EY Operational Excellence For Insurers
EY Operational Excellence For Insurers
EY Operational Excellence For Insurers
Contents
Introduction Executive summary The opportunity: insurance for the emerging consumer Effectively targeting emerging consumers 1 3 5 9
Operational excellence: a holistic business transformation approach 13 Investors take why operational efficiency is critical for insurance investment 17 Conclusion 19 Express Life making a difference in Ghana Investors take profile of LeapFrog EY: helping to transform the insurance business in emerging markets 20 21 22
Introduction
We are pleased to present this report which explores the opportunities and challenges of selling and providing insurance to low-income customers, and shows how an organization can use an operational excellence approach to operate efficiently and, thus, sustain profitability. The report is a collaborative effort between EY and LeapFrog Investments, a profit-with-purpose private equity fund and the worlds largest dedicated investor in insurance and related financial services to low-income consumers in Africa and Asia. LeapFrog is successfully tapping this market by investing in companies that offer financial products, and providing valuable safety nets and springboards to the next billion low-income emerging consumers. We have incorporated our perspectives and those of LeapFrog to drill down on operational improvement activities that will play a dominant role in future investment in this emerging consumer market. We encourage you to use this report to create forums for discussion among insurance companies, intermediaries, regulators, investors and other stakeholders. Identifying the operational levers that are critical for success in these markets will ensure that business model paradigms evolve to effectively service this large and important customer segment. Shaun Crawford Global Insurance Leader Rajiv Memani Global Emerging Markets Leader
Executive summary
The middle class has played a special role in economic thought for centuries, and has been the primary segment responsible for the growth of consumptiondriven economies. In Asia alone, 525 million people can count themselves as middle class more than the total population of the European Union. We are now seeing the rise of a large low-income segment that is predicted to become a major market influence over the next 10 to 20 years: the emerging consumer. Today, these consumers typically lack the basic financial services that are critical to fuel savings and investment. Greater financial inclusion will play an important role in the transformational journey from the low-income segment to the global middle class. Beyond just a safety net, insurance is an enabler for such consumers, allowing them to take risks and invest in business opportunities without worries of losing their earnings to an unforeseen event. Insurance for such emerging consumers is growing in global importance as various entities from state-backed public sectors and mutual companies to large-scale commercial insurers focus on this market. While this business segment is often termed microinsurance by regulatory regimes, our broader definition of insurance for the emerging consumer is more aligned to the theme of this report. With growth expected to come from emerging markets in Asia and Africa, insurers are looking to invest in these markets to achieve their growth targets. The critical challenge will be to access and service these customers in the most cost-efficient and sustainable manner while building long-term relationships. As we will discuss, the challenges in these markets are unique as local constraints affect business and operating model designs. No cookie-cutter models will work. This market also presents a need for greater financial, operational and technical investment. A differentiated operational strategy backed by a dedicated organization, skilled manpower and robust performance management systems is critical for insurers to succeed. These pillars of the operational excellence framework are defined in this report. It is important for insurers, investors and other stakeholders to invest in building this framework in their organizations to support the business transformations required to reach emerging consumers and achieve sustainable value.
Emerging consumer
(low income sector)
USD 2 USD 9 per day
2000
2005
2010
2015
2020
2025
2030
Rich Middle class Source: The World Poor Bank; Kharas and Gertz, 2010 Source: The World Bank; Kharas and Gertz, 2010
1. Innovating for the next three billion, EY, 2011, p.1. 2. Hitting the sweet spot: the growth of the middle class in emerging markets, EY, 2013.
Common challenges
Lack of trust Mobile segment
Common Challenges
Table 3. Common challenges faced by emerging consumers
One of the fastest growing markets Over 44 million low-income lives and properties covered
174 million covered via a government-backed insurance scheme Over 60% of total microinsurance customers are in India
America
South Africa, Kenya, Ghana, Zambia, Ethiopia, Nigeria are developing microinsurance regulations
45 million people (and property) covered Concentrated in 5 countries >55% in Mexico and Brazil
Primary countries focusing on microinsurance include Philippines, Indonesia, Bangladesh, Pakistan, etc.
