Why insurance demand is surging among low-income consumers

By Fernanda Lima
Fernanda Lima, Partner at LeapFrog Investments, discusses the insurance marketplace demand for products that suit low-income customers

Insurance is a ubiquitous product in most of our lives, but in many emerging markets it remains unusual for the average person to have access to insurance.

Take for example Indonesian Gojek driver Nur Fajar, a customer at one of our portfolio companies, insurance startup PasarPolis. Taking out life insurance for his father last year, through PasarPolis, was one of his first interactions with the formal insurance market after hearing about the policy from a friend.

Just three months later, Nur’s 58-year-old father contracted COVID-19 and passed away, leaving a significant hole in not just the family but also the household’s cashflow. He and his mother were surprised to find that the policy indeed provided cover in their circumstances and the funds received helped cover the costs of his father’s care and funeral arrangements. Now, Nur spends his time educating those in the community about the benefits of insurance as an agent with PasarPolis, proving to others that insurance, in his own words, is “real”.

Insurtech inclusion is on the rise

Nur is typical of millions of emerging consumers who are hungry for insurance, but unsure until recently how to access it, or if the benefits were “real”. Emerging markets have dramatically low insurance penetration rates, measured as the ratio of written premiums to GDP. Emerging Asia and EMEA have penetration rates of only 3.7% and 1.6% on average, compared with 11.7% in the US, and 11.1% in the United Kingdom. Across emerging markets, the gap in insurance protection leaves millions at risk of crippling financial loss through shocks like natural disasters or illness. Emerging countries account for $160bn (96%) of the global insurance protection gap.

LeapFrog’s recent 2022 Emerging Wealth and Health Index, a study of almost 4000 low-and middle-income consumers across eight markets, shows that these low penetration and coverage rates are not driven by a lack of demand for insurance. In fact, there are astonishingly high rates of insurance demand across emerging markets, and insurance is one of the products our respondents most wanted to use in the coming 12 months.

In some of the world’s least-served insurance markets like Indonesia, Nigeria, and Ghana, where penetration rates are all below 2% , around one in four respondents said that they planned to buy insurance in the next 12 months. In Kenya, which has a penetration of only 2.2%, this figure was almost 1 in 2. Overall, insurance ranked roughly on par with savings and investments as the financial product consumers most wanted to use next year. These results point to a growing awareness of the benefits of insurance, and a huge opportunity for insurance businesses to tap into robust demand with innovative new products.

Experiences on the ground point to why insurance demand is so strong. It’s clear that the average emerging consumer is acutely aware of the difficult trade-offs, and significant financial stress, faced by the uninsured. 

Around three in five of those interviewed about their financial situation reported facing financial hardship in the last 12 months, with health-related issues being the largest contributor at 19%. And 14% of respondents reported falling into debt or losing savings due to a health shock. Indeed, around three in four respondents rely on out-of-pocket money to pay for their healthcare needs, and only one in 10 use private insurance to cover medical bills. Faced with a healthcare shock, three in five respondents prioritised medical bills, and one in three cut back on entertainment and food.

The need for low-cost insurance has skyrocketed

These financial shocks affect overall mental health and outlook as well, the data shows. Those with chronic conditions, for instance, who face higher medical expenses, are more likely to feel their family will be financially worse or much worse off next year, and more than twice as likely to report poor or very poor mental health. In Kenya and Ghana, where insurance rates remain low, the main benefit of accessing financial products, reported by half of the respondents, was reducing financial stress.

The Covid-19 pandemic has brought these experiences into focus. In LeapFrog’s own portfolio, claims paid across our insurance businesses doubled in the last two years to 1.2 million per quarter for Q421, largely driven by a surge in healthcare claims. Many of these claims are for new micro-insurance products pioneered at companies like PasarPolis in Indonesia and miLife in Ghana. These companies have made a concerted effort to distribute insurance to low-income consumers through mobile platforms that have slashed the cost of premiums and helped onboard millions of new customers.

Closing the insurance protection gap for low-income consumers

Still, many people across the emerging world struggle to access insurance. Two-thirds of those who were surveyed by LeapFrog said they faced difficulties accessing the financial services they needed, with high cost or lack of a reliable income cited as the main reasons. Informal work, unemployment, or education status are also key drivers of financial exclusion. In India, where only 15% of respondents worked in the formal economy, 10% said it was difficult to access financial products because they didn’t have the correct documents. In Kenya, which had the second highest rate of unemployment of any country, one in four people said they couldn’t meet the criteria for financial products, and more than half said they had made failed when trying to purchase a financial product in the last 12 months.

One in 10 Indonesians, where student literacy skills rank low, said they faced difficulties understanding financial products. Often, these barriers to access could be solved with new technologies like algorithmic underwriting or smarter digital distribution and marketing. Already, these innovations are opening new markets for insurance, and encouraging those typically excluded from insurance to access coverage.

 Insurance use and future demand for index respondents

Overcoming these barriers and seizing on the incredible demand for insurance products across global growth markets is not only critical to improving the lives of individuals. It also supports overall economic growth. Insurance is the often-underappreciated cousin of other economic growth drivers like technology and access to credit. It creates pools of capital to manage risk exposures, supports sustainable economic growth by protecting businesses against shocks, and underpins robust consumption with products like health and income insurance that allow consumers to better manage their household budgets.

A greater understanding of these benefits, and the experiences and needs of emerging consumers, can help insurance penetration continue to grow across emerging markets, delivering a higher quality of life and more resilient economies. 

About the author: Fernanda Lima is a Partner at LeapFrog Investments, a private investment firm that invests in high-growth financial services and healthcare companies in emerging markets.


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