Know Your Customer: challenging conventional wisdom in insurance

Tuesday, September 29, 2020

When researchers found that half the population of Ethiopia were both interested in and could afford to buy microinsurance products, it turned conventional thinking on its head. “We discovered things which were completely different from our preconceived ideas,” says Craig Thorburn, Lead Financial Sector Specialist at the World Bank. “You can’t assume you know best what customers want. Anyone who is interested in being a profitable insurance company can’t afford to ignore a market of 50 million people sitting on their doorstep.”

Michael J. McCord, Managing Director of the MicroInsurance Centre at Milliman, agrees. “Some people said, why bother asking - we already know the answers. But of course we now know the answers were not exactly what people thought.”

Both Thorburn and McCord were among the authors of the 2018 report What people want: investigating inclusive insurance demand in Ethiopia. The discovery that half the population were willing and able to pay for insurance cover surprised them. “It’s the sort of insight that only comes from knowing your customer intimately,” says Thorburn. “Many companies say taking the time and effort to understand your customers thoroughly is too expensive. But if a product doesn’t work well, it’s usually because the company doesn’t understand the customer. If you launch a product without doing the research, it’s going to fail, it’s going to pollute the market and customers won’t be served well.”

The MiN’s latest Expert Forum KYC: Bugbear or hidden gem? brought Thorburn and McCord back together to stress the importance of consumer research before designing, developing and bringing a product to market. Assumptions about customer needs are often based on conventional wisdom which, when tested in the field, proves to be incorrect or at least misleading.

The 2018 report was on a scale rarely seen in the insurance industry. 3000 household surveys, 32 focus groups and countless follow-up interviews. “We not only know what customers are concerned about, we know if they sleep on a mattress, what their house is made of, how far they have to walk to hospital, which language they speak, which crop they get income from, who has a mobile phone and what kind of health issues they have,” says Thorburn.

“The objective was to identify what risks people had and how they managed them,” adds McCord. “We would have information that would help create products to address those needs, to identify markets, formalise an approach to distribution and marketing and communications strategies. Products need to be based on client input.”

“Anyone who is an insurance nerd is going to be interested in this data,” says Forum moderator Andrea Keenan, Senior Managing Director for Strategy & Communications at A.M. Best. “Insurance requires that data is done right. We don’t often get the chance to ask the right questions and then follow up with more questions. This study is incredibly robust.”

As well as revealing a hitherto vast untapped market, the research debunked accepted thinking around the role of Edirs in Ethiopian society - the traditional local community groups which often provide cash support in the event of a crisis. “Two-thirds of the people we interviewed said Edirs only provided a tiny contribution towards these costs,” says Thorburn. “Conventional wisdom is that most underserved customers don’t like big formalised institutions - they prefer small, local and informal. In Ethiopia it turned out they do like to deal with a big company. We’ve all seen insurers try and reach people through small local institutions and it doesn’t always work. If they had read our research we could have saved them the trouble.”

“That was a real lightbulb moment,” agrees McCord. “People want to deal with large, secure formal institutions, they don’t want to deal with the Edirs or local groups. They want to know their insurance is real, they’re protected and they’re not going to get scammed.”

The research also revealed flaws in conventional thinking around health insurance - especially hospital cash products. “A lot of hospital cash is promoted through mobiles in the low-income space,” says Thorburn. “But guess what, it turns out most rural Ethiopians don’t want to be admitted to hospital overnight. Many live a long way from hospital and they would rather be at home with their family. Just dealing with hospitalisation is not really going to solve their problems.”

Although the report was researched and written well before the COVID-19 pandemic sent shockwaves through the insurance sector, there are lessons to be learned about similar global crises. “We can draw parallels with climate change and the impact it’s having on crops and diseases,” says McCord. “There’s a challenge to recognise these events are happening more frequently and that business interruption insurance may only be a short-term solution. Huge parts of the population are in lockdown and out of business - that’s a massive cost. How do insurers cope with that? We’ve got to think ‘risk management 360’ - going beyond insurance.”

Despite the costs of consumer research before developing new products, it’s money well spent. For example, by asking so many questions, the Ethiopia researchers discovered valuable information about the frequency and cost of events. “That’s useful for quantifying premiums,” says Thorburn. “Lots of projects just guess the price point, and then they fail - what a surprise! Taking the time to ask a few extra questions yields a whole bunch of information which is very useful for pricing and quantifying risk.”

Not all insurers have the technical capacity or resources to do in-depth customer research, but investing in KYC is crucial for sustainable microinsurance. “If you don’t develop the right product, it’s going to turn off the market itself, then it’s going to turn off insurers who say ‘look, microinsurance doesn’t work’. Insurers need to understand the data, use it to find out what clients want and convert that into real products and services,” concludes McCord. “Product development must start with clients or you’ll waste a lot of time, money and reputation. Understand your clients first, then do the design and development. That’s the most important thing in microinsurance.”