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Breakthroughs in Managing (and Insuring) Tangible Assets

In recent years, high-net-worth families have increasingly turned to tangible assets for more than their aesthetic values. A 2012 Barclays report found that high-net-worth individuals in the U.S. hold an average of 9% of their wealth in tangible assets. A 2011 ACE Private Risk Services study of high-net-worth households found that 74% of respondents, all with more than $5 million in investable assets, cited investment value as a reason to purchase rare art or wine, valuable jewelry, sports memorabilia or classic cars. Two-thirds said the potential for appreciation in value was important in their purchase decision.

As values of many categories of tangible assets have escalated, these assets increasingly serve to diversify investment portfolios during periods of volatile market gyrations. In the ACE study, more than half of the respondents reported that the investment diversification value of their tangible assets has become more important to them since 2008.

“Investors are increasingly looking to hard assets, such as valuable art, antiques or fine watches and wine collections, because of the perceived ability of these assets to hold value during market fluctuations,” says Tom Livergood, chief executive officer and founder of The Family Wealth Alliance, a Chicago-based family wealth research and consulting firm. “Across the industry, we’ve seen investors rush to safety and stay there.”

Blind spot

Even as tangible assets gain recognition as a new asset class, high-net-worth individuals rarely bring to their passions for art, wine or jewels the same rigor they have when making financial investments or business decisions. In ACE’s 2011 study, despite the growing number of households reporting greater importance of tangible assets to their investment portfolios, nearly 40% of those surveyed did not have all of their precious items insured against property loss with a valuables policy. Additionally, one in three reported that they were not updating the market value of these assets at least once every three years, and a full 15% of respondents had no formal documentation of their non-financial assets.

“It’s amazing how often some advisers, especially those with sophisticated knowledge of financial markets, suddenly turn unsophisticated when it comes to non-financial assets, notably art,” says Ronald Varney, owner and president of New York-based Ronald Varney Fine Art Advisors.

To Evan Jehle, a New York-based principal at Rothstein Kass, a professional services firm with a significant family practice, wealthy families typically pay 
far less attention to their personal property than to their business affairs. “Our clients would never let something fall through the cracks in their professional lives, but many families have never thought of their tangible assets in this way before.”

Thomas Handler, partner and chairman of the Family Office Practice Group at Handler Thayer, a Chicago-based law firm recognized as a leader in serving family offices, private businesses and high-net-worth individuals, says his office often advises clients who don't have a business plan for their tangible assets. “It is incredibly important for wealthy households to understand how to hold, report, title and insure their non-financial assets in estate planning.”

Challenges of managing tangible assets

Today’s investors have the opportunity 
to reap significant benefits – financially
 and aesthetically – by investing in
tangible assets, but these investments 
pose risks and challenges different from investment
 in traditional assets. Wealthy households and their advisers may cheer the rebounding market for art and other valuables, take comfort that they have diversified their investments and look forward to potential price appreciation in the future. However, those cheers could be premature if owners of non-financial assets fail to understand and properly address the critical issues facing these assets. Those issues include: value and authenticity, documentation, estate and tax planning 
as well as insurance; additionally, owners of tangible assets should embrace the new technology tools that dramatically improve the management of tangible wealth.

Value and Authenticity

The market value of tangible assets can change, sometimes rapidly. In July 2013, a 1954 Mercedes-Benz sold for $30 million, the highest price ever paid for a car at an auction, shattering the previous record of $16.4 million set in 2011. Global sales of wine, diamonds and precious gems have also been increasing, often to record levels. In December 2012, Sotheby’s recorded its highest one-day jewelry sales in the Americas, selling $64.8 million of high-carat diamonds and precious gems. The Live-ex Fine Wine 50 Index reached 106 in April 2013, up 5.3% in the first half of 2013. Over a 10-year period, prices for gold more than quadrupled, only to retreat more recently.

The market for fine art is especially robust. In 2012, Christie’s auction sales totaled more than $6 billion, a 10% increase from 2011. In May 2013, Christie’s reported $640 million of sales in its Post War and Contemporary department in one week, setting an auction record for any individual category.

Dramatic shifts in the market present challenges as well 
as opportunities for investors in tangible assets. “Today’s market is both global and complex,” Varney says. “Modern and contemporary art have made all the headlines, for that is where the greatest demand is today; but by next year the market could be turned upside-down, as happened in the fall of 2008 amid the global financial crisis.

