Emerging markets: Huge opportunities for brokers

While very different from the traditional middle class, the rapidly growing emerging middle class in South Africa presents huge opportunities for the insurance industry and for brokers to build sustainable businesses.

The emerging middle class market is one of the largest markets in South Africa. With the growth of the South African economy since 1994, this market has been the engine for the South African economy.

The impact of this market is also clear in the financial services industry, and most notably in the medical schemes industry. Casper de Vries of Alexander Forbes Health comments that 93% of the growth in lives covered by medical schemes between 2005 and 2009 was due to the increase in the Government Employees Medical Scheme’s members, the majority of which come from the emerging middle class.

“Similar trends are apparent in the membership growth of other medical schemes targeting the middle class. The total number of lives participating on medical schemes in South Africa would have decreased during the past five years had it not been for the growth in these medical scheme options.” says de Vries.

But is it a viable market?

The importance of this market has not gone unnoticed by the major players in the insurance industry. Mkhuseli Setuse, Product Manager at Absa Insurance notes that this segment makes up 56% of Absa Insurance’s total portfolio and continues to be their strategic focus area. Jonathan Holden, Executive of Operations at Lion of Africa Insurance comments that this market has been pinpointed by the company as a key market for 2011.

Jannie Venter, Divisional Director: alternative channels for Liberty Retail SA, says that their analysis of the local consumer market has shown that there are definite opportunities in the emerging middle class. “There are socio-economic shifts taking place in South Africa which point to a growing emerging middle class. This market is growing rapidly and continues to change the rules in terms of the speed with which they are moving into middle market income tier. This market represents a big part of the future consumer.”

Lion of Africa says it is proud to support the emerging middle class. “The majority of people in the emerging middle class have a bright future ahead of them,” explains Holden. “They are generally hardworking people who are committed to living a better life. They are educated, informed and savvy and for the first time they are viewing insurance not as a ‘nice to have’ but rather an essential mechanism for protecting, maintaining and growing their wealth.”

Challenges

Of course there are some challenges in targeting this market.

Mutual & Federal notes that these clients tend to have high debt-income ratios, which impacts cash flow and the ability to save. “This market tends to spend a far higher proportion of their income on lifestyle products than other market segments and is likely to make these purchases on credit,” explains Vuyo Lee, General Manager for Strategy and Marketing. “Interest rate changes therefore have a significant impact in the market in terms of disposable income and their ability to service debt.”

Pieter Erasmus, Head of Marketing at Momentum Short-Term Insurance also points to affordability as a significant issue. “There are several reasons why the emerging middle class market does not have insurance, and at the top of the list is the fact that premiums are generally too expensive. In addition, in the short-term space, these clients often don’t have an excess readily available, should they have to claim.”

Nicolette du Toit, Branch Head - Eastern Cape for Alexander Forbes Health adds that this market can also be quite volatile as these clients do not find “intangible benefits” very attractive - they have a greater need for immediate gratification. “Loyalty is also not of high importance, and their decisions are more often based on who can offer them the best deal at that point in time.”

Momentum’s Head of Electronic Sales, Darrell Ingram, believes that this is essentially a high-volume, low-margin market where the cost of distribution is an important factor. “Fortunately, technology and increasing accessibility with decreasing costs to web and Mobi web access is able to assist in lowering this cost while still ensuring the engagement and delivery of expert financial advice to consumers in the manner in which they are most comfortable.”

Where are the opportunities?

Karin Muller of Sanlam Personal Finance says that the opportunity lies in the sheer size of this market, and the fact that part of this market has been under-served in the past. “As people move into this market and their wealth grows, they need a broader set of financial products.”

Lee concurs: “One of the fastest growing segments in South Africa, this market is driven mainly by growth in disposable income. As a result, these consumers are acquiring more assets and lifestyle products, creating opportunities for the short-term industry. This segment of the market also has a relatively lower insurance penetration than the established middle class and high income customers, creating an opportunity to provide short-term insurance solutions. The growth in this segment is also driving demand for financial services products in general.”

Sylvester Kgatla, Head of Product Development, ABSA Investments, agrees, adding that households and families within the emerging middle class have an increasing disposable income, which can be applied to either consumption or saving. “Anecdotally the trend has been more towards consumption than saving and the opportunity is there to provide education on saving and investment as well as the vehicles to facilitate that investment.”

While the recession has not promoted the spending power of this market, Ingram believes that the economy is on the up, albeit slowly, as is the education level in this market. “The need for financial security and the spending power on this need will improve in future.”

Strategies for targeting this niche

Mutual & Federal believes that brands play a strong role in customer choice in this market. “It is important that your brand strongly resonates with this market and you can demonstrate the relevance of your offering in their everyday life,” says Lee. “This segment cannot be targeted with the same approach as the traditional middle class since there are some cultural nuances and pyschographics that need to be clearly understood.”

Liberty Retail SA adds that targeting this market will be an ongoing challenge. “As emerging middle class customers become more financially savvy, they are realising the benefits of the financial planning process, and they are accessing more comprehensive benefits,” explains Venter. “We have to continue to refine our insights of specific market segments to bring targeted propositions to clients.”

Momentum adds that the emerging market requires a scrupulous approach to assisting clients in meeting their financial needs and doing their financial planning. “The consumer should be able to trust in the process. This necessitates the need for a personal touch which can take place through an expert financial planning call centre. Worksite marketing can also be employed. It is important to be there for consumers initially and remain with them throughout the financial journey. We need to gain their trust and actively support the community or group.”

Alexander Forbes Health comments that a lot of time needs to be invested in these clients to build sound and long-lasting relationships. “In this market one has to ‘start with the end in mind’ – without a clear goal, it could be challenging to get the client to commit,” says du Toit. “This, however, is where our financial advisors can add significant value in terms of assisting clients to visualise the long-term goals, and offering specialised and appropriate solutions and advice to realise these goals.”

“Bear in mind that the emerging middle class has generally never had a need to insure against risk before and as such need the correct guidance when it comes to cover,” says Lion of Africa’s Holden. “A strong relationship with their financial advisor and faith in the institution with which they place their risk will ensure everyone wins at the end of the day. Flexible options are also important, allowing insurers and brokers to partner and grow with clients from graduation to retirement.”

Untapped goldmine

Aon South Africa’s Patrick Pillai calls the emerging middle class “an untapped goldmine”. “The emerging middle class has not classically been seen as an area of focus up until now. What is required is a wide range of products that make insurance both accessible and attractive. Value for money, access to financial advice and a personal touch will show our clients that they are not being given a ‘one glove fits all’ service.

Be sure to read the article in FAnuus which explores some of the unique product solutions available to brokers targeting the emerging middle class market segment.