#1Microinsurance in Brazil Opportunities for market development CNSeg & Funenseg Presentation Rio de Janeiro, 2 December 2009 cenfri The Centre for Financial Regulation & Inclusion#2Agenda 1. Market assessment Coffee break 2. Drivers of market development 3. Strategy cenfri#3"Microinsurance is not microbusiness!" Armando Vergilio cenfri#4Our brief ☐ Objectives ■ Assess the market Propose a strategy Consider regulation □ Methodology □ Consultations □ Focus groups Analyse SUSEP database □ IETS & FGV data analyses Consider Funenseg research Consider Consultative Commission reports & activities cenfri#5Market assessment Who's the target market? □ Current insurance usage Demand insights Industry analysis Product analysis Distribution channels cenfri#6Who's the target market? AB (>3 SM): 15%, 29m CD (<3SM) +/- 67% of the MI target market population, 128m 35% E: 18%, 35m 30% 25% 20% 15% 10% 5% 0% Source: FGV (2009); Beltrao et al, 2009 No income O up to % MW MW% 01% ½ to 1MW 1 to 2 MW 2 to 3 MW 3-5 MW >5 MW Did not declare TOTAL Urban Rural#7% of households Current usage Bolsa: 19% of hhs 45m people E: 14% 1 MS insurance: 40m+ [informal insurance: 20m+ CD: 70% Income 2 MS 3 MS AB: 16% cenfri#8Current usage ☐ POF 2002/3: FGV (2009): >15 yrs Midwest Total (%) % of CDE Total insurance 16.79 10.78 South Health insurance 12.94 8.09 Indivi- Car insurance 2.95 0.73 Southeast duals Life insurance 4.31 2.56 Private retirement Northeast plan 0.45 0.16 Other 1.41 1.2 North Product % usage Insurance 35.89 Health Plan/Insurance 28.78 House-Auto Insurance 7.14 holds Life Insurance 10.75 Pension Plans Open or Closed 1.1 Property Insurance 2.32 Other 3.69 Expenditure on health 51.33 0 5 10 15 20 % of individuals aged 15 or more with insurance 25 cenfri#9Current usage □ IETS (2009) - all ages Rural Private pension Health & dental Auto & property LLife & funeral Total excl. pension &.. Total insurance 0% 10% 20% Urban Metropolitan Total 0% 10% 20% 30% % of households with insurance 40% 50% 30% cenfri % of households with expenditure on type of insurance#10Current usage: squaring the numbers ☐ 2003 picture: Roughly 1/3 of households Higher metro (41%) than rural (8%), reduce by about a third for C, D & E North & Northeast (30% of all hhs) most underserved ☐ What has changed since then? ☐ JLV (2009): 50m served □ ANS (2009): 51m health ◉Conventional wisdom: 20-25m funeral 10m+ mass/popular 21m+ microcredit - % credit life? . Total scenario: • 40-50m (excluding health) Datafolha survey (2009): 428 low-income hhs ■ 44% insurance (22% life, 27% health) 30% -37% of adults Of which 23-33m MI cenfri#11Demand insights “When we made the funeral plan, everyone in the family was in favour of it, except my husband. But we went ahead anyway, and he was the first to die, poor man. The funeral plan paid all the expenses. So we were right, and he was wrong." cenfri#12Demand insights The new reality ■ A sense of transformation and new-found prosperity ■■Budgets: prioritise food & utilities, rent (but 66% own house), education, health ■Making room for leisure "Everything is easier now...food...We can purchase TV sets, pay monthly instalments. I was able to buy my home, which was my dream." But no savings, rather debt "When there is a salary increase, there is an increase in debt. It is easier to buy things, everyone has a credit card." cenfri#13Demand insights Risk experience: "New reality" attitude spills over into risk experience and concerns about the High Death Health Accident future Health risks cause most financial pain ☐ Unemployment beats death to 2nd place Fear of theft a daily reality for many ☐ Damages to house structures ranked last Severity Low House damages Low Note: size of bubbles denotes ranking Unemployment Theft Frequency High 'ri#14Demand insights Coping strategies all ex post ☐ No savings to fall back on ☐ Loans: family & friends first call Advances from employers or clients Credit cards Consigned credit Productive credit □ Donations/"listas" ☐ Caixinhas ☐ ROSCAS (Sorteio) "It is a great mistake for us not to have savings" "If I can, I borrow from my sister. I repay her as I can. Sometimes, I don't even repay the full amount. We forget about it, and don't worry about it. But if she can't pay a bill, I'll pay it for her, and if I can I'll still lend her more." "I immediately think of my credit card. I draw from it straight away, without having to explain myself to anyone. I just cannot delay the repayment, because the interest is so high