Underserved populations and market niches are ripe with potential for insurance innovators who are willing to take on the challenge of creating opportunities in areas that may seem unprofitable at first glance, says the chief executive of the Americas unit for one of the world’s largest reinsurance companies. And the ability to reach those markets digitally is key.

Life insurance for middle income families in the United States is one such underserved market, according J. Eric Smith, CEO of Swiss Re Americas.

That’s “one area that I see as ripe for innovation. It’s an underserved portion of the market,” Smith told attendees at the Entrepreneurial Insurance Symposium in Dallas in September. “In the U.S., if you look at life insurance and look at people that are making $40,000 to $90,000 a year in household income, which is a lot of the households in the U.S., there’s nobody in life that’s taking care of those people anymore.”

The products are out there and they are affordable, but middle income families “don’t buy it because no one’s talking to them about it and no one has figured out how to do it online,” he said.

Consumers are getting comfortable with online financial transactions, such as banking and purchasing auto insurance. But the life insurance industry lacks a digital channel for serving the middle income customer.

So the challenge for entrepreneurs, Smith said, is “how do you connect with those consumers who are so not being taken care of, who have been so underserved? How do you connect with them? How do you get them to buy a product that they need and they can afford, but they just don’t know about it?”

The Smart Device

Small businesses in both developed and developing nations, such as Colombia, also represent an opportunity for insurance entrepreneurs, especially those with the ability to reach out to customers digitally, Smith said.

In Colombia, the economy has been in a growing at a steady pace for the past 10 years. The big global insurance companies have recognized the potential and now that the political and regulatory environment is enabling them to expand their offerings there, local insurance enterprises are being threatened, Smith said.

One of Swiss Re’s clients, a Colombian insurer, decided it had to come up with a new approach to capturing and keeping its share of the market. The company’s CEO looked at segments of the market that were being underserved and realized that with Colombia’s booming economy there are “thousands and thousands and thousands of small businesses that have never had insurance,” Smith said.

That CEO decided he could market small business packages to these new entrepreneurs through digital channels, through their smart devices.

“So that’s how he’s going to do it. … He’s figured it out, and what he knows is that it works. Obviously it’s both the virtual along with a call center. … But he knows he can build a base of thousands and thousands of small businesses that someday, not all of them, but some of them will become middle size businesses, and some will become large businesses,” Smith said.

And, he added, in a country like Colombia, people are loyal to those who helped them when they were at the bottom of the ladder.

“The part that the entrepreneurs have missed so far in our industry, is that whether it’s middle America or whether it’s Brazil or Colombia or whether it’s Indonesia, all these new entrants into our marketplace, the insureds, they’re all using smart devices. Almost all — if they aren’t today give them two more years,” he said.

Microinsurance, Microfinance

Microinsurance and microfinance play an important role in high growth and developing world markets and they are areas in which Swiss Re is involved today, Smith said.

“But I also think [they are] going to play a bigger role in our market here in the U.S.,” he added.

Why? Because there are many, many young people that are unemployed in this country and big companies are not going to be creating all the jobs that are needed.

“A lot of these young people that are unemployed today, they’re going to have to create their own jobs. They’re going to have to become entrepreneurs and they’re going to have to figure out something and they’re going to have to go out and do it,” Smith said.

“One that’s going to work for them is they’re going to have to get micro loans. … And what we’ve learned is that you can combine a microinsurance policy with a micro loan,” he said.

One place the combination is working well is in Haiti, where Swiss Re has partnered with the micro lending organization, Fonkoze.

“Most of those entrepreneurs in Haiti are women. It’s almost all women — they’re the doers. They’re the creative ones; they’re the entrepreneurs; they’re the ones making things happen. But they are terribly, terribly exposed to floods, winds, droughts, all sorts of things,” Smith said.

With a small loan — say $500 — they are able to create a business and support their families. Swiss Re has responded by developing a multiple trigger product to protect these small business owners in the event of a catastrophe.

“What the micro covers do is, if something happens then these pay off their loan for them. So they can get a new loan and start all over. That’s what we do. … I think that is going to catch on,” he said.

Microinsurance is at work in Africa, as well, where his company has developed a product for farmers. The product contains triggers—for drought, for instance. If there’s not enough rainfall, it triggers a payment.

“We’ve got thousands of farmers across certain areas and they have coverage,” Smith said.

“They’re going to get the crops or they’re going to get the replacement money. … And what that allows them to do, the most important thing for them is to not have to move. … Because in those societies if something bad happens and you have to pick up and move, that’s when really bad things happen,” he said.

It boils down to understanding a broad need and being creative in addressing that need in order to help create resilience in a society. And that’s important because as a society becomes resilient, incomes improve and a middle class is built.

“That’s what our industry is built on, the middle class, that’s where all our premium comes from,” Smith said.

The opportunity across the globe, then, is to be more creative and deliver new products in different ways to the large populations of individuals that don’t currently enjoy what those in prosperous countries like the United States enjoy.

“Which is, when bad things happen to us … we’re able to get back on our feet. Whether it’s a business, whether it’s an individual, whether it’s somebody’s house, we’re able to get back on our feet,” Smith said. “And in most parts of the world it doesn’t work that way.”

Micro Lending in the U.S.

While microfinance is largely associated with developing nations, microfinance in the United States has been around since the 1980s, according to a 2011 report, “American Offshoots: Will Microfinance Ever Really Take Root in the U.S.?,” published by the Wharton School of Business.

At the time the report was published, there were around 362 microfinance institutions in the United States, the largest of which, Accion USA, was launched in the early 1990s. By January 2010, Accion USA, an offshoot of Accion International, had provided around 19,500 small business loans worth more than $119 million, the report said.

Interest rates are generally high with microloans and are based on the cost of the money being lent, the cost of default and transaction costs, according to the international non-profit micro lending facilitator, Kiva. The lower the amount lent, the higher the interest rate, largely because transaction costs are basically the same whether a loan is for $25, $50, $100 or $500.

Some of the larger microfinance institutions in the United States include:

• Grameen America. The financial organization, Grameen America, founded by Nobel Peace Prize recipientMuhammad Yunus, offers microloans, training and support to women creating small businesses. Since its launch in New York City in January 2008, Grameen America has provided nearly 97,000 microloans to close to 38,000 women in the United States. The Grameen America approach is based on a group model, in which women create support groups and build peer networks, to help ensure the success of their businesses.
• Kiva. Kiva is a non-profit organization that works internationally with microfinance institutions to provide loans to people without access to traditional banking systems. Kiva.org dubs itself as a person-to-person micro-lending website, which allows individuals to make small loans to entrepreneurs. In 2009, Kiva.org launched an online portal to serve small business owners in the United States.
• Accion USA. The Accion U.S. Network has made nearly 50,000 loans totaling over $406 million since its inception, according to information found on its website. In addition to loans that range from $200 to $300,000, Accion USA provides counseling, group training, access to online business resources and referrals.