Alan Fausel, vice president and director of the Fine Art Department in the New York office of Bonhams, a London-based auction house, cites the rapidly changing market as a serious issue for investors. “There is a huge risk and reward in today’s market because so many investors are entering uncharted territory. Today’s contemporary market has seen so much volatility and so much uncertainty with newly famous artists, that investors are especially challenged to understand the true value of the works they own.”

Protecting investments in art, jewelry, antiques or wine begins with an appraisal. Smart investors should perform their due diligence to select appraisers with specific expertise in the genre of their assets. “An accurate appraisal is the foundation for every decision 
an investor will make regarding his or her tangible assets,” says Anita Heriot, Philadelphia-based president of Pall Mall Advisors, a U.S. and U.K. art appraisal firm. Before donating, selling, insuring or placing valuable items in a succession plan, investors must know how much everything is worth. “Wealthy individuals must understand that the values of their tangible assets have changed, and these values will continue to change over time,” Heriot says. “Without understanding the value of their property, people cannot even begin to make correct decisions.”

Heriot observes that wealthy individuals sometimes drastically undervalue their tangible assets. She recalls one family that was tracking assets based on appraisals from 1983, with nearly 30 years between consultations. The collection was originally valued at about $2 million, but, after an updated appraisal, the
 fair market value was nearly $100 million. “There were paintings of incredible value hanging on only one nail, including a Rothko with an insurance value of at least $70 million. Had this family known what their property was worth, they certainly would have taken better care
 of it.” An appraisal from a qualified professional can
 also minimize other risks, as well as provide guidance regarding potential fakes and forgeries. In addition, an appraisal can identify other issues that could affect the value of the item or the right to ownership. These include the sale of items made from protected species, protected antiquities or stolen works.

Documentation

All too often, high-net-worth individuals and families find the process of documenting, tracking and managing
the contents of their home, including fine furniture and other valuable items, to be onerous. Proper documentation of personal property typically involves photo or video records, storage of purchase receipts and, in the case of highly valuable items, expert appraisals, proofs of title and provenance and records of any restoration work. Moreover, values need to be regularly updated, sometimes on both a depreciated-value and replacement-cost basis.

“Families rarely keep accurate records of their tangible assets because, quite frankly, it can be a lot of work,” says Jarrett Bostwick, wealth transfer and estate planning specialist at Handler Thayer, the Chicago law firm.

“If someone buys two pieces of art, a piece of jewelry, two watches and a diamond pendant for his wife, then they have to sit down and put a schedule together, contact the insurance company and have them come in and have them ask you a whole bunch of questions, which is kind of a pain. Rarely do our clients partake in this kind of rigor.”

If documentation is done at all, it tends to be completed inadequately and infrequently. ACE Private Risk Services and Trōv have been collaborating on a program in which specialists have examined the contents of more than 3,000 homes of high-net-worth families. In this Home Contents Valuation program, ACE risk consultants used Trōv technology to provide the industry’s first customized estimates of the value of a home’s contents at policy inception. Nearly 50% of the homes evaluated did not have enough insurance to cover their contents, and the average amount of underinsurance exceeded $415,000 per home. Condominium homes were particularly at risk. Nearly 80% had inadequate contents coverage. Among homes warranting an increase in contents coverage, those with a structural value of $2 million to $3 million had an average shortfall of $417,000 in contents coverage; those with a structural value of $5 million to $7.5 million had an average shortfall of $852,000. Furthermore, many valuable items were only protected by general contents coverage in the homeowner policy, when they should have been listed as scheduled items in a valuables policy.

The lack of proper documentation of a family’s tangible assets can lead to wide-ranging problems. “You have to know what you have in order to be worried about it, and to take steps to avoid losing it,” says Joy Berus, attorney at Berus Law Group in Newport Beach, Calif., a specialist in tangible asset protection. “If a family doesn’t have an updated inventory of their valuable possessions, they leave themselves vulnerable to taxes that could have been planned for and reduced, discrepancies, risk of serious financial loss and the inability to pass down their assets to the next generation with a step up in basis. Proper documentation of a household’s tangible assets is the first step in identifying a family’s tangible wealth, and can make the difference between security and paralysis.”

