Industry Opinion: Distribution is King

There is no demand for insurance.  Insurance is sold not bought.  Distribution is king.

These maxims describe the nature of the retail insurance business worldwide; whether in fully mature markets such as Europe, United States and Japan, or emerging markets such as Russia, Uganda, India or Guatemala.

No Demand
No one wakes up in the morning and says, "I need to buy insurance."  As opposed to the latest IPhone/HTC Legend, IPad/Kindle or cereal, people don't respond to a television, print, radio or billboard add by going immediately to a retail outlet and pulling the latest insurance product off the shelf.  Consequently, insurers invest little money on advertising as response and/or top-of-mind rates do not generate profitable returns.

Experienced insurance professionals attribute the general disinterest to overall aversions to the "tragic" or "difficult" that may or may not come to pass.  People generally do not think, or want to think, that someone in their immediate family could suffer a death or illness.  In many Asian cultures, the topic of death is taboo and thus insurance companies' talking points emphasize education for children.  Likewise, people do not want to think that something sporadic and outside their control such as an earthquake, hurricane or fire could wipe-out their livelihood.  The difficult nature of quantifying the actual value of assets and the cost for their protection from something with low probability magnifies these aversions and uncertainties.

Certainly, exceptions to this maxim do exist.  Mandatory automobile insurance has prompted very strong direct to consumer operations whereby television, billboard or print adds invite clients to contact the insurance company via the telephone for a quote on this commoditised insurance product.  Aflac's quacking duck sells supplemental, work-based insurance through television and print advertising.  And, event marketing such as raffles and golf tournaments put insurance brands in front of specific consumers.  However, each of these exceptions comes with the caveat that insurers still must sell the insurance to the client.  A telemarketer still must sell car insurance to the client who calls in response to an advertisement, the employer usually must establish and serve as the distributor for Aflac's coverage, and event marketing usually targets distributors of insurance such as brokers or large companies.

Consequently, for those of us who have built profitable, sustainable insurance businesses in a variety of markets, the intense discussion of the "demand" in the microinsurance sphere seems to miss the nature of the business.  We scratch our heads as donor or taxpayer monies pay for studies to assess market demand when worldwide practices of insurance suggest those hard-won dollars could be used more effectively on developing important facets of the industry.  Yes, awareness of insurance grows as markets develop, but the drive is not demand but selling, and thus distribution.

Sold, not bought
Insurance is sold, not bought; it represents the classic and perhaps extreme example of a push market.  The sales process starts by insurance companies or intermediaries identifying risks or needs of people or companies.  Once clearly identified, they construct products to cover those needs by looking at worldwide or local practices and running them through various profit testing scenarios to identify those with the most potential for profit and growth.  Then, they test product variations through focus groups that allow them to tailor products to sell profitably to the targeted population.   Thereafter, companies determine how to sell the product; often testing several sales arguments and distribution methods.  The company or broker often can bypass focus group stage with enough experience from elsewhere and go directly to the distribution testing phase.  Once the company has found the most cost effective and expansive sales argument and distribution method, they roll-out the product, making necessary adjustments along the way.  Obviously, if the focus groups flop entirely or the testing phase of distribution proves ineffective, the insurance company either modifies the product and sales process or discontinues the endeavor entirely.

For microinsurance, a look at product development for the mid to low income segments in mature and emerging markets can prove extremely valuable.  Companies have followed the above process to move "down-market" by developing and selling low-cost, simply underwritten products such accident, health and life through a variety of distribution methods.  Consequently and thus for years, insurers in Spain and many other markets have sold simple products in an informative and ethical manner over the telephone or over-the-counter (OTC) in a matter of minutes to people with relatively little knowledge or understanding of insurance.    The product arrays on the current microinsurance landscape suggest this emerging industry has taken learnings from more developed markets and applied them, including the pioneering A&H credit life product in Africa.

Distribution is King
Without distribution, insurance companies cannot sell their products and thus cannot exist.  Distribution involves two key components:  1) relatively easy and efficient access to clients and 2) a simple payment mechanism to transfer premium from the client to the insurance company.  If you build it, they (insurance companies) will come.

Insurance markets vary in their development due to insurers' ability build profitable distribution channels.  Over the years, distribution in developed and emerging markets has evolved as companies sought more efficient methods to sell their products.  These distribution methods include tied-agency networks visiting families and companies to provide products from one company; independent and/or large networks of brokers providing multiple lines from various companies for individuals and companies; bank distribution providing mainly life insurance products to their customers, and; finally, direct to consumer operations selling marketing of simple life, accident, health and property products via telephone and mail to customer databases or lists.