Table 4: Size of the market Source: Microinsurance Innovation Facility Annual Report, International Labor Organization, 2012
pyramid (as shown in Table 2), whereas other developing countries such as Ghana and Nigeria have a flatter pyramid, with most potential customers in the low-income segment. Globally, we observe many insurers and intermediaries expanding their sales focus down the pyramid to reach the emerging consumer. Depending on the specific market, some players are servicing the low-income customer segment through simple insurance offerings and third-party distribution. Nevertheless, the vast majority are conventional insurers targeting the current top of the pyramid. Irrespective of the geography, insurers recognize that todays low-income customers are tomorrows middle class. However, winning this customer segment is not just about creating lower-priced products or selling existing products using a third-party distributor such as a micro-finance institution. Insurers will have to learn from the dynamics of their respective markets and drive innovation by transforming their strategies and operating models to grow with emerging consumers and their developing needs.
But is it profitable?
The foremost challenge for insurers in this market is the lack of systems and dedicated performance management tools to track profitability. These are often missing because of a lack of investment or simply lack of focus by senior management. The industry segment is young and lacks tracking tools. Insurers usually do not separate performance reporting between traditional and emerging consumer insurance. Future performance management tools need to capture metrics for both revenue and cost to determine the profitability trends for this segment. Typically, there is a lack of historical risk data for lowincome consumers. Thus, pricing is not very scientific and uses proxies with a constant iterative feedback loop. As historical data quality improves, we expect risk-based pricing for this segment will lead to betterpriced products. Insurers are leveraging various technology-enabled channels, such as mobile phones in Africa, to sell these insurance services, thereby reducing distributor and operating expenses. They are also selling life insurance through retailers reusing rechargeable vouchers, thus eliminating the distributor layer and
trimming costs significantly. Various governmentsponsored insurance schemes have standardized processes for enrollment of new beneficiaries, post-sale servicing and claims management. However, there are no universal measures to reduce market costs an important objective since insurers need to demonstrate profitability. Those insurers who can redefine their operating models and generate high operational efficiency will reap the benefits of serving this large, untapped and developing customer segment.
have been part of corporate social responsibility or philanthropic programs. Often these projects target specific concerns related to product development, distribution or customer awareness. Such forms of funding do not appear sustainable or scalable for the long term. Transformational programs are required to achieve operational excellence. This is where investment from insurers or private equity investors (more specifically, impact investors) can bring true value not just in the form of capital, but also technical knowledge and expertise to develop cost-efficient distribution channels and well-designed products, and to drive organizational change for profitability.
As insurers rapidly expand in emerging markets, we see opportunities to help them with specific geographic issues in impact investing, measurement and value generation. We are working together with LeapFrog Investments to reach this virtually untapped market. Their approach is a compelling complement to our Insurance for the emerging consumer is still in a nascent broad service lines and global competence. stage. While large insurers may be deploying significant capital to penetrate this market, other initiatives
Awareness
Affordability
Accessibility
Table 5. Key focus areas for insurance for emerging consumers Internal success factors
that insurance sales, post-sale servicing and claims management are quick and efficient.
4. Promoting Microinsurance in Ghana: Microinsurance as a Means of Insurance Sector Development, Microfinance Gateway, 2012.
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important to run an efficient operating model with simplicity and innovation, and ensure that internal processes are standardized across the organization. Customer interfaces need to be simplified with each customer touch point for consistent communication. The need to leverage technology to achieve these objectives is a given.
operational quality and efficiency, which is critical to running a profitable business in a low-margin segment. In the next few years, innovative solutions that provide insurance to emerging consumers will include: Selling insurance through a utility company (e.g., Mapfre and Codensa in Colombia) Reaching small businesses for agriculture insurance via mobile phone technology (e.g., Kilimo Salama in East Africa) Integrated products with a telecom provider; outsourcing customer service and premium collection to intermediaries or facilitators (e.g., Bima in Asia and Africa) Many of these solutions will be independent or integrated services. But insurance companies will drive these innovations, and only those players that are able to develop profitable operating models will succeed. While leveraging third-party providers for various services will be important, insurers still need to focus on their customer relationships and operations to generate maximum value from these third-party relationships. Customer-centricity, operational efficiency, risk management and performance management will be crucial, but will not ensure sustainable success in this market. The most important aspects are corporate culture (change, individual involvement and leadership) and the mindset of people.