The magnitude of the potential issue is evident in one statistic: Over the next
 30 years, as much as $27 trillion of 
family wealth will be transferred from 
Baby Boomers to their children and grandchildren. That inheritance will include a great deal of tangible assets that will need to be documented, appraised, accounted for and protected.

Wealth managers often encounter situations in which a client dies and the family or trustee does not know where all of the valuables are. “These issues don’t usually come up until a client passes and you have to collect all of the assets and figure out what’s there,” says one wealth manager who works with high-net-worth clients. “Tangible assets aren’t addressed enough in the typical conversations between wealth managers and their clients.”

Handler, the attorney, points to a noted photographer who was living in a retirement home. 
He kept with him a large collection of negatives of images of leaders, celebrities and historical events.
The photographer suffered from dementia, and over
 the years most of the collection slowly disappeared. “Unfortunately, the family did not have a record of everything and didn’t know who took the photographs,” Handler recalls. “We found some of the items on the black market on websites. But the vast majority is never going to see the light of day.”

Berus recalls working with professional athletes and asking if their wealth advisers asked them if they possessed sports memorabilia. “Every one of them said the same thing, ‘Nobody has ever asked before.’ One retired football player talked about how he lost the majority of his lifetime collection because it had been in a fire, and it wasn’t insured. He couldn’t prove what he had and had a major loss because of it.”

Berus adds, “When people don’t know what they have, they can lose money and be taken advantage of by people who do know what they have. You don’t want to lose the value of what you own or be taken advantage of. You also don’t want to cause tax problems for yourself or pay unnecessary taxes. When you know what you have and know what it is really worth, you can make better decisions.”

Loss Prevention

By definition, tangible assets are subject to risks of physical damage, theft and the ravages of time. Yet experts say that high-net-worth families often neglect
 to take steps to protect their art, jewelry, wine and other valuables from these threats. One ACE study, for example, found that 40% of wealthy individuals surveyed failed to take advantage of the services of a risk consultant who could help them reduce the risk of damage and theft.

Collectors do not always realize the risk-prevention measures available to them to help guard against, 
and minimize, exposures, says Heather Becker,
 chief executive officer of the Conservation Center, a Chicago-based provider of conservation services for fine art, textiles, photography and sculptures. “No one wants to think a significant loss will happen to them.”

Many families display or store their precious possessions in ways that increase the risk of loss. For instance, they hang artwork above an active fireplace, where the hot, dry air and soot accelerates deterioration. They neglect to place a historical artifact, such as a letter written by a famous figure, in an archival box protected by anti-ultraviolet protective glass, exposing the artifact to dangerous rays and fumes.
 Or they store a valuable stamp collection in a closet beneath a bathroom. If the tub overflows or the toilet develops a leak, the stamps could be ruined. “So many people forget that these assets – art, wine, gems – are very fragile,” Varney says. “Valuable assets can go from $1 million in value to $0 in the blink of an eye.” Investors who fail to properly address these threats remain vulnerable to severe financial loss.

Even items made of strong, durable materials can be
ar risk. Becker recalls the story of an ancient metal sculpture, which its owner stored in a warehouse for several years while not on display. While the owner made sure the sculpture was stored in a protective crate, the crate was stored on its side, instead of standing up. “The sculpture was severely warped and sustained considerable damage,” Becker says. “There is a cumulative effect to these risks that individuals must account for.”

Insurance

Given the increasing value of rare art, precious gems and fine wine, and the array of physical threats and other financial exposures confronting these pieces, proper insurance represents a critical part of a complete wealth-protection plan. Often the best place for families and their wealth advisers to start addressing this need is with an insurance broker or independent agent who specializes in serving families with emerging or established wealth. These insurance advisers, who can be recognized by their access to specialty insurance carriers, can usually suggest and coordinate services from a variety of experts.

While investors of tangible assets may go to great lengths to acquire the items they desire, they frequently fail to adequately protect them. In a 2012 ACE survey, fully 86% of insurance agents said the families who insure their homes and possessions with mass-market insurance companies likely carry too little insurance for their treasured items. One in three wealthy families was updating the market value of their collections every three years.

“Waiting three years or more mean their valuations will be wildly out of date,” says Fausel of Bonhams.