I'll lose my shirt." "If someone has a problem, they can negotiate an exchange with the winner. So they take the money, and then when their names are drawn, they repay the person that made the exchange with them." miri#15Demand insights Insurance awareness & perceptions: ☐ Insurance not spontaneously mentioned as a mitigation strategy Despite quite high penetration ☐ Across the board awareness, but detailed understanding lacking Fine print remains a challenge "Insurance is like savings, it is money that one sets aside for when one needs it. But right now we cannot save; the money that we earn is not enough yet for us to save." "If there is any trickery, any fraud, they don't pay out. I think that this is fair. What isn't fair is that they don't pay out if premiums are in arrears." "I think it was the fine print that complicated the situation when my father became an invalid. Neither he nor we understood that he was entitled to a disability pension. We only found that out after he died." cenfri#16Demand insights Insurance awareness & perceptions: ■ Most uninsured remain suspicious & bad "word of mouth" publicity "Insurance is good, but half complicated. In my case I pay, but I don't know if I'll ever be compensated." "Some say insurance isn't trustworthy. Their car was stolen, and the insurance didn't pay out. ☐ But the insured are won over & see insurance as "disciplined savings" "Insurance leaves you feeling more comfortable about the future. You sleep better at night, because you have fewer worries." cenfri#17Demand insights Perception of cost 1: 100 "focus group participants imagine the cost of insurance to be in the ratio of 1(monthly premium) to 100 (compensation)" cenfri#18Demand insights Insurance awareness & perceptions: ☐ Yet not only for the rich □ Value for money, especially if benefits are tangible ☐ Funeral assistance ☐ Food baskets ☐ Health plans in high demand, but expensive Medicine discounts valued as alternative ☐ Extended warranties Relatively high persistency "It's not just for the rich. But first we need to sort out our expenses. Once we have managed that, it will be easier to start thinking about life insurance, for example." "It's cheap, only 17 reais per month for 10 people... the salesmen come home, chat with you, show you that it is worthwhile... and then they take care of everything very well, the coffin, the wake, the flowers for the hearse, coffee, tea, biscuits. You don't have to worry about anything." "The insurance offered by Coelce is very good. It covers fire, life, unemployment, the basic food basket, and even discounts for medicines bought at pharmacies." centri#19Demand insights Insurance distribution is pervasive (pushy?) ☐ Premium payment is easy Insurance sold close to everybody "I have credit cards. At every opportunity they try to sell me insurance." "The insurers send direct mail, with promotional offers, or saying that the premium was paid... they send magazines; they try to please... they try to sell you more insurance... they phone my husband to find out if he would like to take out other insurance..." "It's very easy. Insurance is sold on every street corner. There are stalls at shopping centres, in the middle of the isles, at the bank..." "Everyone knows someone who works in insurance. It's easier than playing the lottery." “If you enter a bank, immediately there is a salesman trying to sell you insurance. If you speak to the manager, if you request a loan or a credit card, he almost forces you to buy insurance." "Here in São Paulo, a Kombi stops in the street, various young ladies descend, and then go from door to door selling a funeral plan." cenfri#20Demand insights Thinking of life rather than death "I don't like to speak about death. It's like someone is cursing me. I immediately change the subject. Insurance! Don't even think about it!" ☐ The challenge of converting potential demand into actual usage ☐ Need for tailored products and flexibility cenfri#21Claims ratio Gross premiums % of GDP 2.50% 2.00% 1.50% 1.00% R$ 80 R$ 60 R$ 40 R$ 20 R$ 0 Premiums as % of GDP Insurance penetration Penetration 1995 1997 1999 2001 2003 2005 2007 Billions Total premiums (Billions) 1995 1997 1999 2001 2003 90% 70% Claims ratios 50% 30% 10% 1995 1997 1999 2001 2005 Asset 2003 2005 excl. VGBL Total Premiums (100%) Life (52%) Auto (30%) Life excl. VGBL 2007 Assets (8%) Auto Total industry Life - excluding VGBL 2007 Industry analysis Total industry: ☐ Strong growth since 2003 largely driven by VGBL □ VGBL contributed 62% of premiums in 2008 ■ Claims ratios reduced significantly in both life and asset categories Sales expenses for total period remained between 15-20% over the period cenfri#22Industry analysis Performance of relevant product lines 8000 Life-group + 6000 4000 2000 Millions! 