Have we ever stopped to think what our products look like to a layman?
Have we gazed at a supermarket aisle lined with shelves upon shelves of what are essentially the same or slightly differentiated products but with different branding or labelling? How many of us actually read the labels in endeavour to match what is on offer to what we really need? Do we always know what we’re looking for in the first place?
If purchasing tangibles presents us with so much dilemma, how much more difficult would it be to sell insurance; a service? This is even more complicated by the fact that if with a food item the dilemma is between, say, fewer carbohydrates or more sugar, with insurance it is simply a case of consumers either not appreciating the need for it all or not understanding the intricacies of insurance. This is not to suggest that consumers are to blame for ineffective demand; we are also not doing a good job at creating effective demand.
Utility, Demand and Effective Demand
Some might think that it is relatively easy to sell something for nothing. I beg to differ and I may have statistics to prove it but that would be a topic for another article. It is generally not price, but utility that creates demand. Price, in this respect, is of secondary importance in that from demand then the concept of effective demand evolves. The theory of utility (in economics), as the word suggests, relates to the relevance or importance that a consumer attaches to a product or service. Utility having been established, price then comes into the picture, i.e. if there is a perceived need for a product or service, it is then that a consumer would ponder on how much one is willing to pay for it. Whilst, in insurance we all seem savvy to the fact consumers want to consume more for less and less for more, we also seem to ignore the fact that they would not be willing to consume at all if they do not appreciate the utility of insurance.
Why is it for example that in certain GCC markets, insurance demand is dominated by motor and medical (where these are a legal requisite), energy, aviation, marine, construction and commercial / industrial property (where these are required by virtue of contractual and/or financing agreements)? How much insurance purchased within the region is purely discretionary? If one had to strip from the premium spend per capita within the GCC all of the above compulsory forms of insurance, the stark reality is that very little insurance is purchased on a purely voluntary basis.
The reasons for this vary from socio-religious (that is now being slowly challenged by Takaful insurance), lack of insurance awareness / education in general, demographics (with significantly large and relatively transient expatriate population) and, in some of the GCC states, the still evolving regulatory and supervisory framework.
All of these have contributed to pseudo-competition within the GCC markets based almost entirely on price resulting in a blood-bath. The markets are still evolving and vary between the tacitly protectionist (i.e. a single company controlling over 60% of a market) to other markets with more covert forms of protectionism. The larger companies within these markets have also sought to expand mainly within the MENA region in markets that are generally less developed. Whilst this has helped diversify the breadth of their premium portfolios, the same ‘top-line’ strategy is generally pursued in less developed markets where premium growth is even more reactive or dependent on the general pattern of economic activity.
The financial crisis probably helps accentuate the need for a 2-pronged approach, i.e.
- more ‘bottom-line’ or profit focus within the MENA region in general probably necessitating the assumption of more net retained risk and greater emphasis on non proportional reinsurance; and
- for the larger companies seeking geographical growth looking west instead of east or within the region. Notwithstanding the availability of reinsurance capacity, there is still room for more retail capacity in Europe particularly with the growth of aggregators and syndication of capacity. The business model is different to the one adopted within the region and would expose companies to more transparent and, in some cases, better regulated use of capacity.
A longer term view on profitability is required than the current revenue driven models characteristic with the MENA region.
Pre-requisites for both of the above are education and regulation.