ACE Private Risk Services and Trōv analyzed 94 valuables schedules to compare stated replacement values with current market values. For the 48 schedules of fine art assets, comprising 1,722 objects, 665 objects were potentially underinsured. For the 46 jewelry schedules, one in four objects was potentially underinsured. Moreover, 32% of all the analyzed items had descriptions that were too vague or incomplete to allow for an accurate valuation. If a loss were to occur, this could lead to a dispute.

Emerging technology

For individuals and families with substantial tangible assets, new technology tools exist to make tracking, analyzing and sharing information about their assets significantly easier and more efficient. Pall Mall’s Heriot sees high demand for these tools: “As tangible assets become more valuable and wealthy families become more invested in their personal property, we see clients begging for a better understanding of what they own and greater knowledge of what it’s all worth.” The goal for wealth advisers and their clients should be to make tracking and analyzing information about personal property regular, everyday actions rather than infrequent behaviors.

Progress is promising. ACE Private Risk Services offers clients access to its Home Contents Valuation service, providing guidance regarding general contents coverage at policy inception–at the moment, coverage for personal property, a home’s contents, is typically assigned based on a percentage of the home’s structural value or it is a guess. Trōv has developed technology, partnerships and applications to tame the unruly mass of data about every tangible asset in its members’ lives. The core of the
 Trōv platform is a private, online digital locker where the information about property and possessions is collected and securely managed (called a Trōv, like treasure trove). Because most of Trōv users’ important personal property is located in their private spaces, Trōv is training appraisers and insurance risk managers to use its Trōv Collect application when they are in their clients’ homes. With the acquired information, a Trōv is activated – and with it a complete knowledge of what each family owns, where it’s located and what it’s worth. Acquisitions can be automatically added to a personal Trōv at retail point-of-sale, via electronic receipts and through a mobile application. The Trōv Mobile app enables members to snap a picture of any acquired item, add any support information, such as a receipt, package art, bar-code or QR-code, and send it to their Trōv in real time. As purchases are added, and as values change within the Trōv, the member can choose to have his or her advisers automatically notified to ensure the items are always accounted for and adequately protected.

Vision of the future

The future of wealth management encompasses an understanding of a client’s tangible assets as well as financial assets, completing the picture of total 
net worth. By using a continually updated inventory
 of personal property, families can manage risk on a real-time basis, applying effective loss-prevention techniques, securing the proper amounts of high-quality insurance coverage and anticipating tax and estate-planning issues. Insurance companies such as ACE will be able to recommend safety measures and introduce coverage rates that are increasingly fair, accurate and economical. Private bankers, estate planning attorneys and family offices will develop deeper relationships with their clients and referral networks. Wealth advisers will be able to expand the perspective they offer to clients and engage other appropriate professionals, such as insurance brokers, on a more timely and routine basis. Advisers who provide clients with a full-circle view of their assets will be well-positioned to gain a competitive advantage.

Cloud services, such as those provided by Trōv, will even enhance enjoyment of prized possessions. With a few simple strokes on a mobile device, an owner will be able to find like-minded collectors. Buying, selling and sharing will become a dynamic experience, and, because it will be easy to track the history of an object, every possession with have a story built into it. 

Conclusion

Demand for tangible assets of art, wine, jewelry and other collectibles is on the upswing, and auction sales across the globe continue to skyrocket. As these tangible assets are increasingly recognized as means of investment diversification, wealth advisers are challenged to provide a full-circle, comprehensive view of a client’s entire portfolio. Fortunately, new technology tools are meeting these ever-expanding demands. Mobile and cloud technology services improve the tracking, management and valuation of tangible assets, providing families and their advisers with greater awareness. Furthermore, these tools enable families to secure comprehensive insurance coverage and loss-prevention services, assess investment risk across both financial and tangible assets and more effectively anticipate tax and estate-planning issues. In today’s digital age, an analysis of any high-net-worth individual’s assets must include these tangible assets to complete the picture of total wealth management.

For the white paper on which this article was based, click here

How Does Your IT Budget Compare?

In my conversations with insurers, I am frequently asked about IT investments. People want to know what the trends are around IT budgets and how their spending on information technology compares with others. To help explore these topics, we analyzed insights from our portfolio of research and did some additional analysis.