Microfinance institutions (MFIs) have proven to be kings for microinsurance precisely because these institutions have direct access to clients and an easy way to pay for the insurance.  Often through an obligatory, group cover, the borrower must take the insurance along with the loan in an efficient process that packages the loan with the insurance.  Ideally, MFI (or any other lending institution) sales staff explain and illustrate the insurance cover, its cost and the claims process during the sale of the loan.   The client then either pays for the insurance via financing on top of his/her loan or through a deduction from the loan disbursed.  The MFI then passes along the premium to the insurer through a clear invoicing process.  The fact that credit-life product offerings often include non- traditional term-life (funeral) riders for clients and family members and  catastrophic riders (credit-life+), and that the cost of this insurance can come up to a 50% discount over traditional credit life cover in more mature markets underlines the distributional strength of MFIs in their respective markets.

On the other hand and from a business point of view, microinsurance has much to offer MFIs.  First, Credit life+ allows MFIs to manage the risk of default due to death in the family.  Often MFI clients are small, family-owned and operate shops and the death of the client, spouse and/or children can have a severe effect on the client's ability to repay the loan as productivity and revenues can fall.  Lending institutions can be tempted to take this default risk upon themselves.  However, most regulatory environments mandate that lending institutions move this risk off their books to an insurance company, even if wholly owned by the bank.   This underlines the importance of outsourcing the risk to an institution with professional capacity to understand and thus underwrite the risk.

Second, credit-life+ allows the client to manage risk in a cost-effective manner that removes liability of her or her family for repaying the loan while providing additional monetary assistance should something tragic occur.  A simple illustration:   A client taking a $300 loan and getting a credit-life+ cover of the loan balance plus $600 for funeral/other benefits, would pay $3.00 for the insurance benefit at a 1.0% rate on the loan.  If a client and/or spouse suffered a loss two months into the loan, they would have the loan balance paid off (simply at $150) and receive $600 for expenses.  If the client did not have insurance and had to take an emergency loan for $750 ($600+$150) for four months at 50% EAPR, client's family would pay approximately $125.  Should a client establish a savings account to cover a tragic event of equal value, he/she would need to deposit $188 per month over a four month period to cover the $750 value provided by the insurance.  Given the tight constraints on the disposable income of MFI clients, $1.50 looks like a very favourable risk management option, especially when the client most likely cannot get this cover in the open market.

Third, microinsurance can generate solid net income streams to MFIs.  Lending institutions spend an incredible amount money building distribution and thus there is incredible, inherent value in this distribution.  Product providers such as insurers, money transfer services and others are wiling to pay commissions to lending institutions for access to this distribution.  Generally, the income initially comes from distributing credit-life insurance.  With time, lending institutions get into more direct to consumer sales through over the counter or telemarketing to their databases.  Worldwide, lending institutions in competitive markets can generate up to 30% of their net income from insurance.  If the institution is in start-up mode, the percentage becomes even higher; up to 30% of net revenues.  As "free money" dries up and MFIs strive to run profitable, sustainable businesses, MFIs ignoring this worldwide market practice due so at the own peril and most likely risk the sustainability of their enterprises.

Microinsurance has lagged in its development particularly because insurers have had few options aside from MFIs to distribute to low income households and businesses.  The low cost, low ticket products preclude the development of expensive agency and/or brokerage distribution.   Likewise and in the past, the lack of technology prohibited more sophisticated direct to consumer methods that many companies use to access the lower income market as in more developed markets.  However, microinsurance maybe on the cusp of a more rapid development as ubiquitous mobile phone, money transfer and other services are starting to present excellent opportunities for insurers to reach these populations.  Mobile phone companies and money transfer services, have access to enormous number of customers and easy payment mechanisms.   The payment mechanism cannot be over-emphasized:  again taking a cue from direct marketing, companies lose 50% of potential insurance customers on the phone, once they begin asking for a payment mechanism - credit card, bank account….  Given these opportunities, the fact that these businesses see value in their distribution, and they are looking to maximize their revenues - just as lending institutions do worldwide - microinsurance should have the some excellent opportunities for expansion.

After working in a number of varied markets over the years, one can see the fundamentals of building and managing an insurance enterprises spread from market to market.  In short markets are more similar, than dissimilar especially if trying to establish a profitable, sustainable insurance business and industry.  In the end, people do not demand insurance, insurance is sold and distribution is king.  The more microinsurance practitioners recognize these maxims and develop ways to sell and distribute insurance products, the more quickly people and companies will be able to mange their risks and the industry can grow to more than 1% of worldwide premiums.