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Are Philippines Next for Disruption?

With a population of approximately 102 million, the Philippines was the fastest-growing economy in Asia in 2016 and is one of the fastest-growing in the world. With more than half of the population under the age of 25 and buoyed by $50 billion in remittances and outsourcing annually, the economy is expected to outperform its peers over the coming years. This, combined with a $160 billion infrastructure plan, will set the stage for a rapid increase in the size of the middle class.

See also: Insurtech Ecosystem Emerging in Asia

The Philippine insurance sector is one of the oldest in the region, with development dating back more than 200 years — and it is among the region’s most mature and competitive markets. There are now more than 32 million Filipinos covered by insurance, with 28 million of those covered by rapidly expanding micro insurance products. The ratio of coverage increased dramatically from 19% in 2010 to nearly 33% in 2016. There are currently 63 brokers, 31 life insurers, 71 non-life insurers and one reinsurance firm operating in the country. There is also a growing international presence, with global firms such as Axa and Mapfre investing heavily in the market. 

We believe that a country’s insurance market is ripe for disruption when it has:

1. A rapidly growing middle class;

2. Strong and sustained economic growth;

3. Increasing demand for insurance products;

4. Increasing levels of leisure and family-oriented activities; and

5. Growing levels of disposable income and, most importantly, society that is embracing digital technology and connections.

The Philippines clearly has the first four attributes, but what about the digital aspect? Consider the following: The Philippines is the third-largest and fastest-growing market in smartphones in SE Asia. Three in 10 Filipinos own a smartphone. The average smartphone user spends three hours and 14 minutes a day on the internet via smartphone. Of that time, 78 minutes a day is spent on entertainment and related content, 56 minutes a day on apps and 40 minutes a day on communications services. Within 15 minutes of waking up in the morning, 79% of Filipinos have already checked their smartphones, and 40 million Filipinos are active on social media. Of those, 81% use Androids, with the remaining 19% using IOS. As to demographics and usage, 88% of users are under the age of 34, with 53% under the age of 24.

The usage and social media aspects are even more telling, with 94% of all users on Facebook. And 32% of Filipino smartphone users download six or more apps per month, while 45% of those have paid for apps or made in-app purchases. Mobile banking is now used by 14% of smartphone owners, and this usage is increasing 25% per year.

See also: Why Southeast Asia Is Ready for Disruption

Is the Philippine insurance industry ripe for disruption? Is the Pope Catholic!

Easy Pickings in Southeast Asia

With GDP rates in SE Asia exceeding 6.3% per annum, with premium growth for life, accident and other policies higher than 13% last year in the region and with insurance penetration rates of 5% or less, we seem to be looking at a slow, fat rabbit.

But we don’t seem to be able to shoot it. Why?

See also: Innovation — or Just Innovative Thinking?  

While numerous global and regional insurance carriers have created venture capital funds, insurtech incubators and grand initiatives, the carriers’ fundamental view of the world has not changed. Consider the following: In 2016, there were approximately 75 deals in private tech investment by reinsurers and insurers, up from three deals in 2013. On the face of it, this is encouraging. However, of the total tech deals completed in 2016, more than 72% involved U.S.-based startups and only 12% involved ones in Asia. In other words, the fastest-growing markets of the world received only a fraction of the total tech investments from the insurance industry, which is not exactly transformational.

You can’t shoot even a slow, fat rabbit if you don’t aim at it.

If we assume an average of a $2 million for each of those private deals, this equates to $150 million in total capital commitments. Let’s be generous. If the average deal size was $10 million, the total industry commitment would have been $750 million, or less than .02% of the industry’s $4.5 trillion in annual premium.

Can you imagine a private equity firm like Blackrock investing only two-hundredths of a percentage point of its assets in products and ventures for the future? Neither can I.

In all fairness, it is not easy to disrupt the status quo in insurance.  After all, for well over a century, insurance was a game the house almost always won. Other than catastrophic events (hurricanes, tsunamis, floods, etc. — many of which are co-insured by local and federal governments), insurance has been a safe bet if, of course, you are the house.

In the face of change, many insurers have recently undertaken initiatives to break the mold. MetLife recently created LumenLab in Singapore, where a 7,800-square-foot facility is an incubator for innovative startups from outside the insurance industry. But with MetLife’s earning declining more than 19% from 2015 to 2016, is it enough? Aviva, a British multinational with more than 33 million customers across 16 countries, recently launched an initiative to encourage entrepreneurs to develop disruptive solutions. The mission statement reads: “Our mission is to connect with extraordinary talent, uncover breakthrough innovations and give those breakthrough innovations the opportunity to thrive.”  That’s very passionate, but what is the end game?