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5. EY analysis
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We believe that an operational excellence approach can help insurers improve levers to achieve efficiencies and customer focus across the organization in all of these dimensions:
Operational excellence
Performance management
Operational dimensions inin Operational Excellence Table 7. Operational dimensions operational excellence
Performance management
Identify issues and define the future state of information flows, reporting/measurements, decision-making and meeting structures (transparency, motivation, quality) Develop governance, operational targets and KPIs, identifying issues in decentralized organizational structures
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Operational excellence activities start with the process flow, but they incorporate dimensions such as employee skills and enterprise performance management that are supported by other operational enablers. The corporate culture is crucial for sustainable success with emerging consumers; activities around mindset and behavior are in many ways the basis for a holistic operational change. In regard to challenges in the day-to-day business in emerging markets, there is a natural fit in using the operational excellence approach in change activities.
Standardization
Customer focus
End-to-end perspective
Innovation
Pragmatic solutions
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We believe that the years of easy wins for investors in terms of multiple expansion or financial engineering are over. To really create value you need to get your hands dirty, operate at and below board level and have a relentless focus on driving growth and operational efficiency. Niclas Thelander, LeapFrog Investments
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Conclusion
Incomes are rising in developing economies faster and on a greater scale than at any previous point in history. The global middle class will grow rapidly over the next 20 years and could constitute 50% of the worlds population by 2030. Financial inclusion will play an integral part in this development. For insurers and investors in emerging markets, the future middle class is a huge business opportunity based on the number of potential customers and innovative solutions. There is also uncertainty about profitability and operational challenges that make the investment a bet on the future. In the end, the attractiveness and development of this market will be driven by investors who believe that market entry provides more opportunities for profit than alternative investments. We believe that more players will start investing in the insurance market for emerging consumers, either through their own operations or other vehicles or funds.
As the margins in the emerging segment are low, operational efficiency is important. Current business and operating models lean toward an internal setup. However, the more the market develops, the more it will merge structurally with the traditional insurance business in emerging markets and be enriched by new services and solutions. Investors with a value-based investment style, driven by operational improvement activities, will play a dominant role in developing this new market segment. Operational excellence becomes a perfect solution for investors and insurers to support this growth journey and generate sustainable value in the emerging consumer segment.
Authors
Andreas Freiling EMEIA Insurance Leader +49 (0) 6196 996 12587 [email protected] Jan-Erik Behrens EMEIA Financial Services Transaction Advisory Services +49 (0) 6196 996 29804 [email protected] Rohan Sachdev India InsuranceLeader +91 226 192 0470 [email protected] Pranav Nadkarni India Advisory Services Insurance Performance Improvement +91 22 6192 1417 [email protected]
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LeapFrogs intention was to support Express Life with both capital and entrepreneurial expertise gathered from other investments and the longtime experience of LeapFrogs management. Doug Lacey, LeapFrog Investments
The value-creation efforts were recognized as LeapFrog announced the sale of its ownership stake in Express Life to Prudential PLC, a leading global insurer, in December 2013.
6. LeapFrog Investments Press Release LeapFrog expands insurance industry in West Africa via record Foreign Direct Investment, April 2012
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If you would like to discuss any of the topics in this report or learn more about how EY can help your business, please contact us.
Contacts
Shaun Crawford Global Insurance Leader +44 (0) 207 951 2172 [email protected] Yuji Ozawa Japanese Insurance Leader +813 3503 1100 [email protected] David Hollander Global Insurance Advisory Leader +1 215 448 5756 [email protected] James Littlewood Latin America Insurance +1 305 415 1849 [email protected] Andreas Freiling EMEIA Insurance Leader +49 (0) 6196 996 12587 [email protected] Jonathan Zhao Asia-Pacific Insurance Leader +85 2 2846 9023 [email protected]
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