Working on this research project was illuminating. The findings validated and quantified some key assumptions about how and where technology investments are being funded. Some of the major conclusions show that:

  • While there is wide variance in the percentage of premium that insurers are allocating to the IT budget, the industry average continues to run between 3% and 3.5%.
  • A significant portion of the IT budget is allocated for discretionary spending. Nearly 40% of insurers indicate that 10% or more of their budget is discretionary, and more than 20% of insurers allocate more than 20% of their budget to discretionary use.
  • There is major investment in technology-based solutions occurring outside the IT budget. 59% of insurers report significant spending outside the IT budget, with 5% of insurers stating that spending outside the IT budget exceeds 50% of the budgeted IT spending.

There are no hard and fast rules dictating an appropriate or normal or acceptable percentage of premium that should be spent on the IT budget. Spending levels are and should be influenced by the business climate, strategic initiatives and the competitive landscape.

It is great news that more insurers report better alignment of IT investments with business objectives and strategic initiatives. This alignment is critical to driving new collaborative approaches for addressing both challenges and opportunities. The industry is serious about investing in the modernization of systems and architectures. That investment is laying a foundation for the optimization of business processes and operations in every aspect of the environment. The result is transformation that delivers real value and the ability to drive innovation for the future.

This is a pivotal time for the industry, and technology is an essential enabler for the capabilities that will deliver needed growth and efficiencies in the coming years.

During the planning process, it is important to look beyond how the budget compares with that of peers, and to assess what funding is required to support the business capabilities that are needed to compete. Understand what the gap is. It may be necessary to exceed the traditional percentage of DWP allocation that your company has grown comfortable with. Realize that in today’s environment, the reality is that IT spending is high, and many companies are able to find additional funding in business units to help meet company goals and position for competitive advantage.

For more information from our recent report, IT Budget and Spending Realities and Trends in the North American P&C Insurance Industry, please visit our website: https://strategymeetsaction.com/.

How to Focus on Emerging Markets: Operational Excellence

Global economic trends will transform the customer base for most industries across the world. Rising per capita incomes, favorable demographics and continuing economic growth are leading to a massive expansion of the emerging middle class.

The World Bank defines the middle class in two brackets based on earnings per day: US$2–US$9 and US$9–US$13. According to the World Bank, 10 times as many people entered the lower versus the higher income bracket between 1990 and 2005— highlighting the success of countries such as India and China that have invested millions in the middle class over the past two decades. For this report, our focus is on 
those earning US$2–US$9 a day, or the “emerging consumer.” We define the “global middle class” as earning an average of US$10–US$100 a day. This level of consumer has more disposable income to buy consumable goods and to invest.

While the remarkable growth of emerging market economies has brought millions out of poverty, fewer people have moved into the global middle class. Over the next two decades, we estimate that the middle class will expand by three billion people, coming almost exclusively from the current low-income segment. Financial inclusion will be important to aid this expansion. The significance of insurance for this low-income customer segment cannot be overstated, particularly given the lack of social health care in these countries. Life insurance supports a family when the breadwinner dies; in-patient hospitalization costs are generally paid for through out-of-pocket expenses and can deplete existing savings. As climate change and natural disasters such as Cyclone Phailin in the Philippines become more prevalent, the importance of asset-backed insurance (e.g., for weather, cattle and livestock) continues to grow.

The importance of insurance

Insurance has clear social value for the emerging consumer. Low-income consumers need to be insulated from risk because they lack the accumulated capital to withstand adverse events. Apart from its advantages as a risk management tool, insurance enables low-income consumers to take calculated risks to emerge from poverty, make wise investments or ensure their families will be provided for in case of an unforeseen event.

As economists Abhijit Banerjee and Esther Duflo point out in their book, Poor Economics, the poor are not irrational in their spending behavior, but rather hyper-rational, because the value of each money unit is higher than for other consumer segments. Thus, insurers should understand some of the key challenges facing these consumers and align their operating models to service them better:

  • Inconsistent cash flows — These consumers often have irregular pay cycles, making premium payments difficult.
  • Significant dependency on a single source of income — Dependence on one main breadwinner may create a financial burden.
  • A mobile segment — Many jobs require long commutes from rural areas and constant mobility; lack of portability and accessibility may hinder the purchase of insurance.
  • Lack of awareness of the concept of insurance — Risk pooling or premium payment benefits that may not accrue to the customer may be difficult concepts to understand.
  • Lack of trust — For some industries, this may lead to reputational issues; these can be more extreme when purchasing an intangible product like insurance.