0 70% 2000 PA-group 60% 1600 50% 1200 40% 30% 800 * * * 20% 400 10% Millions 0% 0 70% 2500 70% Credit life 60% 60% 2000 50% 50% 1500 40% 40% 30% 30% 1000 20% 20% 500 10% Millions 10% 0% 0 0% 2001 2002 2003 2004 2005 2006 2007 2008 2001 2002 2003 2004 2005 2006 2007 2008 2001 2002 2003 2004 2005 2006 2007 2008 2000 Extended warantees 1600 70% 2000 70% Multi peril 60% 60% 1600 50% 50% 1200 1200 40% 40% 30% 30% 800 800 20% 20% Millions 400 400 10% 0 0% Millions 10% 0 0% 2001 2002 2003 2004 2005 2006 2007 2008 2001 2002 2003 2004 2005 2006 2007 2008 • Claims ratio Selling expenses Direct premium Increasing client coverage, decreasing value to consumer Strong premium growth in all these categories Claims ratios dropping and/or very low Sales expenses increasing and very high on credit life and extended warranties (bundled products)#23Industry analysis Premium breakdown: Brazil Group Credit Group Extended Multi PA life life Warranty Peril n/a n/a 30% n/a n/a 30% Investment income 10% 30% 30% 10% 10% n/a 10% 22% Management 30% 13% expenses 25% 51% 10% Net claims 16% 50% 52% 37% Sales expenses 20% 21% Source: SUSEP database (year ending June 2008) Significant variation in sales expenses High sales expense in bundled sales (credit life, ext warranty) Claims ratios very low for Group PA, Credit life, Extended Warranty High potential underwriting surpluses cenfri#24Industry analysis Premium breakdown: SA Asset* Life* Funeral 13% Investment income 7% Investment income 9% Investment income Net claims 64% 101% Net claims Net claims 59% Mgmt expenses 10% 19% Mgmt expenses Mgmt expenses 26% Commission 6% Commission 10% Commission Profit: 17% Profit: -4.2% Profit: 19.8% Average results for 5 years ending Dec 2008 Source: FSB (2008) * Based on results for "typical" life or asset insurers defined as those writing business across most product lines cenfri#25Product analysis Product Monthly premium Benefits R$600 life (R$200/basket) Retailer product R$7.5 Credit R$2.1 provider Utility 1 R$3.99 not Utility2 available Utility 3 R$2-8 R$500 PA hospitalisation (R$50/day) R$10,000 accidental death (double if in public transport) Monthly prize R$1,500 Up to 50% discount on medicines R$3,000 life R$840 funeral 4 prizes of R$1,500 per month R$20,000 house (fire, lightning, explosion) R$50/month for 4 months towards electricity bill involuntary unemployment/temporary disability R$50/month for 1 year towards electricity bill PA 4 monthly prizes of R$3,000 Life: R$5,000 & 12 electricity bills of up to R$50 each &4 food baskets of R$150 Funeral assistance up to R$2,000 Up to 60% medicine discounts R$3,000 monthly draw Life & asset (home) insurance Credit life Extended warranties cenfri#26Product analysis Funeral +/- R$1,200 Product Monthly premium Benefits Funeral insurer R$12-30 per family?] Affinity R$10 (telemarketing) R$1-4 (direct mail) Employee groups R$5 (average); R$15 (max) [per family] Bank R$15-50 [per family(?)] Funeral home R$18 ave. [per family] Optional life (income protection) R$10,000 monthly draw Financial protection for unemployment Home insurance Assistance call centre Capitalisation component Natural & accidental death Disability Birth (with congenital disease) Work-related illnesses Maternity food assistance Funeral cover in case of accident at work Credit life Unemployment Home & house assistance (services support) Personal accident Funeral Educational insurance for children Funeral assistance R$2500 Food aid Discounts on medical consultations at own clinic Discounts on pharmaceuticals Legal advice cenfri#27Distribution channels Overview Innovative mass distribution models 75,000 individual brokers; 35,000 corporate brokers Insurance proposals sourced through (Decree-Law 73/66): Clients directly ■ Their legal representatives Brokers 7 main channels have evolved cenfri#28Distribution channels Channel 1: banking channel Insurer Roles Underwriting Product development Bank Broker Correspondents Sales force C C C C C C C Product development Consolidating data Premium collection Marketing Admin Labour cenfri#29Distribution channels Channel 2: Database selling Ins. 1 Ins. 2 Roles Underwriting Product development 3rd party