with Adrian Gore, CEO of Discovery, 21 September 2009.
9. London Interbank Offered Rate. It is the interest rate offered by a specific group of London banks for
US dollar deposits of a stated maturity. This is a widely used benchmark or reference rate for
short-term interest rates (Source: available at: http://great-rates.com/benchdt.htm#L, accessed
17 February 2009).
j
j
PAGE 16 EMERALD EMERGING MARKETS CASE STUDIES VOL. 2 NO. 1 2012
10. Interview with Alan Pollard, MD of Vitality, 5 October 2009.
11. Interview with Barry Swartzberg, group executive director of Discovery Holdings, 6 October 2009.
12. Interview with Herschel Mayers, MD of Discovery Life, and Kenny Rabson, head of product
development at Discovery Life, 6 October 2009.
13. Interview with Neville Koopowitz, CEO of Discovery Health, 6 October 2009.
14. The club later went into liquidation, but two new gyms emerged – Virgin Active and Planet Fitness –
with which Vitality entered into agreements.
15. Available at www.oldmutual.co.za/about-us.aspx (accessed 22 January 2009).
16. Interview with Herschel Mayers, MD of Discovery Life, and Kenny Rabson, head of product
development at Discovery Life, 5 October 2009.
Keywords:
Entrepreneurialism,
Financial services,
Strategy,
Corporate environment,
Private health insurance
17. E-mail correspondence from Kenny Rabson, head of product development at Discovery Life, 29
March 2009.
18. The product was later incorporated into DI’s stable.
19. An investment vehicle that helps to ensure that retirement benefits continue to grow on a tax-efficient
basis once a person has left their current employer and ceases to be a member of an approved
retirement fund.
References
Association of British Insurers (2009), ‘‘UK insurance – key facts’’, September, available at: www.abi.org.
uk/Publications/ABI_Publications_UK_Insurance__Key_Facts_2009_58b.aspx
Business Report (2008), ‘‘Destiny exits US retail insurance market’’, Business Report, 26 February,
available at: www.busrep.co.za (accessed 16 September 2009).
Candy, G. (n.d.), ‘‘Innovative insurance’’, available at: www.moneyweb.co.za (accessed 22 January
2010).
CNBC Africa (2009), ‘‘DSY – Discovery Holdings Limited – audited group results and cash dividend’’,
2 September, available at: www.abndigital.com/page/news/sens/190649-DSY-Discovery-HoldingsLimited-Audited-Group-results-and-cash-dividend (accessed 10 September 2009).
Council for Medical Schemes (n.d.), ‘‘Annual Report 2008-2009’’, available at: www.medicalschemes.
com/publications/ZipPublications/Annual%20Reports/CMS_A-R_2008-09_20090902.pdf
Department of Health (2002), ‘‘Inquiry into the various social security aspects of the South African health
system’’, (Committee of Enquiry, Health Chapter), 14 May, available at: www.doh.gov.za/docs/reports/
2002/inquiry (accessed 18 December 2009).
Discovery (2004), Annual Report 2004, p. 10, available at: www.discovery.co.za/investor_relations/
2004_annual/2004_financial_frameset.html (accessed 7 January 2010).
Discovery (2008), Annual Report 2008, available at: www.discovery.co.za/investor_relations/2008_
annual/index.htm (accessed 7 January 2010).
Discovery (2009a), Annual Report 2009, available at: www.discovery.co.za/discovery_za/web/logged_
out/investor_relations/financial_information/financial_information_content/annual_report_2009/index.
html (accessed 7 January 2010).
Discovery (2009b), No Limits (book produced for the Discovery Sales Conference 2009).
Financial Services Board (2008), Collective Investment Schemes Annual Report 2008, available at: ftp://
ftp.fsb.co.za/public/unit/AR2008.pdf (accessed 22 January 2009).
Liberty Holdings Limited (2008), 2008 Annual Report, available at: www.libertyfinancials.co.za/lib/
content/financialreports/annual2008/default.asp (accessed 22 January 2009).
Mitchell, C. and Soicher, A. (2006), ‘‘PruHealth: a healthy expansion for discovery?’’, WBS-2006-8, WBS
Case Centre.
Old Mutual (1997), Health Benefits Business Report, 18 July 1999, Discovery Plans Listing, p. 37.
j
j
VOL. 2 NO. 1 2012 EMERALD EMERGING MARKETS CASE STUDIES PAGE 17
Pearmain, D. (2000), ‘‘Impact of changes to the Medical Schemes Act’’, South African Health Review,
Vol. 17, Health Systems Trust, available at: ftp://hst.org.za/pubs/sahr/2000/chapter8.pdf (accessed 17 April
2003).
Ranchod, S., McLeod, H. and Adams, S. (2001), ‘‘Low-cost options in medical schemes: the need for
low-cost options and an analysis of benefit designs in 2001’’, CARE Monograph no. 6 (December 2001),
Vol. 2001, Centre for Actuarial Research (CARE), University of Cape Town, Cape Town.