See also: Insurers Are Catching the Innovation Wave  

True innovation, transformation and disruption are cultural issues, and must be cultivated and encouraged from the top. Most insurance CEOs do not engage in high-altitude mountain climbing, scuba diving or any other extreme sport, nor do they hang out at the Google campus. Most importantly, they do not spend a lot of time in Bangkok or Shanghai. But they should, because that is where the new markets are forming.

There are, of course, exceptions to the rule. The first is Axa, which has created Axa Ventures, a true, well-funded venture capital subsidiary with a mission to invest in disruptive ventures that can actually get to market. The fund is led by Minh Tran, who has a successful history in venture capital and disruption. The second and less obvious group is Munich Re, based in Germany, which has launched numerous digital and venture initiatives. Germany has become a center for insurtech, and, while Munich Re’s efforts are, in my opinion, still not completely coordinated, it is clearly making a company-wide effort.

If insurance carriers want to lead the pack, they must embrace models similar to the one Axa has created, and they must make a corporate commitment to transformational change — especially in emerging markets. Disruption does not happen overnight, but it does happen. And, in a legacy industry ripe for change, it will happen sooner rather than later.

The question is whether it will be led from the inside or whether the industry will be dragged kicking and screaming into the future from the outside.

Why Southeast Asia Is Ready for Disruption

The Southeast Asian insurance market is ripe for disruption. With a growing middle class, rising incomes and a propensity to use digital technology for real-time purchases, the market is now looking for innovative, real-time solutions for growing insurance needs.

The past 15 years have truly been disruptive in SE Asia, with real regional GDP growing at an average rate of 6.5 per annum and household incomes growing to $38,000. Technology development and dissemination is equally impressive. Internet penetration is expected to grow from 260 million users today to 400 million by 2020. The overall SE Asia internet economy is expected to grow to $200 billion by 2025.

Growing economic prosperity is translating directly into rapid and sustained growth in the SE Asia insurance market. Munich Re Economic Research is forecasting overall premiums to increase more than 9.5% in 2017. Life products are expected to do even better, with growth of more than 13.5% per annum. With almost two-thirds of the vast population of Asia-Pacific now using smartphones, insurtech is expected to grow quickly. For example, in Malaysia, the online life platform and startup U for Life allows consumers to purchase life insurance products instantly online. All these factors are laying the foundation for the imminent disruption of the SE Asian insurance market.

See also: Insurtech Ecosystem Emerging in Asia  

True disruption in SE Asia will require a blend of high-tech and high-touch approaches so that insurance companies can keep their relationship with the consumer personal while concurrently ensuring that they optimize the efficiency of the relationship. Technology will continue to develop rapidly, with an increasing use of artificial intelligence, facial recognition and telematics. Winners in the age of disruption will also maximize the use of robotics, process automation and data analytics to make the customer pleasant — or at least not painful.

True disruption will only come when we throw the proverbial book out and leverage technology to reshape insurance. What if you had the ability to purchase insurance, as you needed it, as long as you needed it and at the moment you needed it? Taking it a step further, what if your insurance provider could anticipate your needs and provide you with the opportunity to purchase a temporary policy before you had even thought of it?

Let’s say that you are planning a three-day deep sea fishing trip with your friends. You receive a text from your insurance agent, who has been notified of your trip via social media. He is wishing you a great adventure and for $25 a day suggests an additional $75,000 in accident/life insurance just for added comfort. As you are spending $1,200 on the trip, the extra $75 is a small expense, but the additional comfort is significant.

This is situational insurance, and to get there a number of things will need to happen. First, insurance providers are going to need to develop very robust data sets for the individuals they plan to cover. Providers need to know the basics: age, marital status, income, etc. and then they will need to dive deeper. Providers will need to know people’s hobbies, aspirations, fears, passions and more. Providers then must keep building on the data and keep it timely.

Of course, the devil is in the details! For situational insurance to become a reality, providers will need artificial intelligence, as they must begin to anticipate behavior so that they can begin to develop relevant products and know when a client is going to potentially need them. Getting to this point will take time, as it will require the support of behavioral scientists, statisticians, mathematicians and of course, AI specialists, all working together.

At Soteria, in Hong Kong, we are actively working on this situational model with the support of Mapfre and Allianz. Actuaries like situational insurance products, as the statistical odds of death or a serious accident during a limited period are quite low, even if extreme sports are involved. However, the model will require the support of insurance carriers and regulators, even though continuity and predictability have been thrown out the window.

See also: How to Respond to Industry Disruption  

How close is situational insurance to becoming reality? Five years ago, did anyone really believe driverless cars would exist?

Just don’t be surprised if you get a friendly text before heading out on your next scuba diving adventure.

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.