Take two sales and profit scenarios. Scenario 1: a customer pays $100 for a life insurance plan that costs $20 to market to this customer for a profit of $80. Scenario 2: 20 customers buy life insurance plans for $5 each that costs $1 to market, thus generating the same profit of $80. Shouldn’t this insurance company be pursuing both client segments simultaneously?
In Asia, to date, Scenario 2 doesn’t really exist. It's seen as too costly and time consuming to reach these 20 customers, particularly if they're spread out in rural and semi-rural communities. Instead, companies pursue Scenario 1, gravitating toward acquisition strategies targeting higher-end customers in densely populated regions. But what forces might now drive firms in Asia to pursue Scenario #2?
Demographics in emerging markets are changing. The World Bank cites that four billion people globally are currently excluded or underserved by businesses due to being low-income consumers with income defined between $2 and $10 PPP (purchasing power parity). Their spending power is predicted to reach $15 trillion by 2020 and $30 trillion by 2025, according to McKinsey. This is a population the consulting firm refers to as emerging consumers. They are on the cusp of moving into the middle class. These people can currently afford many products and services, and their purchasing power will only increase over time. But because companies haven’t targeted them, this segment is still vastly underserved. The World Bank estimates that roughly 1.7 billion adults remain unbanked, meaning without an account at a financial institution or through a mobile money provider.
As they rise into the middle class, these emerging consumers will prioritize major life events related to health and wealth, such setting up a bank account, buying a car, having a wedding, starting a family, and sending their kids to school. Given how large this population is, the potential business volume is significant. Think back to the insurance scenario I mentioned above. They can only afford a $5 insurance policy now, but as they become members of the middle class, they will be able to afford much higher cost insurance policies in the future.
Technology to the rescue
It is easier than ever to reach these consumers at scale. No longer is selling door to door the norm. Half of humanity has joined the global economy and they are accessing mobile phones. Mobile technology’s ability to connect people is powerful. Digital helps companies better identify, engage and distribute to customers. According to the International Finance Corporation, over two billion low- and middle-income people have mobiles, but limited access to financial services. Digital technology is fundamentally altering access to financial services. Digital has made reaching these consumers not only exorbitantly easier, but also exorbitantly cheaper. In addition to reaching more consumers, digital enables companies to understand the consumer, allowing for a more relevant product to be tailored and offered to them at a cost they can afford.
Efforts to provide emerging consumers with essential financial products and services to help them rise out of poverty and ensure they don’t fall back into it have been relatively disappointing thus far. Research done by the World Health Organization has pointed out that the biggest cause of people reverting to poverty is a lack of insurance protection, including health insurance, as well as disability and life insurance for the primary wager earners of families. If companies are able to provide products and services to these segments, they can help to drive social impact by providing these people with safety nets and protections as they continue to move into – and stay in – the middle class.
A case study in Thailand
Thailand's Syn Mun Kong Insurance (SMK) typifies this approach in terms of using technology to provide financial services to underserved emerging market consumers. Thailand’s second-largest auto insurer and fifth-largest general insurer is now shifting its business model to target emerging consumers. Thailand’s population is around 70 million people and represents an underpenetrated auto insurance market that grew at an average rate of 18% per year between 2009 and 2012, according to SMK. Insurance penetration remains low, but market demand is accelerating. SMK’s management team recognized this market opportunity and is using technology to drive growth into a lower customer base by shifting its focus to selling insurance online to a generation of consumers new to the technology. Moreover, SMK is not only using technology to reach more clients, but also as part of its underwriting process, harnessing the data it collects on users. This insurer operates to a large extent on a model that involves third parties, where pricing risk can take several days. SMK is now installing software that will allow salespeople to understand the risk and quote a price immediately. Technology results in greater reach and speed.
Companies need to focus on understanding these customers and finding ways to serve them well at massive scale. Once these consumers have access to financial services, they can begin to borrow, start small businesses, gain access to insurance, and build their savings, all of which contribute to economic growth and capital market expansion. Though Thailand is a good example where this has started, it is now playing out across developing Asia, including India, Vietnam, Cambodia, Indonesia, the Philippines, and Sri Lanka. This a massive market opportunity. The real question is not when a company will capitalize on this opportunity, but rather what company is doing well enough to ignore a four billion client segment?
Disclosure: Syn Mun Kong Insurance is a portfolio company of LeapFrog Investments, which is the employer of the writer of this post.