Reuters (2009a), ‘‘Discovery FY profits up’’, 2 September, available at: www.moneyweb.co.za/mw/view/
mw/en/page292516?oid¼ 314928&sn¼2009 Detail (accessed 22 December 2009).
Reuters (2009b), ‘‘Discovery invest to reach R10bn in assets’’, 25 November, available at: www.
moneyweb.co.za/mw/view/mw/en/page292520?oid ¼ 332913&sn ¼ 2009 Detail (accessed 22
December 2009).
SAfm Market Update (2009), ‘‘Discovery annual results: Adrian Gore – CEO, Discovery’’, transcript
of interview, 2 September, available at: www.moneyweb.co.za/mw/view/mw/en/page295799?oid¼
314869&sn¼2009 Detail (accessed 22 December 2009).
Schumpeter, J.A. (1975), Capitalism, Socialism and Democracy, HarperCollins, New York, NY.
Whitfield, B. (2006a), ‘‘Discovery’s destiny in trouble’’, available at: www.fin24.com/Companies/
Discoverys-Destiny-in-trouble-20060303 (accessed 16 September 2009).
Whitfield, B. (2006b), ‘‘Discovery standing by destiny’’, transcript of interview, available at: http://
business.iafrica.com/transcripts/919007.htm (accessed 16 September 2009).
Further reading
Financial Services Board (2009), Annual Report 2009, available at: ftp://ftp.fsb.co.za/public/documents/
AReport2009.pdf (accessed 22 January 2010).
Old Mutual (n.d.), available at: www.oldmutual.co.za/about-us.aspx (accessed 22 January 2009).
Exhibit 1
Figure E1 Discovery Structure in 2009
Discovery
Discovery
Health
(est. 1992)
Discovery
Life
(est. 2000)
Discovery
Invest
(est. 2000)
PruHealth
(est. 2004)
Covered more
than 2 million
lives
Covered more
than 550 000
lives
Covered 13,000
policy holders
Covered 200,000
lives
Contributed 54%
of group new
business in 2009
Contributed 26%
of group new
business in 2009
Contributed 7%
of group new
business in 2009
Contributed 10%
of group new
business in 2009
Discovery Vitality
(est. 1997)
PruProtect
(est. 2007)
Vitality
Contributed 2%
of group new
business in 2009
Vitality PruHealth
Covered 1.4 million lives
SOUTH AFRICA
Source: Discovery (2009)
j
j
PAGE 18 EMERALD EMERGING MARKETS CASE STUDIES VOL. 2 NO. 1 2012
UK
USA
Exhibit 2
Table EI Segmental Information for the Year ended June 2009
R million
RSA
Health
USA
30 June 2009
Income statement
Insurance premium revenue
25
234
Reinsurance premiums
(2)
(11)
Net insurance premiums
23
223
Fee income from administration
business
2,751
–
Receipt arising from reinsurance
contract
–
–
Investment income – shareholders
31
1
Investment income – policyholders
–
–
Net realised gains on financial
instruments held as available for sale
–
–
Net fair value gains on financial
instruments at fair value through profit
or loss
–
–
Vitality income
–
37
Net income
2,805
261
Claims and policyholders’ benefits
(10)
(376)
Insurance claims recovered from
reinsurers
1
37
Net insurance benefits and claims
(9)
(339)
Acquisition costs
–
(11)
Marketing and administration
expenses
(1,737)
(186)
Recovery of expenses from reinsurer
–
–
Transfer from assets/liabilities under insurance contracts
change in assets arising from
insurance contracts
–
–
change in liabilities arising from
insurance contracts – premium
deficiency reserve
–
(21)
change in liabilities arising from
insurance contracts
–
103
change in liabilities arising from
reinsurance contracts
–
–
Fair value adjustment to liabilities
under investment contracts
–
–
Profit/(loss) before BEE expenses
1,059
(193)
30 June 2009
Impairment on financial
instruments held as
available-for-sale
BEE expenses
Profit from operations
Finance costs
Foreign exchange loss
Share of loss from associate
Profit before taxation
Taxation
Profit for the year
UK
Life
RSA
UK
Vitality
Holdings
Total
679
(115)
564
4,218
(730)
3,488
30
(12)
18
–
–
–
–
–
–
5,186
(870)
4,316
4
101
–
29
–
2,885
–
6
–
750
148
12
–
3
–
–
14
–
–
21
–
750
224
12
–
65
–
–
–
65
–
–
574
(515)
(9)
–
4,555
(1,679)
–
–
21
(3)
–
907
950
–
–
–
21
–
(9)
944
9,187
(2,583)
29
(486)
(52)
638
(1,041)
(1,096)
2
(1)
(96)
–
–
(58)
–
–
–
707
(1,876)
(1,313)
(371)
188
(1,050)
–
(144)
35
(838)
–
(3)
–
(4,329)
223
–
1,209
83
–
–
1,292
–
–
–
–
–
(21)
50
(479)
20
–
–
(306)
–
(788)
(71)
–
–
(859)
–
(97)
(35)
1,275
–
(153)
–
54
–
18
(35)
1,963
(96)
(13)
1,854
(16)
(23)
(1)
1,814
(590)
1,224
Source: Discovery (2009a, b)
j
j
VOL. 2 NO. 1 2012 EMERALD EMERGING MARKETS CASE STUDIES PAGE 19
Figure E2 Discovery’s gross revenue since 2001 (R millions)
40,000
35,591
35,000
30,068
30,000
28,006
23,911
25,000
19,295
20,000
14,345
15,000
10,946
10,000
7,739
5,494
5,000
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Information provided by Hylton Kallner, Discovery marketing
director
Exhibit 3. Members of Adrian Gore’s Team
Adrian Gore (45)
BSc (Hons), FFA, ASA, MAAA, FASSA
Group chief executive officer
Gore started DH in 1992. He was chosen as the Ernst & Young Entrepreneur of the Year in
1998. He currently serves on the boards of Discovery Holdings, DH, The Vitality Group (US),
Vitality LifeStyle (Pty) Ltd and PruHealth and PruProtect in the UK. He is also the chairperson
of Endeavor South Africa, a global organisation that focuses on developing entrepreneurs.
