Tag Archives: Chile

The Dark Side of Rapid Change

Global trade and investment have been great engines of progress for much of the world. Over the past two decades, poorer countries reduced the gap between themselves and their richer counterparts for the first time since the Industrial Revolution, in no small part because of the opportunities opened by global trade. Technology has the same transformative potential in industries as varied as energy, health care, transportation and education. Inventions that are imminent or already here could transform the lives of billions of people for the better.

Yet, as we see in the 2016 U.S. election campaign, and as we have seen in Europe and elsewhere, rapid change has a dark side. If too many people are unable to adapt quickly and successfully to these changes, they will push back – blaming trade or immigrants or the elites – and demand a reversion to a simpler time.

The task of governments is to help people manage these transformations so that they benefit many and do as little harm as possible. In the U.S., governments mostly failed at that task during the era of globalization; if the full benefits of the coming technologies are to be enjoyed, governments will have to do much better this time around.

See also: ‘Interactive Finance’: Meshing with Google  

The competitive pressures created by globalization should have been no surprise. About 45 years ago, President Richard Nixon’s top international economic adviser, Pete Peterson, warned him that rising competition from Japan and Germany, with much more on the way, “poses adjustment policy which simply cannot be ignored.”

Americans have unquestionably gained by the lower prices and higher quality that import competition enabled. Apple iPhones and the latest Boeing jets are the result of the collective input of tens of thousands of collaborators in dozens of countries around the world. But many lost well-paid manufacturing jobs to import competition or outsourcing, and the U.S. government has made little effort to mitigate those costs, even in worker retraining.

President John F. Kennedy promised in 1962 that the government would help American workers who lost out to trade competition as the U.S. lowered its barriers to imports. “When considerations of national policy make it desirable to avoid higher tariffs, those injured by the competition should not be required to bear the full brunt of the impact,” he said. But today, the U.S. spends a smaller proportion of its wealth on worker retraining than any of the other 34 member countries of the Organization for Economic Co-operation and Development except for Mexico and Chile.

Too often, the attitude of the U.S. government has been deeply irresponsible, assuming that markets would simply sort everything out for the best. In the long run, everybody may end up with work and income, but, in the short run, as Peterson told Nixon, the failure to help Americans adapt to the new reality will “leave long periods when the transition is painful beyond endurance.”

With technology change, too, we know well in advance exactly what is coming. Driverless technology, for example, will soon become the standard in the trucking industry. Driverless trucks can run 24 hours a day and won’t demand overtime pay. There are 3.5 million truck drivers in the U.S., and an additional 5.5 million jobs in related industries – roughly one in every 15 American workers. They could perhaps go to work for UPS or deliver pizzas, but many of those delivery jobs will be lost to drones.

Personal-care robots will increasingly replace home healthcare aides, and self-checkout machines are already replacing retail-store clerks; these are jobs that filled some of the gap left by the disappearance of manufacturing jobs to global competition, but they, too, will soon be under siege. Automation is even hitting law and education, two sectors long thought immune to technological substitution.

See also: How Technology Breaks Down Silos  

These vulnerabilities necessitate something that too often was absent in the era of globalization: good public policies. Artificial intelligence will transform teaching, for example, but, without access to the highest-speed broadband, students in poor and rural areas will fall further behind their urban counterparts. And unless we strengthen social safety nets and retraining schemes, there will be far too many losers in the labor market. There is no way to avoid the huge impact that technology will have on employment; we have to prepare for it and help those whose skills it antiquates.

Much more even than globalization, technology is going to create upheaval and destroy industries and jobs. This can be for the better, helping us create more interesting jobs or freeing up time for leisure and artistic pursuits. But unless we find ways to share the prosperity and help Americans adapt to the coming changes, many could be left worse off than they are. And, as we have seen this year, that is a recipe for an angry backlash—and political upheaval.

This article was written with Edward Alden.

How to Be Disruptive in Emerging Markets

Much has been discussed as to the coming disruption of the insurance industry in emerging markets. While I believe that it is happening, I also believe that, contrary to the common held view of many of my peers, building a disruptive insurance platform in emerging markets is going to be a marathon and not a sprint. I do not claim to have all of the answers. In fact, we are not even close to having most of the answers, but we have learned a few things along the way.