Despite these challenges, customers spend sleepless nights worrying about various risks. The vulnerability is much greater for this segment than for others with higher disposable income.

How big is this market?

In 2009, there were approximately 1.5 billion–3 billion people with minimal access to formal insurance services globally, as highlighted by Lloyd’s of London. Today’s audience has not changed significantly, but consumers face different risks — related to life, health and assets. ILO’s Microinsurance Innovation Facility believes that insurance for low-income consumers has evolved differently across geographies — from 200% growth between 2008 and 2012 in Africa to a steady evolution in India and other Asian economies.

India has the largest share of low-income consumers with insurance — the result of strong regulation and government schemes, especially in health insurance. South Africa, Kenya, Ghana and Tanzania have been rapidly increasing coverage and developing microinsurance-focused regulations. Asian economies such as Indonesia, the Philippines, Bangladesh and Pakistan continue to grow in this space, as well.

Emerging markets are unique in terms of demographic and economic segmentation. Countries such as India have a more standard income-based segmentation pyramid, whereas other developing countries such as Ghana and Nigeria have a flatter pyramid, with most potential customers in the low-income segment.

Globally, we observe many insurers and intermediaries expanding their sales focus down the pyramid to reach the emerging consumer. Depending on the specific market, some players are servicing the low-income customer segment through simple insurance offerings and third-party distribution. Nevertheless, the vast majority are conventional insurers targeting the current “top” of the pyramid.

Irrespective of the geography, insurers recognize that today’s low-income customers are tomorrow’s middle class. However, winning this customer segment is not just about creating lower-priced products or selling existing products using a third-party distributor such as a micro-finance institution. Insurers will have to learn from the dynamics of their respective markets and drive innovation by transforming their strategies and operating models to grow with emerging consumers and their developing needs.

But is it profitable?

The foremost challenge for insurers in this market
 is the lack of systems and dedicated performance management tools to track profitability. These are often missing because of a lack of investment or simply lack of focus by senior management. The industry segment is young and lacks tracking tools. Insurers usually do not separate performance reporting between traditional and emerging consumer insurance. Future performance management tools need to capture metrics for both revenue and cost to determine the profitability trends for this segment.

Typically, there is a lack of historical risk data for low-income consumers. Thus, pricing is not very scientific and uses proxies with a constant iterative feedback loop. As historical data quality improves, we expect risk-based pricing for this segment will lead to better-priced products.

Insurers are leveraging various technology-enabled channels, such as mobile phones in Africa, to sell these insurance services, thereby reducing distributor and operating expenses. Insurers are also selling life insurance through retailers reusing rechargeable vouchers, thus eliminating the distributor layer and trimming costs significantly. Various government-sponsored insurance schemes have standardized processes for enrollment of new beneficiaries, post-sale servicing and claims management. However, there are no universal measures to reduce market costs — an important objective because insurers need to demonstrate profitability. Those insurers that can redefine their operating models and generate high operational efficiency will reap the benefits of serving this large, untapped and developing customer segment.

Need for greater investment

Insurance companies in emerging markets have typically found it expensive to cater to the emerging consumer. The high cost of acquisition, lack of trust and inaccessibility make outreach difficult. Moreover, many insurers have failed to develop a sound business case, with a low-cost and differentiated operational strategy, to enter these markets.

Insurance for the emerging consumer is still in a nascent stage. While large insurers may be deploying significant capital to penetrate this market, other initiatives have been part of corporate social responsibility or philanthropic programs. Often these projects target specific concerns related to product development, distribution or customer awareness. Such forms of funding do not appear sustainable or scalable for the long term.

Transformational programs are required to achieve operational excellence. This is where investment from insurers or private equity investors (more specifically, impact investors) can bring true value — not just in 
the form of capital, but also technical knowledge and expertise to develop cost-efficient distribution channels and well-designed products, and to drive organizational change for profitability.

As insurers rapidly expand in emerging markets, we see opportunities to help them with specific geographic issues in impact investing, measurement and value generation. We are working together with LeapFrog Investments to reach this virtually untapped market. Their approach is a compelling complement to our broad service lines and global competence.

Effectively targeting emerging consumers

Many insurers have used existing operating models in innovative ways to reach the low-income consumer.
 A large private sector life insurer in India, for example, created a “top-up” life insurance product in 2008, offering low-income consumers pay-as-you-go options. This eliminated scheduled premiums for consumers who typically do not have a steady stream of income.

