Toward the end of last year, we published our predictions for the insurance sector for 2023. One of the projections included a 20% increase in policy lapses as consumers struggle with the cost-of-living crisis. This situation will hurt insurers, with many considering cost-cutting to compensate for lost revenue. “When in trouble, always cut costs” is a fallacy, because cost-cutting is limited and cost cannot go below zero. How about finding a more sustainable solution by expanding the market size and creating a colossal business opportunity?
Insurers Must Focus On The ‘S’ Of ESG To Grow The Market — And Their Revenue
Most insurers view regulations as a necessary evil (this is a highly regulated industry and incurs a high cost associated with regulatory compliance). As environmental, social, and governance (ESG) regulation becomes the norm, it’s unsurprising that a portion of the insurance industry automatically reacted: “OMG, here comes another regulation!” Due to the close dependence between the insurance industry and the environment, the ‘E’ of ESG has become the focal point of all ESG discussions. But what about the ‘S,’ the middle child? This part appears to be an aside.
The social component (S) of ESG is an ample business opportunity for the ailing insurance industry and its leadership teams. It satisfies regulatory requirements (for example, ESG reporting) and can potentially facilitate insurers’ growth and profitability by targeting an underserved customer segment. A matchbox calculation on publicly available data produces a bleak estimation of the number of uninsured individuals worldwide. This calculation includes mandatory insurance such as health insurance in the Netherlands and auto insurance in India, so at best, this is a conservative estimate. Africa has the highest uninsured rate at approximately 92%, followed by Asia, South America, and Oceania at about 60% each. I estimate North America to have 50% underinsurance in the life insurance sector and 15% noninsured in the mandatory (in most states) car insurance sector. So the opportunity to insure the uninsured and underinsured is immense. With inclusive insurance, society will benefit, and the increased number of insured individuals can raise insurers’ revenue.
By providing low-income or marginalized individuals and families with insurance products that are suitable, accessible, fair and equitable (SAFE), insurers can tap into new markets and customer segments. The following includes a list of advantages that such a strategy would bring to insurers:
- Increased revenue. The World Resources Institute talks about 4 billion people sitting at the base of the economic pyramid. These low-income consumers are a good indication of the vast number of uninsured and underinsured. Selling insurance to just 1% of this group would expand market size by 40 million. Apart from top-line growth driven by simple inclusion, it would also increase cross-selling opportunities and reduce operating costs through economies of scale, thereby increasing profitability.
- Customer acquisition and retention. Insurers can increase customer acquisition, retention, and satisfaction by offering innovative insurance products that meet more comprehensive customer requirements and preferences. For example, 75% of Gen Zers prefer buying sustainable products. Profitability over the long term and increased customer loyalty are potential outcomes of inclusive insurance.
- Risk-spreading. By distributing risk more evenly across a larger group, inclusive insurance can assist insurers in reducing their overall risk exposure and maintaining a more stable financial position. Inclusive insurance can lead to more predictable and reduced risk exposure through the benefits of the law of large numbers, diversification, improved risk assessment and pricing, lower capital requirements, and lower capital costs.
- Enhancing of reputation. By prioritizing inclusivity and social responsibility, insurers can improve their reputation and attract new values-based consumers and investors who value companies that prioritize ESG factors. This may result in increased market share and profitability.
Breaking Down Barriers: Deliver Inclusive Insurance Profitably
Implementing an inclusive insurance strategy has its challenges. To make these low-margin products profitable, insurers need to achieve significant scale. But there are issues with the distribution of insurance solutions and with low connectivity or the high cost of digital devices and data. This segment also needs higher literacy. To overcome these challenges, insurers should:
- Engage in private-public partnerships. The government, other industries such as telecommunications (which can provide inexpensive data), and the insurance industry must collaborate to overcome these obstacles. For as little as INR ₹436 (USD $5.26) per year, the Indian government offered life insurance coverage of INR ₹200,000 to individuals aged 18 to 50 with bank accounts. The Life Insurance Corporation of India and other life insurers developed this product with affordable premiums. The Jio-led (telecommunication provider) journey of low-cost data usage pricing alleviated the logistical difficulties and enabled digital. Other examples include National Health Insurance Scheme in Ghana, the National Flood Insurance Program in the USA, and Rashtriya Swasthya Bima Yojana in India.
- Launch new SAFE insurance products to meet the needs of this segment. In other instances, insurers could offer insurance products aimed specifically at excluded consumers. MicroEnsure collaborates with mobile network providers and other alternative channels to market and sells its affordable insurance products in Africa and Asia. BIMA is a provider of digital microinsurance in the emerging market. Two more insurers that have developed similar solutions are Toffee Insurance in India and Pioneer Insurance in the Philippines.
By offering insurance products that meet the needs of marginalized and low-income populations, insurers have a unique opportunity and responsibility to promote financial inclusion and social equity while also growing the insurance market.
Insurers: The S in ESG represents a superpower rather than just a letter that can help you succeed in a competitive and complex world. So don’t be shy: Be social, and show that you are solicitous. Connect with me through an inquiry or guidance session to discuss the usage of S in ESG in the insurance industry and how you can make the most of it.