While many are quick to predict the demise of the traditional broker, I believe that the evolution of disruption within the insurance market will be one of natural selection. There are many highly profitable brokers in these markets that have a deep understanding of their customer, regulatory issues, market trends and simple common sense. Most are family-owned, with a new generation of family members anxious to take the helm. And while most of these brokers are not tech-savvy and certainly do not have regional or global aspirations, the ones of interest are forward-thinking and anxious to take on a new challenge as they clearly see how the winds of change are blowing.

I see these brokers as natural partners, and by acquiring key brokers in each market the aspiring disrupter will gain immediate market share, revenues, EBITDA, customer and databases, infrastructure (yes, customers still like to talk on the phone), licenses and management talent. With those beachheads in place, you will be able to take the next step, which is to apply technology to the existing base. This can start with the basics; consolidating databases, cross-selling, upselling, retention, dashboard analytics moving ever further up the food chain to digital marketing, big data and someday the mysterious artificial intelligence.

All of this creates short-term value, as you will see immediate increases in CAGR, EBITDA, retention rates and other key metrics, but that doesn’t change the perception of insurance for the consumer. In simple terms, these changes are not disruptive and at the end of the day are boring for customers.

See also: An Eruption in Disruptive InsurTech?  

So what will be the secret sauce? The carriers are an integral part of the ultimate disruption process, as they will work with the broker and consumer to develop the transformational products that the new consumer is going to require. This will be a key part of the challenge, as this will require a radically new approach to product development and, of course, dissemination. Products will include temporary auto insurance, school insurance for books, computers and other needs, home office insurance (do you know how many new consumers work out of their home) and unique vacation insurance. These products will drive real value for shareholders, while at the same time we are ultimately improving the lives of our customers.

I am convinced that one of the key secret ingredients for creating disruption within the emerging market insurance industry will revolve around product bundling and the great feeling you get when you believe that you just received a gift. It is also about being part of a contest and, yes, winning a prize.

By partnering with leading manufacturers of cosmetics, sporting goods, automotive, school supplies, and fashion apparel, the aspiring disrupter can bundle these products with the underlying insurance product that their customer is buying and enjoys buying. In the most basic form, when our customer buys travel insurance they will receive free sun care products. If they buy school insurance, they receive free school supplies. It is a win-win for the product supplier, the customer and the insurer.

If you think this is fluff, just ask the new consumers who are watching every penny in their budget.

But that is not enough, as we want a long-term relationship with our customer. So in addition to all of the above we are sponsoring online contests. To promote scholastic achievement and safe driving, we will soon have one for the zaniest insurance videos, i.e. my homework was actually eaten by an iguana or my car was crushed by an elephant. All of this is meant to build a very real bond with the consumer, improving their lives along the way.

The evolution of disruption in emerging markets has been interesting to observe, as the “the rage of the day” began more than two years ago with the aggregator model. Numerous well-funded ventures launched online insurance websites in Brazil, Argentina, Colombia, Thailand and many other markets with a few common traits. The ventures were not disruptive, they had no existing customer base and they had no real strategy for interacting with the new consumer. The majority of these online insurance portals were “aggregators,” providing real-time or in some cases faster-time quotes from multiple insurance providers. The sites were often difficult to navigate and crowded and typically lacked originality. Soon, the novelty began to wear off as investors realized that “Build it and they will come” was not going to happen.

Disruption became the flavor of the day, but most investors and operators didn’t really grasp or even care what the term meant. The overriding concern was “getting traffic to the site,” and, while digital marketing strategies were developed and bandied about, the fallback position quickly became traditional media. In one case, the dominant online insurance broker in Brazil was told by its investors that it would not receive the next tranche of capital unless it dramatically increased spending on TV, print and radio advertising. Yes, the media of the past had become today’s agent for disruption.

While spending millions of dollars on traditional media for insurance is still a fact of life in many mature markets, it can hardly be called disruptive or for that matter even efficient.

The next phase of evolution came in the form of “digital marketing” and mobile apps. As smart phones typically outnumber the average population in most emerging market countries (in Brazil, there are an estimated 280 million smartphones for a population of 200 million people), the logic stands that this is the best way to reach the consumer. But dig a little deeper and ask yourself a very simple question: How important is insurance in your day-to-day life? For all of us who are selling, packaging or creating insurance products, insurance is the center of the universe, but for the average consumer insurance rates a two or a three on a scale of one to 10, if that.

