A lot has been said about low insurance penetration in Pakistan and many professionals fear that it may further deteriorate in the face of rising inflation and ongoing economic challenges.
Average Pakistanis, whose earnings are roughly $4 to $30 per day, are mostly excluded from insurance, even though they are often the primary target, especially of digital insurance. While struggling to put food on that table amidst historically high inflation rates, these people find it hard to spare money to purchase insurance products.
As an active practitioner of insurance in Pakistan, as well as regional emerging and frontier markets, I confess that as an industry, we are finding it hard to overcome some of the myths hardcoded in our approach. Let’s take a look at some common myths and try to bust them with empirical evidence:
Claims when paid quickly and frequently generate more promoters than detractors and that in turn helps grow revenue and profits
Myth 1: insurance is always sold, never bought
Over my career, I always heard from colleagues that ‘insurance is always sold, never bought’. As discomforting as it sounds, the statement makes one wonder if insurance has any innate value.
Built on the principles of social welfare, insurance offers a mechanism where many chip in small amounts of money which is made available to those few who suffer a predefined loss. It is a sophisticated and valuable risk mitigation tool.
Perhaps the concept of ‘contributed by many, benefit for a few’ is something that makes some people believe that it is not for them, and they are imposed upon by providers.
This lukewarm demand and ‘always sold’ mindset has given rise to intermediaries such as insurance agents, brokers, banks etc. Sitting between an insurance company and a potential buyer, intermediaries carry out the job of distribution. This business model is so deeply rooted that it is almost impossible for a retail insurance business to imagine distribution without a middleman.
Intermediaries are normally remunerated with a commission taken from the premium they bring in from buyers. The very nature of compensation structure leads to, at times, forced and foul selling and hence the adage that insurance is sold, never bought.
With the emergence of digitisation, we have been introduced to the concept of InsurTech — technology to deliver insurance. The concept brought along the idea of commoditising insurance and hoping that people purchase it the way they buy other things online or in marketplaces.
The awful experience of Covid-19 fast-tracked digitisation and changed the way people carry out day-to-day transactions. However, compared to other financial services, people are still less likely to buy insurance all by themselves.
Myth 2: buying insurance digitally requires literacy
Commonly used services such as the internet, social media, ride-hailing and e-commerce platforms were non-existent a couple of decades ago or so. All of these require some level of understanding and have been adopted by a large number of people.
If people can embrace these products and services, why not insurance? The answer to this question is multifaceted but a simple interpretation is that digital products and services take general literacy and other dynamics of the target market into consideration and bring products to their level rather than expecting customers to reach the products’ level.
In order to test this hypothesis, we teamed up with some well-known brands providing common digital products and services to the masses and offered insurance creating the same processes as are found in non-insurance digital products or services. Interestingly, the customers, some 95 per cent of those who never had any prior insurance experience, responded in almost the same way as they would to non-insurance products and services.
Myth 3: it’s all about distribution
Contrary to the common perception, insurance growth is actually driven by a strong delivery model — distribution is a part of the overall delivery of insurance.
Customers are smart and expect more than just a product. Hence there should be an emphasis on delivery as it comprises several components such as marketing and education, distribution, easy sign-up and enrolment process, Know-Your-Customer capture, premium payment, customer engagement, servicing and claims.
Myth 4: claims are losses
One of the conventional beliefs in insurance is that claims are losses and must be avoided at all times. This is equal to saying that a restaurant classifies the cost of food you have consumed there as a loss as opposed to the cost of goods sold!
In defence of insurance suppliers who often deal with low frequency–high impact risks, a few claims of exorbitant amounts can cause a significant difference hence the prevailing attitude against claims.
However, when you shift from a small niche to the mass market, the tables are turned and you are dealing with high frequency–low impact risks and claims there play a key role and should be viewed as a cost of growth as opposed to losses. Claims when paid quickly and frequently generate more promoters than detractors and that in turn helps grow revenue and profits.
The writer is the CEO of MicroEnsure Pakistan (Private) Limited
Published in Dawn, The Business and Finance Weekly, July 4th, 2022