Written by Richard Leftley and Peter Gross
Mobile insurance has established itself as one of the fastest-growing business models in mobile financial services in emerging markets.
Although MicroEnsure did not invent mobile insurance, many of the fastest-growing models are now based on the “freemium” product we built for Tigo Ghana in 2010 and have since launched in 13 other markets across Africa and Asia.
As mobile insurance has grown, a debate has emerged regarding high-touch vs. low-touch distribution models. In high-touch models, agents are used to sell and educate customers, whereas in low-touch models, the majority of sales and education occur through a mix of above-the-line channels, such as radio, TV, billboard; and below-the-line channels, such as SMS, USSD, balance notification, and IVR.
The primary logic for utilising agents in MicroEnsure’s original model in Ghana was that, because typically 90% of mobile insurance customers were previously uninsured, these customers would need a high level of education prior to deciding to take the product. During its initial roll-out, however, MicroEnsure discovered that customers were more than willing to take up a free mobile insurance product based on its perceived value and connection with a telecom brand, whether or not an agent was present to explain the product.
As a result of this experience, MicroEnsure has chosen primarily to utilise a low-touch distribution model in its mobile insurance business. The primary rationale for this choice is as follows:
1. High-Growth Models Require Low-Cost Distribution
As documented in multiple studies, “freemium” insurance – where subscribers receive insurance for free in return for meeting minimum spending requirements for the partner telecom – has established itself as the fastest-growing model in mobile insurance. MicroEnsure is aware of at least 22 freemium insurance models launched since 2010, and yet the most recent model to have been launched with an agent distribution model was launched two years ago, in June 2013. In fact this example, where free insurance was distributed by agents, is striking because although the telecom has more than 55 million customers, industry information indicates that fewer than 3% of telecom subscribers were signed up for insurance within the first two years, and the product providers have communicated that the service would be cancelled in July 2015.
By contrast, when MicroEnsure launched its freemium product on an agent-less basis with Airtel Nigeria, the product reached 3% penetration of the subscriber base in less than 6 months. Agent-less mobile insurance has truly demonstrated that, when the value proposition is sufficiently high, insurance can be “bought” and not “sold.”
The lesson for MicroEnsure is that agents neutralise the large user base availed by a telecom partner, as the product can only grow as fast as agents can sell it. As a result of the smaller risk pool, underwriting is more expensive, and the resulting price of the insurance product must increase. More importantly, however, agents increase the end price to the telecom; MicroEnsure was told by one of its telecom partners that an agent-led model offered by a competitor was more than 300% more expensive than an agent-less model. Without a telecom’s willingness to pay, the high-growth freemium model is dead on arrival, as the last two years of mobile insurance market history have demonstrated.
2. Benefits are the Best Education and Retention Tool
The initial argument for using agents was always that uninsured, low-income customers needed to be educated about insurance prior to deciding to take a product. MicroEnsure has found in its 12-year history, however, that low-income customers are very well-educated about risk because they face it on a pervasive and various basis. In other words, whereas rich customers must be sold on insurance, due to the relatively low level of risk they face, low-income customers are well aware of risk and merely need to find solutions to help them manage their risk.
This awareness of risk in the consumer base has led MicroEnsure to continually increase the benefits available in its free insurance products. Whereas our mobile insurance model started by offering life insurance only, in 2014 we added accident and hospital cash insurance to our core mobile insurance offering in Africa, calling it “3 for Free.” The increase in benefits has led to an increase in claims, which is also correlated with an increase in subscribers. As a case study, we launched the same “3 for Free” product (without agents) in a market where we had previously offered free life insurance only (with agents), and we saw a drastic increase in claims (1,000%) and policyholders (450%) during the first year.
Our agent-driven competition, however, has gone in the opposite direction, reducing product benefits in order to cover the high cost of agents. One competitor in Africa launched a personal accident cover in 2014 with 300 agents which was priced at a significant premium to existing market rates as a result of the agent costs. Based on MicroEnsure internal analysis, the cost of sales on this personal accident product represented at least 75% of the retail price to the customer, indicating that the economics are likely insufficient to generate durable customer value.
In essence, when you remove the high cost of agents, you can provide meaningful benefits that consumers appreciate and can reasonably expect to receive, whilst achieving excellent penetration and loyalty benefits for telecom partners. In contrast, with agents, mobile insurance customers are well-educated on products that will never benefit them.
3. Agents Turn Mobile Insurance into a Jobs Programme
In conclusion, then, when agents are involved in mobile insurance, consumer benefit by definition must decrease.
Insurance is simple math, and mobile distribution makes insurer margins increasingly thin. Therefore, operators must choose where they want to create value. When agents are involved, the agents themselves clearly benefit from having a job; however, because customers receive little tangible benefit, such a programme can hardly be said to be designed for them. Agent-led mobile insurance models benefit thousands of agents (as well as the companies that own them), but not millions of customers.
In the perspective of MicroEnsure, if agent fees – instead of customer benefits – continue chewing up the lion’s share of small mobile insurance premiums, such models are unlikely to see high renewal rates, and are equally unlikely to create durable financial inclusion.
Consumers at the Bottom of the Pyramid, who must be the most value-sensitive consumers of all, are sure to prefer models which provide value for money over those which merely micro-ize the traditional insurance gimmick of collecting premiums with no expectation of claims.