Neville Koopowitz (45)
BCom, CFP
Managing director of Discovery Health
Koopowitz joined Discovery as marketing director in 1996, having spent his entire career
prior to that in the health insurance industry. He serves on the board of the Sports Science
Institute of South Africa and the Board of Trustees of the Laureus Sport for Good
Foundation’s South African chapter.
Herschel Mayers (49)
BSc (Hons), FIA, FASSA
Managing director of Discovery Life
Mayers joined Discovery in 2000 to set up and launch DL. Before that he spent 20 years in
senior positions at Liberty Life heading up administration, underwriting, systems,
technology, product development and finance for group and individual life business. He
was also a director of Millennium, Guardbank, Oracle and Liberty Healthcare. He also serves
on the board of Discovery Holdings, Vitality and the Association of Savings and Investments
South Africa.
Alan Pollard (40)
BSc (Hons), FIA, FSSA
Managing director of Vitality
Pollard is a qualified actuary and joined DH in 1994 to head up research and development.
There he was responsible for the design and development of the DH products until he took
up his position as head of Vitality. He is a member of the executive committee and actuarial
committee of the Discovery Group.
j
j
PAGE 20 EMERALD EMERGING MARKETS CASE STUDIES VOL. 2 NO. 1 2012
John Robertson (61)
BCom, CTA, CA (SA), HdipTax
Executive director
Robertson joined DH in April 1993 and was responsible for information technology strategy,
systems development, information technology networks and finance. He is currently
responsible for all aspects of information technology, e-commerce and all internal corporate
operations at Discovery. He is also responsible for the strategic development of technology
and information systems for Destiny Inc. and for the South African operations of the
PruHealth joint venture.
Barry Swartzberg (44)
BSc, FFA, ASA, FASSA, CFP
Executive director
Swartzberg, a qualified actuary, helped Gore to start DH in 1992 and was involved in
developing the Discovery concept. After DH was launched, he was involved in setting up the
administration and systems infrastructure for the company. Following that he was the
marketing director and then CEO of DH from 2000 to 2005. He is currently the group
executive director of Discovery Holdings, and is responsible for Discovery’s international
operations. He serves on the boards of Discovery Holdings, The Vitality Group in the USA
and PruHealth and PruProtect in the UK.
Richard Farber (38)
BCom (Hons) CA (SA) ACMA
Executive director
Farber was a partner at Fisher Hoffman Sithole (PKF) from 1998 until 2001 before joining
Investec Private Bank, where he was the group accountant from 2002 to 2003. He joined
Discovery as the chief financial officer in 2003 and was appointed as the financial director on
1 July 2009. Richard is also a member of the Generally Accepted Accounting Practice
Monitoring Panel of the JSE and an associate of the Chartered Institute of Management
Accountants.
Source: Discovery, available at: www.discovery.co.za, investor relations link (accessed 17
February 2009).
About the authors
Claire Beswick heads up the Case Centre at WBS. She has a BA degree from the University
of Cape Town, a Post Graduate Diploma in Management from WBS, and more than 20 years’
experience in research and writing: as a Researcher at the South African Institute for Race
Relations, a journalist, and now at the WBS Case Centre.
Boris Urban is Full Professor of Entrepreneurship and the incumbent Chair in
Entrepreneurship (Lamberti Foundation) at the Wits Business School (WBS). He has more
than 30 scholarly peer reviewed publications in leading journals. He is the Series Editor and
author of Perspectives in Entrepreneurship: A Research Companion (Pearson/Heinemann
and Springer Books) and co-author of Entrepreneurship Theory and Practice (Oxford
University Press).
j
j
VOL. 2 NO. 1 2012 EMERALD EMERGING MARKETS CASE STUDIES PAGE 21