See also: Pokémon Go Highlights Disruptive Technology 

While the “next wave” was unfolding, other issues became noticeable. Many of the “disrupters” were country-centric, with no real plan or strategy for regional or global expansion, which seemed odd. After all, if you are planning to disrupt insurance in Chile, wouldn’t you want to consider disrupting insurance globally, or at least in somewhat similar countries in Latin America?

Some products, such as auto insurance, were seen as commodities that were as sexy to the consumer as a trip to the dentist, so the market screamed like banshees for new products; pet insurance, travel insurance, smartphone insurance, hotel insurance, sport insurance, bike insurance….the list goes on.

We are increasingly living in an age of data overload, and we need to be very discerning as to the relationship we develop with the customer. We also need to be discerning about local markets. In China, online insurance companies popped up overnight, and many of them reached wild valuations by just selling a single product, like travel insurance. But, in Brazil, the market is much more mature, and travel insurance is about as new as samba.

With a robust online presence, massive investments in traditional media, digital marketing, mobile apps and new products, things were sure to get disruptive, right? Wrong, as consumers were still using traditional brokers, and insurance was still not on their top 10 list.

So what next? Could it be the vaunted but yet indefinable artificial intelligence?

Within the span of two short years, we have moved from science fiction to science fact. What if, through AI, we could predict when our customer would have their next child, next house, car, divorce, marriage and even death?

This would be real disruption, as we would be able to predict consumer behavior and in doing so create a “cradle to grave” lifecycle of products, sales, conversion and retention.

The problem, of course, is that AI is still in its infancy, as there are very few 2001 Space Odyssey HAL computers in the world today. Even if we had mastered this technology, there is still a larger question of how to use it and deploy it. This question will inevitably be answered, but for now we still face the fundamental challenge of taking a very boring product and transforming it into something consumers actually get excited about. We also need to ask ourselves how we would scale across multiple countries in a relatively short time.

That brings us to the end of our story, or, rather, the beginning. Disruption is coming to the insurance industry, and it will find fertile ground in the fast-growing emerging markets and the new consumer. The savvy insurance disrupter will gain massive amounts of data that will have value for a wide spectrum of partners.

Opportunities in Latin America

The Latin America insurance outlook for 2015 is generally favorable, with high-single-digit premium growth across the region presenting complex risks and opportunities. Although real economic growth has slowed recently in the largest markets of Brazil and Mexico, stronger economic growth and inflation in some areas continue to drive premiums. Long-term trends (reduced poverty, shrinking unemployment and a population increasing above the pace of most mature markets) are bolstering consumer demand for insurance products.

In general insurance, catastrophic risks from floods, hurricanes and earthquakes are driving premium growth in a number of Latin American countries. Premiums peak following major losses as demand increases and supply becomes more costly. In contrast, the underwriting cycle slowly reduces premium rates after benign catastrophe-loss periods, such as those experienced in the last few years. The development of efficient distribution systems to increase insurance market penetration and encourage product acceptance remains a critical challenge.

As economic, political and regulatory environments evolve inconsistently across the region, inflation risk continues to persist at varying levels. While Chile’s, Peru’s and Colombia’s annual inflation rates averaged 2% to 3% from 2009 through 2013, Argentina’s and Venezuela’s percentages were the highest in the region. Argentina’s battles with its creditors, and its governmental hand in business, have destabilized its currency. In contrast, Mexico’s government remains stable and is progressing with reforms to modernize insurance and other business sectors.

From a tax perspective:

  • Brazil imposes the highest income tax in the region, with insurer profits taxed at 40%. Popular products include health insurance and term life insurance, as well as auto and property covers, which are sold by independent brokers. Tax incentives for retirement accumulation plans are growing in popularity.
  • Mexico’s tax incentives, promoting retirement savings and a reasonable income tax structure, are contributing to growth. In a country where third-party auto liability coverage is mandatory in several cities, auto insurance generates the highest premiums.
  • The scenario is similar in Chile, where auto insurance is also compulsory and characterized by intense price competition. Provisional life and retirement products are part of the national social security system. Approximately half of all insurers are subsidiaries of international firms. Although an open market has led to stability and a competitive balance, insurers continue to adapt in the wake of earthquakes and other natural disasters.
  • In Argentina, independent agents and brokerage firms account for an estimated 75% of total premiums. The nationalization of private pension funds in 2008 changed the insurance industry structure, sharply reducing the size of the life and annuity market and the number of insurers in the country. Argentina imposes a high income tax burden, with profits taxed at 35% and a 10% dividend withholding tax.
  • Colombia, the fifth largest Latin American insurance market,
    is partially focused on investing in infrastructure to encourage demand for guaranty bonds. Automobile insurance, compulsory personal auto accident protection and reinsurance and earthquake insurance are the most important product lines. The industry aims to develop catastrophe insurance markets and enhance risk models, hoping that a stable commercial market will help deter government response to gaps in market coverage.
  • Peru has upgraded its economy in recent years to manage its rapid growth. Significant changes are being made in consumer protection, tax legislation and new regulation. Peru’s growth forecast is 6% this year, compared with predicted growth of 1.5% for Brazil and 1.1% for Mexico. Many foreign companies are considering Peru as a safe and desirable country for investment.

The Latin America insurance environment is becoming more similar to mature markets. Strong economic growth rates and regulatory reforms in the past decade(s) have attracted a number of global insurers, reinsurers and insurance brokers to the region. Mergers and acquisitions continue to help these global players build their positions. And cross-regional expansion efforts by Latin American-based insurers have increased their size and market reach, as well. These deals are enhancing insurers’ capabilities in product development and risk management. The implementation of new Solvency II insurance capital management regulations in 2015 is expected to result in a shift toward greater insurance industry consolidation and increased sophistication in risk management.

Low penetration rates in Latin America are caused by a number of factors and afford significant room for growth if economic expansion continues. Factors include:

  • Wealth disparity
  • Insufficient tax incentives for retirement products
  • Lack of knowledge among the general population about the value of insurance

Also contributing to potential opportunity is the changing perception of insurance as a necessity or investment, rather than a cost. This comes about with a change to the region’s income disparity, which in most countries is shrinking. Brazil is expecting double-digit declines in premiums across many low-hazard markets. In this heightened competitive environment, many insurers believe they can accelerate premium growth by targeting rapidly growing market clusters.

In comparison, Argentina is experiencing high inflation, tight regulation and a fluctuating economic market; nevertheless, insurance is a fast-growing industry that continues to show resilience in premiums and tolerance for expansion in a challenging environment. Argentina and Venezuela also have strict foreign-exchange control regimes. These generally do not allow residents to pay dividends or inter-company services/royalties outside of the country — in some cases, also limiting the deductibility of certain payments.

In general, it is worth discussing the value added tax (VAT) system in these countries,which is a key concern for insurers.TheVATpaid on the local purchase or importation of goods or services constitutes “input VAT” that typically should be credited against the “output VAT” generated on the taxable sale of goods or services. VAT should not be a cost of doing business. However, VAT is often an unexpected cost when entering a market. In the case of Latin American insurers with VAT taxable and non-taxable activities, the VAT calculation methodology is complex and usually generates some level of irrecoverable VAT.

Some products sold by insurance companies are exempt from VAT, meaning that any VAT incurred on the local purchase of goods or services becomes an irrecoverable cost for the insurance company (although deductible for local corporate income tax purposes). For example, the following are exempt:

  • Argentina’s life insurance and workers’ compensation policies
  • Mexico’s life and pension insurance
  • Certain insurance contracts in Chile, including those related to international trade, insurance of assets located outside of Chile and earthquake-related coverage

Brazil deserves a separate analysis because Brazilian insurance companies are subject to Social Integration Program (PIS) and Contribution for the Financing of Social Security (COFINS) taxes on gross revenues, at a combined rate of 4.65%. PIS/COFINS are not a VAT type of tax but, rather, they are paid on a cumulative basis: any PIS/COFINS paid by the local insurance company is not a recoverable cost. Brazil has a state VAT (ICMS) and a federal VAT (IPI), but these taxes do not apply to the sale of insurance products.

Property/casualty, auto insurance, professional liability, environmental and finance solutions are generally subject to VAT in Latin America, so any VAT paid should be fully recoverable for the local insurance company.

In addition to the VAT, some Latin American countries impose additional layers of indirect taxes that should be carefully reviewed by local insurers (e.g., gross revenue taxes, taxes on financial transactions, net worth taxes and stamp taxes, among others).