tele- marketing Broker Sponsor (utility, telco) Mail campaign; telemarketing agents Facilitating relationship Mining market intelligence Marketing Product development Labour C C C C C C Database Premium collection Admin cenfri#30Distribution channels Channel 3: Retailer Roles Insurer Broker Retailer/Estipulante Sales force C C C C C C C Underwriting Product development Facilitating relationship Consolidating data Marketing Admin Labour Product development Client intelligence Premium collection cenfri#31Distribution channels Channel 4: Credit agent Credit agent model (CrediAmigo example) Insurer Roles Underwriting Product development MFI/bank (Estipulante) NGO Sales force Broker Product development C C C C C C C Consolidating data Premium collection Marketing Admin Labour cenfri#32Distribution channels Channel 5: Common bond PASI model Roles Underwriting Insurer PASI Employer Union Broker Estipulante Product development Marketing Claims processing Admin (contract maintenance; logistics) Facilitating relationship between PASI and employer Suggesting product modules to employer W W W W W W W Pays premiums Pressures company to provide benefits cenfri#33Distribution channels Channel 6: Funeral homes/cemeteries Roles Funeral home Sales force Underwriting (though not generally based on insurance principles) Marketing (via sales force or through funeral homes and cemetaries Collection Claim payment in form of funeral service May include other benefits "in life" C C C C C C C cenfri#34Distribution channels Channel 7: Door to door Roles Insurer Broker Underwriting Product development Client/market intelligence Admin Sales force Marketing Labour C C C C C C Premium collection via correspondents/bank cenfri#35Distribution channels Relative importance Banking correspondents Retailers Database selling Funeral homes - Up to 25m bond Common lives covered currently - Banco Postal - Caixa - POS - etc - Casas Bahia and others - sales agents actively sell agent Credit DZD nfri - Utilities, direct mail, call centres -market already >10m - Collective bargaining: PASI model (2.1m lives covered) - credit/ production coops -E.g. CrediAmigo: 125,000 Sep. 09 - potential in line with productive microcredit market - Standalone insurance sales#36Drivers of MI market development 1. Macroeconomic conditions 2. Social inclusion 3. Pervasive public and private infrastructure 4. Labour legislation and broker regime 5. Cultural drivers 6. Regulatory drivers cenfri#37Macroeconomic conditions 1. Economic growth increases income 2. Stability: regaining trust in long-term financial products 3. But inflation expectations persist 4. The need to rebuild cash-savings (VGBL) cenfri#38Social inclusion Upward mobility: 2003-8: . 27m into ABC • 24m out of ED Source: FGV (2009) % of pop aged 15-60 in each socio- economic group 60 50 40 30 20 20 10 0 L T T Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 LLI E AB C cenfri#39Social inclusion Decreasing inequality: 25 Brazilian household income distribution: 2001 vs 2007 % of households 0 20 15 10 5 2001 2007 0 to 100 100 to 200 200 to 300 300 to 400 400 to 500 500 to 600 600 to 700 700 to 800 800 to 900 900 to 1000 1000 to 1100 1100 to 1200 1200 to 1300 1300 to 1400 1400 to 1500 >1500 Source: authors, based on IETS (2009) analysis of IBGE PNAD 2007 data Income bands: R$ household per capita income/month cenfri#40Social inclusion Room in the budget for insurance: National average Middle East South Southeast Northeast North Rural Urban Metropolitan 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% % of monthly expenditure spent on insurance Source: authors, based on IETS (2009) analysis of IBGE POF 2002/3 data cenfri#41Public & private infrastructure ☐ Ubiquitous, cash-friendly payment system 3.2m POS devices □ 130,000 banking correspondents (mostly payments) □ 126m deposit accounts (2008) □ 208m debit cards ■ 132m credit cards ■ 144m store cards □ 150m+ mobile phones Bolsa Familia infrastructure ■ Unified database (CadUnico) □ 5,500 municipalities cenfri#42Labour legislation & broker regime The largest market is outside of formal employment Population: 180.9m (PNAD 2007) Formal: 62% (54.1m) Population>15 years: 134m Employed: 87.7m (91.8%) Labour force: 95.5m (economically active) Unemployed: 7.8m (8.2%) Source: authors, based on IETS (2009) analysis of IBGE PNAD 2007 data Employees: 55% Employers: 6% Military & civil service: 11% Only 44% "truly formal" Domestic workers: 12% Unpaid/no monetary remuneration: Broader market to be reached outside of 16% Informal: 38% (33.6m) Self- employed: 55% Informal employees: 45% employee groups: 56% of total employed cenfri#43Labour legislation & broker regime Longer distribution chains & larger costs Disproportionate power to aggregators ☐ Product design driven by aggregator interests cenfri#44Cultural drivers Aspiring poor - the growth of consumerism. Brazilians are passionate about life, not death cenfri#45Regulatory drivers 1. Flexibility to adjust regulation 2. Increased compliance costs 3. Restrictive health regulation 4. Large tax burden cenfri#46Regulatory drivers Flexibility to adjust regulation Modular capital requirements Demarcation not restrictive Ability to change registration and compliance requirements based on semi-standardised product categories Scope for ticket sales. ☐ Can facilitate new distribution models cenfri#47Regulatory drivers Compliance costs ☐ Bank-based premium collection ☐ Registration requirements. ☐ Reporting & other requirements cenfri#48Regulatory drivers Restrictive health regulation Prescribed minimum benefits Price controls ☐ Micro health plans not allowed cenfri#49Regulatory drivers Current tax regime Type of tax IOF Applicable Rates Life - 0.38% On what is it levied? Gross premium, PIS-COFINS Health - 2.38% Rest - 7.38% 4.65% CSLL 15% Premium income net of claims payments, but not net of other costs. After tax income. IRPJ 25% Net income cenfri#50Profit Direct premium (retained earned premium Gross premium (Earned premium) Regulatory drivers Tax model: large company Premium breakdown Re-insurance premiums paid* Admin expenses* Claims Commission Extended Group Multi Credit Group PA warranty life peril life 32 32 32 12 12 12 32 3 ☐ 12 12 16 13 51 22 25 20 50 Underwriting profit/loss 52 Investment return* 10 25 25 10 21 21 52 37 46 16 14 26 10 10 Impact of current tax regime % impact % impact % impact % impact % impact 10 % of gross prem % of direct premium % of before-tax profit % of underwriting profit % of claims 26.1% 24% 12% 19% 17% 27% 24% 12% 20% 17% 43% 70% 47% 84% 47% 52% 98% 76% 143% 66% 168% 188% 24% 91% 68% Impact new MI tax regime % impact % impact % impact % impact % impact % of gross prem 0.7% 1% 1% 1% 1% % of direct premium 1% 1% 1% 1% 1% % of before-tax profit 1% 4% 2% 5% 2% % of underwriting profit 1% 5% 4% 9% 2% % of claims 5% 10% 1% 6% 3% Current tax impact 12-27% of direct premium for large co (6) to 21% for small company) 43% to 84% of before-tax profit for large firm (46% to178% of before-tax profit for small firm) 25% to 188% of claims for large firm (13% to 144% for small firm) New Tax regime: Tax burden per product line is between 16 to 35 times lighter for large company and between 9 to 30 times for small company 1% of direct premium 1% to 5% of before-tax profit for large firm (1% to 14% of small co) 5% to 10% of claims for large firm (1% to 9% for small co)#51Strategy ☐ Public policy imperatives □ Large uncovered risks for poor households The income risk produced by the new reality: credit growing but savings not Sting in the tail of mass distribution: high cost to distribution channel, low value to client Suggested policy objectives Reduce costs Ensure value to clients □ Extend risk cover cenfri#52Strategy Potential MI target market 128m target audience (CD) Assume max potential penetration: 50-60% 64-77m people Current MI scenario: 23-33m cenfri#53Strategy Potential MI target market 128m target audience (CD) Potential MI market >40m cenfri#54% of households produc- tive micro- credit: 1m Strategy Potential MI target market Bolsa: 19% of hhs 45m bank accounts/ people credit cards E: 14% With electricity: 98% of households (hhs) Cell phones: >70% of hhs Employed in formal sector: 62% of labour force insurance: 40m+ [informal insurance: 20m+ microcredit: 21m 1 MS I CD: 70% Income 2 MS 3 MS AB: 16%#55Strategic issues 1. Defining microinsurance. ■ Product-based definition Define benefit levels as high as possible (approximately R$30,000?) Do not jeopardise bundled products ■ Limit regulatory arbitrage cenfri#56Strategic issues 2. Intermediation □ Unlock banking correspondents Improve relative power of insurer vs. aggregator Strengthen non-aggregator sales channels □ Capitalise on existing sales forces cenfri#57Strategic issues 3. Reduce costs ◉Tax burden □ Compliance duties 4. New entry ■ Second tier of microinsurance □ Formalisation cenfri#58Thank you Questions or comments: [email protected] [email protected] cenfri