Expansion of insurance companies in emerging markets has been driven by low insurance penetration rates and rising disposable incomes. However, insurance companies in emerging economies have typically targeted the formal sector since a large part of it resides in urban areas and is easier to penetrate through employers. But the informal sector, which mainly resides in the rural areas and where employment is not based on any formal contract, seems to have remained outside the ambit of the insurance companies’ offerings.
We believe that the market that is at the heart of the income pyramid of the informal sector—the middle class—has been left uncovered. We think that if insurance companies are aiming for the next level of penetration in emerging markets, the middle class of the informal sector will be a key segment to target. This is a segment with a growing number of people with purchasing power and presents a huge growth opportunity. Of course, companies will need to develop products that can address the heterogeneity of the middle class. Only companies that will be able to mass-market insurance will be the true leaders in emerging markets.
Our calculations indicate that the middle class in the informal sector constitutes nearly 53% of the total people employed in India, which amounts to 214 million people.
Given that India’s insurance market is still at an early stage of development—average insurance density calculated as the per capita premium in dollar terms is still as low as $47 compared with $89 for emerging economies and $3,655 for industrialized economies—it is reasonable to assume that the rich or the reachable would have been the first target segment. In other words, we think that insurance companies have so far targeted the richer sections of the society, be it in formal or informal sector. They have also considered the poor sections of the society as a target market through micro-insurance. However, we doubt if the middle class—whom we refer to as the workforce earning between $2 and $20—has been targeted. Even if we assume that the middle class in the formal sector has been covered, there is no reason to believe that the middle class in the informal sector has been focused on. This could be because its potential in terms of size and contribution has been underestimated.
Our effort at sizing this segment reveals that the middle class of the informal sector in India is indeed huge—as huge as 53% of the workforce or about 214.5 million people. Out of this around 34 million are residing in urban areas and probably this would be the first segment insurance companies may want to reach to.
Edited excerpts from a report by Towers Watson. Comment at email@example.com