How fidentiaX Manages to Offer Better Deals to Sellers and Buyers?
While we are yet to launch the Marketplace for Tradable Insurance Policies, fidentiaX has already helped its first customer realize a higher value from his life insurance policy. The customer was delighted to sell his contract at a higher value than surrender value offered by the insurer. However, he wondered how we managed to offer higher value than insurer itself. It indeed is a very relevant question and I am sure a lot of our future customers would have the same question. In this post, I have made an attempt to answer the big question. That is, how fidentiaX manages to offer a better deal to both sellers and buyers of tradable insurance contracts.
Before we delve into how we bring in value, it is important to understand why insurers are unable to return your premiums when you surrender. To understand it better, let’s look at what happens to your premium in the first year.
A typical insurer incurs a substantial cost in development of the product and acquiring it. This along with Admin Expenses and Cost of Insurance almost wipes off the first-year premium. This explains why surrender value is typically close to zero at the end of the first year. The graph below describes this concept at a high level.
However, the situation gets better starting the second year especially since the procurement expense has been incurred now. Additionally, other expenses also become lower. The graph below captures the picture starting second policy year.
Now we know why insurers offer non-zero surrender value in the second year and thereafter! At this time, it is important to highlight that the while expense patterns are different each year, the premiums charged are constant throughout the policy term. This essentially implies that while Procurement Expense is incurred on Day 0, it is recouped over the entire policy term. However, if the policyholder chooses to terminate the contract before the policy term, these need to be recouped at the time of surrender resulting in lesser low surrender values in the initial years.
Having understood the expense pattern of a typical insurer, let’s come back to the original question of how fidentiaX manages to offer value to both sellers and buyers. There are no prizes for guessing that the answer lies in Procurement Expense. While insurers incur it on Day 0 and load the premium for the entire policy term, fidentiaX comes in at a time when these expenses have already been incurred by the insurer but premiums are still being charged for the expense. We, in effect, share the part of premium loaded for Procurement Expense with our customers and hence help them get a better deal while still making money for ourselves. While buying we ensure that surrender value offered by fidentiaX is higher than that by the insurer. At the time of selling, we ensure that the returns offered are higher than the original product thus making it logical for them to buy from fidentiaX. In the process of buying and selling, we charge minimal transaction fees to cover our expenses (highlighted in green in the graph below).
The maturity value is higher than the premiums paid because of the investment income which gets bigger each year and more than compensates for the expense incurred by the insurer.
While insurers aspire to offer good value for money to their customers, due to the structure of expenses and premiums they cannot go beyond a point. The same structure of expenses and premiums allows fidentiaX to offer a better value to its customers. This is indeed the perfect example of a win-win game. Come win along with us!
Disclaimer: The article has been written with an aim to broadly explain an otherwise complicated and technical topic to readers with little or no insurance background. Hence, it doesn’t have finer details but is still broadly correct. The graphs are not drawn to the scale and used as an aid to explain the concept.