According to a recent report by the Securities & Exchange Commission of Pakistan (SECP), insurance penetration, measured by comparing the total insurance premiums generated in a year against the country’s GDP, is under 0.9 per cent with an annual premium of Rs553 billion.

This figure is alarmingly low for a country with an estimated population of 240 million, especially when compared to the country’s annual charity contributions of Rs800bn, according to a Dawn article, which far exceeds the size of the insurance market.

The figure includes both conventional insurance and Takaful, a Shariah-compliant insurance-like arrangement introduced in Pakistan in 2008 to meet the needs of its Muslim-majority population. The current insurance penetration is significantly below the global average of nearly 7pc and lags behind several peer countries in the region.

It is worth noting that over 40 insurance companies in Pakistan offer hundreds of products through various touch points and forums such as field agents, banks, websites and telecom operators.

Before exploring possible ways to grow insurance in emerging countries like Pakistan through market-creating innovation, it is important to understand why higher insurance penetration is necessary for a country and its citizens.

Insurance is a financial product that provides a risk transfer mechanism to individuals and businesses upon payment of a fee called an insurance premium.

Individuals face a range of risks in their everyday lives: sickness, injury, death, outliving their savings, loss of employment, loss of assets or the now intensifying risks brought by climate change like the loss of crops, livestock or incomes.

Without insurance, individuals are compelled to retain these risks so that if a loss occurs, they must manage it from their own means and resources.

Marketing, creative innovation and competitive collaboration can help insurance go from a niche sector to mass adoption

In emerging countries like Pakistan, where the vast majority of the population is classified as middle or low-income, people often lack the financial strength to stay afloat should a risk event happen. They end up consuming savings, selling assets, taking loans, or accepting a drop in socioeconomic status.

Lower insurance penetration also puts fiscal pressure on the government along with direct economic losses, indirect losses and effects on overall economic growth.

This is evidenced when large-scale risks affect a significant part of the population. For instance, the 2022 floods in Pakistan affected over 33m people, caused economic losses of several billion dollars and necessitated billions in reconstruction and rehabilitation work. A meaningful level of insurance penetration in the region would have changed the post-flood financial landscape.

As previously stated, there are dozens of insurance companies offering hundreds of products in Pakistan. So, why is insurance popularity low and concentrated among a small niche of financially stable individuals? Our argument, informed by lessons from other industries, is that to grow a product or service from niche to mass adoption within one lifetime, one must embrace market-creating innovation.

This is characterised by simplicity, inclusivity, collaboration, “coopetition” — a combination of “cooperation” and “competition” — and technology. The expansion and ease of access to products like mobile telecommunications, mobile money aimed at financial inclusion, sharing economy services and access to information, entertainment, news and sports are a few examples of how products and services have expanded in recent times.

These products and services are generally easy, affordable and available, and solve the accessibility problems of their consumers — the common men and women, many of whom are not tech experts.

In contrast, most insurance products are complex, with difficult processes not only for claims but also for purchasing and premium payment. These products, often viewed as “the solutions looking for problems”, frequently rely on aggressive selling techniques, which lead to high levels of buyer’s remorse. You will not find many consumers appreciating their experience with an insurance product.

However, we have seen from other markets, including some emerging markets, that by applying the features of market-creating innovation described above, players have been able to commoditise insurance products and expand their reach to unprecedented levels.

Market-creating innovation also involves collaboration; companies collaborate with their competitors to expand markets, share resources or drive innovation while maintaining a competitive relationship in other aspects.

Often, products and services that achieve significant democratisation share the infrastructure and assets developed by others. By combining these resources, companies can create highly valuable offerings for end-users.

It is not uncommon for competing players to collaborate in this way. For example, banks allow customers from competing banks to use their ATMs, telecom operators sometimes share mobile towers to reduce overhead costs, and mobile financial services operators facilitate interoperability to expand their reach.

These collaborative efforts demonstrate how competition and cooperation can work together to drive innovation and make services more accessible to potential customers.

Unfortunately, such examples are not very common in the insurance industry, particularly regarding the insurance of life, health, and personal assets. The small size of the insured market leads to fierce competition, which often results in price wars that negatively impact insurers’ profit margins and hinder overall market growth.

While regulators play a crucial role in facilitating collaboration and competition, as seen in other industries, the insurance sector’s own desire and drive to change the status quo is equally important. The industry’s reluctance to embrace such collaborative and cooperative strategies limits opportunities for innovation and market expansion.

The writer is an insurance professional based in Pakistan

Published in Dawn, The Business and Finance Weekly, August 5th, 2024