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
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.