- Business Mirror
- Category: Banking & Finance
Published on Sunday, 15 September 2013 19:57
- Written by KPMG Perspectives
THE last decade has witnessed strong growth in microinsurance, especially in Asia, Africa and, increasingly, Latin America. India and China have been at the forefront: India alone is currently estimated to account for 60 percent of all the individuals covered by microinsurance worldwide.
Overall, however, market penetration remains relatively small. As a result, there remains enormous growth potential. Industry estimates put the total number of possible customers at between $2.5 billion and $4 billion and value total potential revenue at about $40 billion a year. Quite apart from the direct revenues, many of these potential customers are in emerging economies and can become increasingly valuable to insurance firms as they lift themselves out of poverty, acquire assets and have surplus income to save. We believe insurers are poised to make a big difference in the lives and well-being of these people, developing innovative routes to market to tap into a viable revenue stream.
Strategically, there is a clear commercial incentive for firms to seek first-mover advantage by building positive relationships with low-income groups. In addition, many governments and insurers feel a socioeconomic and moral imperative to offer relevant products that help protect poorer people from events such as drought, the loss of a cow, or the theft of a plough, which can spell disaster. But for people living below the poverty line, who are often averse to buying an intangible service and suspicious of an insurer’s willingness to honor a claim, the question is: why spend my precious dollars on an insurance policy?
As part of national socioeconomic strategies, governments and regulators are responding to this question by raising the awareness and benefits of insurance among poorer demographics and providing the framework within which microinsurance can operate commercially. As a result, in a number of countries microinsurance regulations are being introduced that lower capital requirements for microinsurers compared to traditional regulatory frameworks. They also simplify compliance, relax constraints on distribution channels and minimize licensing and examination requirements for intermediaries.
The need for a new approach
THERE is considerable socioeconomic and regulatory momentum building behind micro-insurance and this is opening up new opportunities for profitable growth.
The key to success for insurers lies in recognizing the diversity of cultural, regulatory and economic environments across the individual countries of Latin America, Asia and Africa. This diversity means that a “one size fits all’ model for product design does not work. Insurers need to look beyond the traditional segmentation strategies around income, wealth, geography and age. Instead, they need to focus more closely on insurance needs and behavior and adapt their customer value propositions appropriately.
In Latin America, for example, and especially in Brazil, the microinsurance market is focused on goods, particularly extended warranties for such items as cell phones and refrigerators. In India and Africa, on the other hand, where 60 percent or more of the population is involved in agriculture, on low incomes and living mainly in rural areas, the main need is to insure those assets that are vital to survival—cattle and other livestock and crops—together with life cover to protect the microfinance loans with which these assets are often bought.
Nor is it the case that there is consistency even within a region—an extended warranty product that is a success in Brazil cannot simply be offered on the same platform and customer value proposition in Mexico, where the appetite for extended warranties is completely different. Equally, in some African countries funerals are major events and there is a strong market for relevant insurance distributed by burial societies and funeral parlors to community clubs. In other countries, death is not a suitable topic even to be raised in discussion.
Apart from this market fragmentation, the low-income segment has other inherent features that require a new approach. In India particularly, more extensive collaborative industry models may be required, with fast-moving consumer goods companies (FMCG), telecom, cell-phone shops, local post offices, grocery stores and sellers of seeds, fertilizers and farming equipment bundling insurance cover with their products or services and sharing customer information. The distribution structures of regional rural banks, cooperatives and business correspondent models may need to be leveraged. And microfinance institutions may need to be even more engaged in selling life policies along with providing a loan. In Africa bancassurance could play an increasing role as banks initially based in South Africa expand their operations across the continent.
Despite their poverty, brands can have a powerful attraction for those on low incomes. As insurers build confidence in their own brands, many policies are being sold as add-ons to products and brands that people already know and trust. For example, UK-based MicroEnsure is now conducting most of its business in Africa through partnerships with mobile-phone companies; while high-profile retail chains that have built their businesses in South Africa are now appearing in other African countries and offer enormous potential for the distribution of financial products.
Nevertheless, the dispersed, remote nature of this customer segment means that it is difficult to reach by intermediary and few low-income people have PCs or Internet connections. However, mobile penetration in the countries of Latin America, India and Africa is already high, with aggressive marketing of the benefits of the cell phone as both a communications and a payment tool. Mobile telephony, therefore, offers a huge potential; and those insurers who are serious about the microinsurance market will have to tap into it.
Managing risk
COMMERCIALLY, the low margins achievable on each policy mean that it can only be profitable if a great many standardized products are sold and managed through highly automated business models that are focused on a large volume of transactions and a low cost of operations. However, the high degree of automation combined with the simpler operating environment being put in place for microinsurance will create challenges for insurers’ risk management frameworks. Especially since some microinsurance regulation has allowed the use of specific channels —such as microinsurance brokers, electronic direct sale channels—that involve less formal requirements and consequently will demand special attention in areas such as fraud prevention and money laundering. Another factor to be considered is risk assessment and product pricing. Given the small premium size and the lack of both actuarial data and any history of pricing, it is difficult to quantify the sales volumes required to cover the risk.
Reinsuring also becomes a problem. As a result, insurers will need to conduct greater research and analysis to achieve a better understanding of individual markets and people’s needs. The right financial models will also be required to set the best pricing margins and help ensure customers are sold suitable products at appropriate prices.
Cross-industry collaboration to share costs and risks may also be needed, such as having a central company that specializes in handling claims or distribution, or creating common industry databases for microinsurance. In India, for example, one option might be a pool of all the microinsurance revenues accrued through initiatives run by insurance companies, the government, postal services and through top-up or bundled schemes. Payment of claims could be managed by the pool based on information stored in smart cards or mobile phones.
Tailor products, lean systems
ABOVE all, product design is crucial. The concept of simply transferring existing products to these new markets may be superficially attractive, but the reality is it will not work. The opportunity is more difficult: to develop and introduce new, tailored products.
Success can only come if insurers talk to people, assess their needs and design their products to fit. In many ways, these are simple markets requiring simple products. For example, modularity may be an important principle. So instead of offering full-blown contents packages, microinsurers might offer products that enable cover for single
