2014 Latin America Outlook

2014 Latin America Outlook
The following text was published today in Inter-American Dialogue’s Financial Services Advisor under the title: “What is driving the insurance market in Latin America?” I provided my view to FSA in advance, and now that it is out there I thought it made sense to share it with you through our blog. Growth continues to be a common theme throughout the region, though not at the same pace that before and not equally in all countries. The Pacific Alliance countries have been growing faster than Mercosur countries, for example. Insurance in Latin America has its own dynamics and has been growing year over year, even beyond GDP increase, and is expected to continue this trend through 2014. A growing middle class is driving insurance buoyance in the region, with Brazil much setting the tone. Estimates indicate that 40M people have gone from living in poverty to the middle class in the past decade in Brazil. Nevertheless, there is a large number of people in the base of the pyramid (BoP) which is also of interest of insurers. Infrastructure investments, trade, and group life and benefits to attract employees are key drivers for commercial insurance growth. We are seeing moves towards consolidation in certain countries which are imposing stronger capital requirements and also acquisitions and new entrants into high growth potential markets, such as Brazil, Colombia and Peru. Competition is increasing and new segments are being targeted with more focus. All this is driving higher investments from insurers as well as competition for qualified talent in the marketplace. Some countries are moving towards a stricter risk-based capital measurement, and the rest should move in the same direction as part of a global and regional trend. In many countries sales practices are far from innovative and what customers expect to be. There is a need to evolve in the use of distribution channels and provide a better customer experience. Most insurers are still tied to legacy systems that impose a burden to become more competitive, efficient and smart. Rising inflation, weakening of financial market due to lower quality of loans (as they compete for the raising middle class); lower demand of products from China (mostly commodities), Europe and USA, and risk aversion from foreign investors are some of the concerns shadowing the region’s potential.

Customer segmentation, fad or future?

Customer segmentation, fad or future?
Traditionally insurers have been structured by line of business and some have grouped those around personal lines and commercial lines to differentiate businesses from people. With the opportunities of varied distribution channels and more sophisticated technologies insurers are starting to be much more granular in their view of the customers. Insurers have now the chance to move from their traditional top notch markets and be able to create an offering to attract the different segments. Some of these moves include Microinsurance targeting people in the base of the pyramid and Small and Medium Business (SMB) insurance products. Microinsurance products are being launched almost every month in different parts of Latin America. Most recently it was announced that Asomi and Redcamif will be launching an initiative in El Salvador with life insurance policies written by Pan American Life Insurance Group (Palig) with premiums as low as $0,68 per month. Some brokers, large ones, are moving into the SMB market but using its affinity platforms instead of their commercial platforms to support this business. While originally SMB should have fallen into commercial, they realize that it requires processes and the agility expected also in their affinity business. In another interesting move, Metlife Mexico announced yesterday the creation of a new division that will sell to socio economic segments C and D and to young people, those that are not the usual target of insurers. According to the classifications developed by AMAI, a Mexican association, the country’s population is divided into five segments: AB (people with high purchasing power and income), C+ (people with higher-than-average incomes, whose families are headed by someone with a college degree and have at least two cars), C (people with middle incomes, whose families are headed by someone with a high school degree and have both a car and the ability to take one trip per year), D+ (people with incomes slightly below average, some secondary education and no family vehicle), D (people with low income levels and a fairly austere way of existence, who have a primary school education and who lack access to traditional banking services). Metlife Mexico will be offering simple and flexible products while also developing better distribution channels, with emphasis in the use of technology. Software vendors are coming in also to provide solutions towards being more granular. Solutions around analytics to better understand your customer, digital to better serve them and master the points of contact, core processing and BPM to adjust your products and processes accordingly, just to mention a few. Last year Guidewire presented its vision on how a core system will be able to support customer segmentation already delivering some required functionality. Core systems are just another gear in the engine and it’s important that vendors acknowledge how they need to integrate into other solutions for the insurer to be able to deliver a customer segmented value proposition. While I believe customer segmentation is where the industry needs to go, it is not without huge challenges. Insurers need to address the differences and purchase attitudes of those different segments.  Omni-channel is one of the aspects, but also dealing with channel conflicts and regulation. Products need to be tailored in a way that can be flexible but capable of scaling massively, and this means looking into pricing, packaging, marketing, distribution and servicing. Processes need to be adjusted in order to provide the correct value to each segment. At the end of the day you don’t want to be perceived as under-performing and not providing the required value, but neither you want to over deliver if this means excess of cost and important cuts in your margins. My final thoughts for you. How will your structure look as you move into serving segments? How will this affect reporting and statistics by the way, which today is seen by line of business (even by regulators)? Are you ready? Are we ready?

