When does a reasonable incentive become an unacceptably high commission? How do you weigh up agent and broker fees against investment in digital distribution? Will mobile distribution put an end to the ‘human touch’? This year’s virtual June Member Meeting (JMM) served as a forum for debate on these questions and many more.
“You can have a Rolls Royce of a product, but if you can’t distribute it, it is just going to stay parked on your desk,” said Siani Malama, Head of Inclusive Insurance at APA Insurance in Kenya. However, paying high commissions to get your product distributed is not necessarily a bad thing, he noted. “The key is the value proposition for the customer. Customers do tend to pay the premium as long as they are getting value. So, while we need to be mindful of the various expenses that make up the total premium for microinsurance products, the driver is actually the value to the customer.”
Despite the trend towards digital and mobile distribution over the last decade, the ‘human touch’ – agents and brokers – remain the number one channel across all emerging microinsurance markets. In Africa, for example, agents accounted for the distribution of 69 percent of all products reported in the latest Landscape of Microinsurance, while in Asia it was 55 percent. In Latin America and the Caribbean (LAC), 55 percent of microinsurance was distributed through brokers.
Excessive commissions – up to 60 percent in parts of LAC – can contribute to poor customer value, undermining trust and hindering microinsurance take-up, argued long-standing member Nigel Bowman, an actuary and inclusive insurance consultant. “If you’re paying more for distribution, customers must be getting less than 50 percent of premiums – probably closer to 20-30 percent. If the distributor is investing their 50 percent commission in educating customers and getting them to understand more about insurance, then there’s an argument to be made for that. But if it’s just going to their bottom line, then I’d argue quite strongly against it.”
For Chair of the MiN Board and Pioneer Life President and CEO Lorenzo Chan, trying to put a percentage figure on an acceptable level of commission misses the point. “What is the optimal distribution fee you should pay an intermediary? If it’s a price that is acceptable to my target market and fits within my pricing, then that is adequate commission.”
One reason why in-person distribution channels remain popular in the face of digital competition is that they deliver value for both insurer and client. “There’s so much agent distribution, because agents are delivering value, and clients are willing to pay for it in order to have an understanding of the product,” commented Cenfri’s Pieter Janse van Vuuren. The added value of human agents in creating trust and understanding has been recognised by Pioneer in the Philippines, who invest in training their network of agents. “Part of our commitment to our partners is to provide capacity building,” said Pioneer’s Melinda Grace Labao. “For example, instead of handing out money in advance as an incentive, we give free training to frontline agents who push the insurance products.”
Whilst the human interface remains a priority in most markets, ‘no-touch’ distribution via mobile and digital platforms such as ride-hailing apps and remittance money transfers are fast catching up. For many insurers, such as Ovia Tuhairwe, CEO at Radiant Yacu in Rwanda, it’s not a question of either/or, but both. “We have different distribution channels including banks, MFIs, co-ops, and agents, but we also have a digital platform,” she explained. “We don’t want to let tech overtake face-to-face, so we use both tech and the human touch.”
Barbara Chesire-Chabbaga, MD of AB Consultants in Kenya, believes customer value is more important than distribution costs. “If we design good, human-centred products, and we actually deliver good value to a client, the issue is not about the cost. The issue moves away from being purely about cost and moves on to other things like trust. People are willing to pay for products that deliver value, but if they don’t trust you, they won’t buy your product.”
Barbara also questioned the orthodoxy that more tech equals lower costs. “Theoretically, it makes sense to distribute through telcos – we would expect the cost to be lower because there’s less friction. But the model is turning out to be more expensive than distributing through agents.”
Balancing commission costs against digital distribution can be tricky. According to Shubasish Barua, SVP at Green Delta in Bangladesh. “If you’re paying very high commission then your business will suffer, because you won’t be able to meet the cost of reinsurance and other operational costs,” he said. “Paying this sort of money is not wise. Regulators need to step in and set a benchmark on distribution costs. But if you engage with technology as your distribution partner, the picture changes.”
However, regulatory capping remains a contentious issue. In India, for example, when the Insurance Regulatory and Development Authority capped non-life microinsurance at 15 percent and life at 20 percent, insurers complained there was no incentive for agents to push their products. In Rwanda, said Ovia, where commissions are regulated to 30 percent of net premium for life products and 15 percent for non-life, insurers need to consider other incentives.
“Distribution is one of the biggest costs in the equation,” observed Queenie Chow, an actuary at the MicroInsurance Centre at Milliman. “But you don’t want players to go for the cheapest distribution channel to meet some regulatory boundaries on the pricing. We have to be careful how we’re regulating pricing.”
The ILO’s Microinsurance Pricing Guide emphasises that commissions are only one in a long list of expenses that need to be considered in product pricing, including marketing, investment in digital platforms, and the cost of collecting premiums. But paying a hefty commission to intermediaries can make the difference between a sustainable product and a loss-making one.
While the bottom line and cost-effectiveness is important, customer value should also drive decision-making in product design and distribution. Striking a balance and finding a sweet spot where profitability, simplicity, and client trust meet is the ultimate challenge, and there is no ‘one size fits all’ approach. Putting the customer at the centre is the best way to start.
Huge thanks to all the experts who brought their valuable insights from around the globe during our JMM sessions earlier this month. We would love to hear more experiences of distribution challenges faced in your markets. Please get in touch to share your views!