Written by Yuri Poletto, Guest Blogger on Tuesday 6 March 2018
In the beginning “being macro” was essential. Macro meant efficiency (everyone has heard about the benefits of “economies of scale” but not of “economies of micro”). Big companies contributed to domestic economies more than small ones, and they were more successful in global markets. MBA students wanted to become the CEOs of big companies; micro companies with micro salaries were not very sexy. And that actually made sense. Before the digital age, companies used to realise value through mass production (that let them achieve lower marginal costs), large distribution networks, big customer care teams, and big R&D departments. Large corporations were the kings of the market, and they attracted thousands of new customers by investing 9-figure sums in marketing budgets.
Insurance companies were not an exception, and there was a good reason for that. The bigger the portfolio of risks of an insurer, the more likely it will generate a volume of claims close to the market average. This is good for insurers as their profitability depends on their ability to predict the amount of claims and to build appropriate tariffs. Size counts in insurance, and insurers achieved this by investing a massive amount of capital and selling huge quantities of standardized policies through a large distribution network.
But one day something happened. The insurance industry discovered that size was not a guarantee of success. AIG was the largest insurance group in the world in 2008, when the US Government had to bail it out for $180 billion and save it from bankruptcy.
Recently, start-ups have started doing something that big insurers are not used to: listening to customers. They are discovering that even if many customers are not open to spending £300 to insure their house, most of them would be open to spending £20 to insure just the things they value more, or to get insured just for one day rather than for one year. Micro then starts to make sense in insurance.
Insurance companies are now struggling to grow in developed countries. A recent study from Munich Re reports that in the last 10 years, the insurance industry registered a narrow 2% growth worldwide1. However, there is evidence that insurers can achieve huge growth margins if they start thinking “micro”.
Zhong An is a Chinese insurtech company. Its business model consists of distributing low-price, high-volume (micro) insurance products through a network of over 200 ecosystem partners like the e-commerce giant Alibaba. Their products are designed to satisfy the needs of the e-shopper; the most popular product is a shipping return coverage that accounts for 35% of Zhong An’s GWP. In 2016 Zhong An’s average GWP per client was around $1.49, but they sold 100 million policies per day on peak days, and have a projected GWP of $1.1bn for 2017. Macro results from micro policies. In 4 years, Zhong An’s customer base has grown to over 540 million people. Their customers today purchase an average of 10 policies per year, with an average premium of $1.49. Zhong-An is not selling motor, home, or life insurance yet, but it’s just a matter of time.
Micro insurance is one of the most interesting trends in the actual insurance landscape. The term “micro insurance” was originally created to identify insurance services provided to low-income people, typically in emerging countries. It consists of offering small insured amounts in exchange for small premiums to those groups of people that are ignored or not served by mainstream commercial insurance, or that have no access to commercial insurance or social protection benefits as they have irregular incomes or are not part of formal or recognized sectors. Recently the term micro insurance has stretched its boundaries and now we can identify three different kinds of micro insurance models:
- Small-ticket insurance – BIMA is a Swedish company that distributes micro-policies in developing countries through local advisors and mobile-services operators, and it recently raised a $100 million investment from Allianz. Impact Insurance and Yeshasvini are other micro-insurers that operate in emerging countries. There are other examples of the application of the small-ticket insurance model in Europe and in the USA. Indeed, if we think of micro insurance as insurance products that combine reduced coverage with low prices distributed through alternative channels, we realize that insurance products like tyre insurance, extended warranties for home appliances, gadget insurance and travel insurance, fall within the small-ticket insurance family. Based on recent research from Accenture, the market size of small-ticket insurance in Europe was equal to $13.5 billion in 20132, and it’s steadily growing.
- Single-item insurance – Technology is enabling the development of new business models built around the micro insurance concept. Trov is a US start-up that gives people the opportunity to insure single items, such as a guitar or a videogame console. Back Me Up is a brand of the insurance group Ageas, that allow people to insure specific items, ranging from glasses to furniture.
The aim of companies like Trov and Back Me Up is to meet customers’ unsatisfied needs, thus penetrating new segments of customers (typically younger) that either can’t afford traditional comprehensive insurance coverage, or are not interested in getting insurance for a house that they don’t own or for a car that they only occasionally use.
- On-demand insurance – Slice is an American start-up that has developed an insurance proposition for the gig-economy based on the on-demand model: when a customer needs coverage for a few hours of the day or a few days of the week, the start-up provides coverage just for that “slice” of time. Slice directly distributes insurance coverage through their website, and they also provide their on-demand solutions to insurance companies through their cloud service platform, as shown by their recent partnership with Legal & General in the UK. Cuvva, in the UK, is another example of a start-up that provides on-demand insurance: it provides UK young drivers with the opportunity to get insured for a single journey without purchasing a comprehensive motor insurance policy.
Despite the micro insurance model seeming very different from the traditional insurance model, micro insurance should be viewed as an opportunity for insurers to explore new growth paths. Instead of stealing customers from each other by reducing their prices and margins, micro insurance allows insurers to enter market niches previously unexplored and win new customers through insurance solutions that are relevant, accessible, and affordable.
To leverage this opportunity, insurers should identify those opportunities in the market that best fit with their strengths and weaknesses and, alongside their traditional business, develop a new micro-insurance value proposition.
The insurance industry is not going to be disrupted by micro insurance, but those insurers that invest in this direction are more likely to gain a competitive advantage that will last in the long term.
1 Insurance Business Magazine – 21 April 2017
2 Big opportunities in small-ticket insurance (Accenture white paper-2013)