Microinsurance as a Disruptive Force

Microinsurance as a Disruptive Force
Some of you may be familiar with Michael Raynor’s work around disruption. In his latest book he refers to being deliberately disruptive and how most companies that disrupt powerful incumbents start out focused primarily and often exclusively on connecting with a specific segment of the market, one that is poorly served — or not served at all. The microinsurance market is, with no doubt, an excellent source of innovation for insurers. It matches perfectly with the underlying conditions required for disruption to occur. Microinsurance is a foothold to an underserved, untapped, and fragmented market with a high cost to serve under the present business model. Innovative approaches to serve this market, including the required technologies, could afterwards be used with success upmarket, where insurers could benefit from agility, scalability, low operating costs, and the lessons learned by servicing a market with totally different dynamics. Innovation around product, pricing, packaging, distribution, processes, and technology, just to mention a few aspects, will be required skills. A good example is Bradesco Seguros in Brazil. Bradesco offers Accidental Death through a product named “Primeira Proteção Bradesco” which sold 1.3 million policies within the first year with monthly premium of US$3.50, single benefit of RS.20,000.00 and 1 monthly sweepstake of RS.20,000 (US$ 10,800). In fact, sweepstakes are an important marketing tool; apparently the most important motive for customers in buying the insurance product.  Distribution is done through Banco Bradesco’s own network of +3,500 branches, +25,000 banking correspondents (supermarkets, pharmacies, grocery stores, etc.) and mobile (sms). For those cities and villages close to the Amazon River, accessible only by boat and out of Banco Bradesco’s traditional network, it required technological support and some inventive: Banco Bradesco introduced a boat containing a bank branch. Technology, such as web/mobile on.iBusiness and traditional POS, is used by agents and correspondents to manage the complete end-to-end process. Focus in simplicity and speed using an accelerated enrollment process by capturing customer data from the CPF or Social Security number. Banco Bradesco has years of experience financially serving the segment market aimed by microinsurance and they are taking advantage of this, though they encountered some more challenges you can read about, along with more real cases and in depth discussion around Microinsurance, in our recent report “Microinsurance in Latin America: Disruption in Practice” at http://www.celent.com/reports/microinsurance-latin-america-disruption-practice

Microinsurance evolution, a Latin American perspective.

Microinsurance evolution, a Latin American perspective.
Microinsurance is referred to the type of insurance that aims to the base of the pyramid (BoP) population, generally those ignored by mainstream commercial and social insurance schemes. It emphasizes the importance of understanding the needs, preferences and characteristics of this target group: the low-income household, the working poor and the under-served. Microinsurance has the potential to play a very important social and economic role by breaking the vicious circle of poverty and vulnerability that affects the low income segments of the population. It can also help local economies by redirecting funds to be invested into high-return/high risk assets, that otherwise would be allocated in low return investments or even kept without investing. The potential market for Latin America is estimated in 360M of people, and for many insurers it is a huge opportunity to position its brand in a population that eventually will demand more insurance products. When you look into these markets you can distinguish 3 clearly separate phases of evolution of Microinsurance:
  • Phase I: Easy products to administer, such as mandatory life insurance tied to micro-finance products.
  • Phase II: Products get more sophisticated providing more options and benefits, turning into voluntary schemes, usually based on health, life and funeral insurance type of products while adding distribution channels to reach a broader audience.
  • Phase III: More complex products with emphasize in adding value to customers and an extended network of multiple distribution channels.
Currently Microinsurance in Latin America is doing pretty well in Phase I and is walking through Phase II. The major challenge nevertheless resides in including more commercial oriented products which typically are developed in Phase III, such as index-based insurance products. Technology plays an important role in supporting microinsurance strategies as they require an innovative approach in areas such as product, rates, distribution, claims and collection. Agility, scalability and high volume-low cost processing are important features for insurers to consider in their supporting systems. In our experience most of insurers in the region struggle to obtain these features from their current systems and enabling those innovatives approaches, which by the way, are also desirable to serve the upper-income segment. Are your systems up to the task? Feel free to comment!

Micro-insurance — Thinking innovatively in targeting the uninsured

Micro-insurance — Thinking innovatively in targeting the uninsured
On a recent trip to South Africa, I was interested to see some innovative ideas targeted at the uninsured, currently around 90% of the population. South Africa, along with other emerging economies, face many structural challenges impeding the broad adoption of insurance. Remote areas of the country have poor road and communication infrastructure. Almost two-thirds of the population have no bank account. Accessibility to financial services is low as is the understanding of the value of such offerings. In a bid to rectify this, the government put in place targets back in 2003 for the financial services industry. The banking sector had to introduce a low cost bank account, now in place, and the insurers had to commit to massively increasing accessibility to insurance. The low cost bank account, called Mzanzi, is standard debit-card based account attracting no service fees. The insurers have accepted the challenge and plan to increase current penetration rates by 180% over the next five or so years.

In my conversations with South African insurers, it’s clear that whilst committed to these targets, tapping into the previously uninsured market remains immensely challenging. The innovation is mostly occurring in the area of products and premium collection. Tying product requirements to the needs of the uninsured is a sure-fire way of garnering interest. House, motor policies have little relevance for those who own none of these assets. However, household contents policies, funeral policies and term life are of interest.

One of the constraints for insurers has been and still is the collection of premiums. With many people not having bank accounts, credit/debit payments or direct debits are just not possible. Mobile phones are being used in one or two cases to purchase insurance. Voucher cards, paid for by cash upfront, offering term life insurance can be bought at supermarkets and other consumer outlets.

Technology can play a role in supporting this small but growing market. Low-cost policy administration and claims systems can form the heart beat of such an operation supported by a flexible product configuration tool. There is little need for broker/agent or consumer portal technology. Products in these markets such as shack insurance, life insurance for a month, or crop insurance may seem unusual but can be supported through the use of modern packaged tools. One of the more unusual product characteristics is the method of premium collection. For example, premium paid upfront, or monthly, or paid via a mobile phone account (or other third party collector). This flexibility needs to be supported a modern product configuration tool.

In South Africa, as in some other emerging countries, tapping the previously uninsured is a government enforced social objective and this has focused insurer’s attention on this challenging area. Micro-insurance is unchartered territory and as such it’s not possible for insurers to look to established markets for best practices. Successful insurers in these markets will continue to innovate in areas of product design and premium collection and this analyst will be keeping an eye on how this market evolves.