This article is based on a discussion with Alex Foong, FSA, public interest director for a private pension administrator and the second qualified actuary in Malaysia in 1981. It explores insights into lessons from home service business and applicability for microinsurance, as well as creative product development: designing participating riders.
Lessons From Home Service Business
In 1983, Alex returned to Malaysia from Hong Kong to work for British American Life Insurance (now known as Manulife Insurance [Malaysia] bhd), a company well-known for its home service business (industrial life). This market segment was also popular in the United States and the United Kingdom, among other countries, until the 1970s. These policies were small in size and meant for the low-to-mid-income population—premiums were collected by going door to door on a weekly, then monthly, basis.
In Malaysia today, wage earners are split into three categories:
- The bottom 40 percent (B40)
- The middle 40 percent (M40)
- The top 20 percent (T20)
The target market segment for home service was the top half of the B40 and the bottom half of the M40.
One challenge related to home service policies was that the premium rate was more expensive than ordinary life policies (meaning the rate per 1,000 sum assured). This was a large source of concern for regulators, as the poor were paying relatively more for their insurance than the rich. This was a reality of the business, though, as the operating and mortality cost of home service was higher than ordinary life insurance.
A popular example to demonstrate this principle is to go to the supermarket and look at the unit cost (per 100 grams) for popular food and drinks. The large containers have a much lower unit cost than the small packets, which makes sense as the cost of one large container is lower than making individual small packets. Unfortunately, the poor can only afford the small packets, whereas the rich can afford the large containers.
The premiums for home service policies were as low as RM1 per month and up to RM100. This was a cost the common worker could afford.
Monitoring the business for home service was different than for ordinary life policies. For instance, lapse rates that follow the LIMRA formula (or similar) are used for ordinary life. But for home service, a net rate that equaled the new business/reinstated premiums brought in by the agent less the lapsed premiums was monitored. The bonus and commission of the agents depended on the net increase rather than the new business brought in, and overall compensation was based on the size of the portfolio rather than new business.
If the typical 13-month or 19-month persistency calculations were done, the results would be poor. This was due to the quality of the agents in this particular market as well as the realities of the market itself. The market segment was the low-to-mid-income population, so agents who were willing and able to reach them were not sophisticated. Once an agent became competent in selling, they would move on from home service to ordinary life—where they could make more income. This was why British American created an ordinary life agency force, so there was a path for advancement for high-quality agents.
Agency cost was more expensive for home service than ordinary life because the agents were full-time staff of the insurer and received a fixed allowance plus collection fees depending on the size of their business.
Another challenge in the home service market was that policyholders in rural areas did not have bank accounts. During the 1970s and 1980s, online transfers did not exist. Instead, the policyholder had a receipt book where the agent jotted down the premium payments when they were paid. This method meant the agent was responsible for holding cash, which led to leakages that were discovered during the time of claims. A key person in reducing this risk of leakage was the manager who audited the agents. This manager would go from house to house to review the receipt book of the policyholders. If leakages were found, the agent would be fired.
Each agent had a specific territory in which they could operate. People who were not poor would not generally buy home service, as there was a stigma attached to it (i.e., do you think I am poor?).
Applicability for Microinsurance
Microinsurance and inclusive insurance are terms used in today’s market. In a sense, this is going back to the old home service days and recognizing that the home service business served a key market segment.
When the insurance market first begins in a country, home service-style products can be a good starting point, as the needs of the country and the people are likely for simple products brought to them directly by people in their own communities. As the middle and upper classes develop, ordinary life business can grow.
In China, Ant Financial uses blockchain to attract a similar market segment while solving the challenge of collections.
A common concern regulators had about home service was the value received by the policyholder. For instance, for a 20-year endowment, it was common to only get a return of 1 percent to 2 percent, and for weekly pay to get a maturity value of 10 percent to 20 percent less than the premium paid. What was not understood is that the market segment was people who did not have bank accounts or the discipline to save. In that sense, this is no different than the challenges in the current lower market (B40). Without an agent collecting premiums every week or month, this segment of the population would never save—so getting back 10 percent less than what they paid is better than the alternative. However, protection for untimely early death remains intact.
Many markets today are exploring various strategies to access the low-income population. The industry truly believes in the good of insurance as a means of protection, and that people from all walks of life deserve to be protected. Even though this product is now called microinsurance, in reality, home service business was a precursor that was present decades earlier.
Home service had a practical, though expensive, means of accessing and selling to its target market. Today, we look to traditional agents to service this market and understand their lack of desire to enter this segment. A lesson from the past is that sophisticated agents are not interested in this segment. Rather, people from the target market need to be brought in to sell directly to their own people—not as agents with traditional commission rates, but with a fixed allowance and bonus dependent on the business net of lapsation.
Although high-tech solutions for this market have been explored, perhaps low-tech solutions are more viable for the population. The question will always remain: How do we justify the poor paying more (percentage-wise) than the rich for insurance? But a more accurate question might be: How do we bring people who are not currently insured into the world of insurance?
Finally, a key with home service business was providing practical coverage, namely convincing the low-income market that they must save money for their future. This was a need that could be understood and sold as opposed to purely death coverage. When accessing the low-income market today, we similarly need to determine needs that are clearly essential and easily understood.
Creative Product Development: Participating Riders
While working for British American Life Insurance, Alex introduced the idea of participating riders (investment-linked policies were not available at that time). These participating riders could be attached to a non-par term, endowment or whole life plan. There were differing ratios of rider to base plan, which provided varying levels of guarantees and bonuses.
Conceptually, this type of innovation allowed an agent to precisely determine the type of plan their customer would want, including the levels of premium rates they could afford. A whole life plan could be the base, with a participating rider maturing when the policyholder is set to retire, when a child is expected to go to university or in relation to other events. A policyholder with limited funds could attach the rider to a term policy to keep the premium rate low, or they could attach it to an endowment policy to provide a significant level of guaranteed return, with the participating rider providing additional yield.
A challenge with the rider was managing the costs due to the extreme flexibility given to agents. This rider was not similar to other riders where the costs of the rider were fairly small when compared to the base plan. For this rider, a small ratio of rider to base plan could be used, in which case most expenses relating to this plan should be built into the base plan. Alternatively, a much higher multiple with a scaled commission structure could be used, in which case the rider should have most of the expenses built-in. Building in expenses to both the base plan and the rider could drive up the price of the product unnecessarily and make it uncompetitive.
Depending on the regulations of a country, a participating rider could be used to maximize shareholder profit for the product as a whole. For example, with this product, there is a participating element and a non-participating element. In Malaysia, shareholders receive 100 percent of the surplus from a non-participating product and only 10 percent of the surplus from a participating product.
From a technical point of view, not all participating products are designed the same. Some have relatively more guaranteed (non-participating) elements, and others have a higher proportion of participating elements. Thus, this type of rider splits up the participating portion and the guaranteed (non-participating) portion, ensuring the shareholders are treated fairly (equal treatment also depends on the country’s regulations and the ability to split the premium into a non-participating base plan and a participating rider).
In a sense, the participating rider product allows the agent and the insurer to focus on the needs of the policyholder and receive fair compensation in a controlled manner. But there can be unhealthy practices in the market, such as competing on pure yield of the products by creating lapse-supported products where the surrender values are significantly lower than the asset share, so policyholders surrendering in early years are funding the returns of the policyholders who do not surrender.
By combining our actuarial strengths with creativity, we can design flexible products that are actuarially sound and can help the agent structure products precisely for the needs of their clients.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.
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