In addition to our earlier discussion of issues facing consumers, there are three dominant challenges for insurers to consider in developing the emerging consumer market.

  • Awareness — Building customer trust through educational and marketing initiatives; the most convincing way for insurers to build awareness is to deliver on their claims’ promises
  • Affordability — Providing insurance at an affordable price and benefits that the end customer values; this places high importance on product design
  • Accessibility — Ensuring ease in purchasing insurance, servicing and claims handling

These three challenges can be mapped to the following external and internal success factors that will play an important role in developing this market.

External success factors

Regulatory framework

A strong regulatory framework is required to support the industry, and emerging markets have benefited from the regulatory push. India’s insurance regulator was among the world’s first to have quota-based mandates for licensed insurers (requiring them to source a percentage of their business from rural and unorganized markets) and to develop specific regulations for products and distribution. A more principle-based approach is being taken by The National Insurance Commission in Ghana in drafting microinsurance regulations. These enable insurers to innovate with product definitions and distribution tie-ups as they develop affordable and accessible products for the lower-income segment.

Technical and logistical infrastructure

Insurers in emerging markets also face infrastructure-related challenges, requiring local and highly pragmatic business solutions. Typical issues include a lack of options to communicate or interact with customers, no “know your customer” processes and limited payment infrastructure. Leveraging the high mobile penetration, various technology-based solutions
 have emerged. Insurers need flexibility to ensure that insurance sales, post-sale servicing and claims management are quick and efficient.

Intermediaries and partnerships

Distribution is one of the most important concerns. Last-mile connection with customers is a challenge because of a large segment living in inaccessible areas, their constant mobility or simply a lack of access to the same touch points more affluent segments have (e.g., bank branches, financial advisors). Use of traditional distribution channels, such as agents or advisors, can be an expensive proposition because of high commissions and the need to adapt specific requirements for this segment. Furthermore, existing channels are typically not trained to deal with the lower-income consumer. Along with traditional channels that are managed in a lean and cost-efficient manner, there are other successful distribution alternatives in this market that include partner-agent models (e.g., using business correspondents), as well as those created by piggybacking on existing distribution channels (e.g., mobile network operators, retailers).

Internal success factors

Low-cost and efficient operating model

Insurance for low-income consumers is a low-margin business because of lower average premiums per customer and relatively high fixed costs. This makes it more important to run an efficient operating model with simplicity and innovation and to ensure that internal processes are standardized across the organization. Customer interfaces need to be simplified with each customer touch point for consistent communication. The need to leverage technology to achieve these objectives is a given.

Supporting governance structure and performance management framework

Institutional and infrastructural conditions in emerging markets lead to specific requirements in running 
the business, such as decentralized sales or strong interaction with intermediaries. This requires robust governance and risk management structures, which support management steering and enable operational control in critical areas such as quality issues or fraud. In these situations, a well-functioning performance management framework, with operational KPIs and controls, is important to identify issues and react to deviations. This should be embedded across the organizational structure.

Simple and innovative product design

Simple yet innovative product design is critical to increase penetration. Products need to be easily understood by customers, easy for agents or intermediaries to sell and provide real value for the client. Additionally, standardized products will improve operational quality and efficiency, which is critical to running a profitable business in a low-margin segment.

In the next few years, innovative solutions that provide insurance to emerging consumers will include:

  • Selling insurance through a utility company (e.g., Mapfre and Codensa in Colombia)
  • Reaching small businesses for agriculture insurance via mobile phone technology (e.g., Kilimo Salama in East Africa)
  • Integrating products with a telecom provider; outsourcing customer service and premium collection to intermediaries or facilitators (e.g., Bima in Asia and Africa)

Many of these solutions will be independent or integrated services. But insurance companies will drive these innovations, and only those players that are able to develop profitable operating models will succeed. While leveraging third-party providers for various services will be important, insurers still need to focus on their customer relationships and operations to generate maximum value from these third-party relationships.

Customer-centricity, operational efficiency, risk management and performance management will be crucial but will not ensure sustainable success. The most important aspects are corporate culture (change, individual involvement and leadership) and the mindset of people.

For the full report, see: Operational Excellence For Insurers.