Even while the Philippines is on track to record a stellar year in premiums for the life insurance industry, a large segment of the population remains uninsured or under-insured.
This substantial and growing group is larger in size and has more purchasing power than the micro-insurance demographic that gets a fair bit of media attention, yet exhibits similarly low insurance penetration levels.
In our opinion, this demographic – termed the Emerging Consumer – presents both the keys for fulfilling the Philippines Insurance Commissioner’s goal of reaching 3% penetration by 2019, as well as providing a significant business opportunity for underwriters.
But, to meet the unique needs of this demographic, insurers will need to tailor their products, distribution, underwriting and policy administration strategies.
The Emerging Consumer
The Emerging Consumer is broadly defined as the large portion of the population that sits atop recognised global poverty lines on the wealth pyramid, but below what can be considered the global middle class.
LeapFrog Investments, a private equity fund uniquely focused on this segment, defines the Emerging Consumer as someone who is earning a daily wage of between US$2 and US$10 (2005 PPP). LeapFrog invests in businesses that provide Emerging Consumers with the empowering financial tools needed to improve their lives, such as insurance, investment and savings products.
In South and Southeast Asia, and sub-Saharan African – the markets served by LeapFrog – the Emerging Consumer segment is estimated to consist of 2 billion people with a combined purchasing power of US$2 trillion.
The Emerging Consumer segment is a large portion of the population in most emerging markets, including in the Philippines. A conservative estimate puts this proportion at 60% of Philippines households – or a target market of at least 60 million people. (see Chart 2).
Under-insured and tomorrow’s middle class
If this huge number is not convincing in itself, two characteristics of the Emerging Consumer demographic make them worthy of the attention of insurers.
First, Emerging Consumers tend to be uninsured, or at best, significantly under-insured. Globally, around 70% of the Emerging Consumer segment falls in this category. These individuals, being above the poverty line, have the financial means to save, and the capacity to purchase insurance products – but at present, they cannot, primarily because they fall outside the financial system.
Secondly, the Emerging Consumer represents tomorrow’s middle class, the growth engine of economies the world over. At the rate the Philippines economy is growing, millions of Emerging Consumers will continue to enter the middle class segment every year, indicating rising incomes and insurable asset values.
Underwriters who are able to acquire Emerging Consumers today will be able to lock in the loyalties of these profitable customers for decades.
A focused approach needed
For risk carriers to successfully capture and serve this largely untapped market, they will need to adapt their approach to the nuances of the Emerging Consumer. Most retail Philippines insurers are focused either on the high- and upper-middle-income segments or on the micro-insurance market.
Emerging Consumers share characteristics with both: they are under-insured, lack familiarity with complicated financial products, demand streamlined and tailored products, but are willing to use insurance as both a risk mitigation and savings device if given the opportunity.
Current microinsurance product offerings are unlikely to provide an adequate breadth or suitably feature-rich insurance products for the Emerging Consumer since their products are designed under the regulatory framework that applies to microinsurers in the Philippines.
Moreover, while the Philippines remains admirably ahead of most countries in the proliferation of microinsurance, a significant portion of these policies are credit life products that provide limited insurance benefits to the individuals, and are more catered for the banks that provide the loans.
As for products aimed at the top of the wealth pyramid, these are meant for people with income levels that are multiples of those for the Emerging Consumer, meaning premiums are often affordable.
Hence, the products and the processes that the Emerging Consumers experience at present, are not designed with them in mind and this results in a large swathe of the population being underserved.
Opportunity for a variety of players
We believe that many players in the Philippines are well-positioned to tap the large and growing Emerging Consumer segment – and this does not just include those that are already in the insurance sector. In fact, innovation may well be driven from outside the insurance industry.
In this age of big data, access to customer information allows companies to leapfrog across traditional industry barriers. Non-insurance companies that hold a big captive customer base are in a strong position to disrupt the industry.
Even if these non-insurance players decide not to become underwriters of insurance risk, they will command a bigger piece of the insurance value equation as the markets puts more of a premium on the access to customer information. We can already see that in the rather hefty price tags that bancassurance deals across the region have been commanding in the recent past.
Sophisticated wealth management approach and alternative distribution models
Philippine underwriters and distributors can take a page from innovative companies in other countries, such as IFMR Rural Channels in India, which essentially brings wealth management to the masses. It uses a sophisticated wealth management approach to customising tailor-made packages of financial services, including savings, insurance and credit, for households’ specific needs. Customers are able to ratchet up and down their insurance coverage and dynamically re-mix their investments, savings, and insurance policies as needs and priorities evolve.
Other examples of companies that have successfully employed alternative distribution models in numerous markets across Asia and Africa are BIMA and Microensure.
One of the ways that they have tapped into the insurance potential of the emerging consumer is by distributing insurance through partnerships with mobile network operators.
In order to do this successfully, they have simplified the entire insurance product / sales / administrations / claims processes. Given the low ticket sizes of the average insurance policy, technology (mobile phones, in this case) has been a key enabler to make the entire model economically viable.
Unique to the Philippines, pawn shops, pharmacies, “sari-sari” shops and other retail networks can leverage their community touch points and trusted positions to expand their service offerings and drive fee income.
As in the examples above, mobile carriers can work with risk carriers to provide insurance as a loyalty benefit in exchange for higher average revenue per user and lower churn.
Success await those who tap the Emerging Consumer segment effectively
The 60 million-strong Emerging Consumer segment remains largely untapped in the Philippines. The risk carrier or partnership that is first able to adapt its products and services to this unique and growing demographic will be well-poised to drive customer growth, premium income, and profitability for decades to come.
Emerging Consumers – tomorrow’s middle class – are asking to be served.
Mr Pritesh Modi is Director and Chief Actuary (Asia) and Mr Alex Nisichenko is Investment Officer, both at LeapFrog Investments.