Can insurance be sold in a sachet?
My father was only 15 when he started his little paint shop with a Rs2,500 loan from his elder brother and a 40 sq.ft hole in the wall. Situated in the heart of the old town in Mangalore, opposite the then fashionable Ramakanthi Talkies. Popular Agencies eventually went on to live up to its name. But the early days were the hardest.
Dad’s biggest problem early on was the fact that none of the “grown-ups” would visit his shop to buy from a teenager. He could lure them by discounting, but given the low purchase volumes, this strategy would eat into margins. He had to think out-of-the-box. Being young and broke, my dad hung out with mechanics, and body-shop owners in the evenings. After all, they were potential customers. Over shared cigarettes and cheap booze, he heard them complain about how most of the paint they bought for “touch-ups”, as they called them, was wasted. This was because 500ml was the smallest can they could buy, but a touch-up needed 100-200ml.
On one such lazy weeknight when this problem was being discussed for the umpteenth time, one of his buddies who’d returned from Dubai pulled out some duty-free maal—a gleaming red Benson & Hedges cigarette tin. Dad was intrigued. As he turned over the little red metal box in his hand, a flash of inspiration struck him. The tin was small and secure. It could hold about 250ml of paint. Could he then sell paint “loose” like he got his cigarettes, charge a small premium, all while giving his customers what they wanted?
And thus the “CT” (short for cigarette tin) measure was born. The very next day, dad visited all the body-shops in town telling them that at Popular Agencies, you could buy as little as a half-CT (125 ml). He had sachetized automotive paint retail. And it paid off. In the years to follow his little paint shop grew, often frequented by mechanics from across the city who wanted a half-CT of paint for a small dent here, a little bump there. These purchases and my dad’s salesmanship led to larger orders, and this business eventually generated enough capital for my father to start a paint factory.
This is not an uncommon story. From shampoos, to pickles, paan-masala, and Pulse candy, not to mention the ubiquitous single cigarette, the history of packaged consumer products retail in India is littered with numerous examples of how the humble sachet has been the foundation of many a colossal brand.
However, some sectors of the economy have been slow to internalize this insight. And financial services is one such sector where this is most evident. As my partner Kartik Srivatsa noted in last week’s edition of this column, microfinance was the last major India-specific financial innovation. It unlocked formal credit for underserved populations by going to the doorsteps of villagers, eschewing the requirement for onerous collateral, and collecting repayments in small weekly instalments.
But why stop there? As is painfully evident from the Reserve Bank of India’s report on household finance, Indian households tend to borrow later in life and are more likely to reach retirement age with positive debt balances, which is a source of risk given that they are no longer earning income during these years. Most of this debt is provided by informal sources such as moneylenders at high interest rates leading to households becoming trapped in a long cycle of interest repayments.
This vicious cycle perpetuates itself because households in Bharat tend to deal with the risk of financial shocks caused by failed monsoons, or a health emergency, by borrowing after the fact instead of insuring against them in advance. In fact, insurance penetration (measured as a percentage of insurance premium to GDP) in India stands at a dismal 3.44%, against the global average of 6.2%. Only about 30% of Indian’s lives are insured, and as RBI report points out, most people (51%) don’t get insurance because they think they can’t afford it, 20% haven’t heard or thought about insurance, and another 17% either don’t understand insurance or think they don’t need it (which is essentially the same thing).
What Bharat therefore needs is sachetized, digital, and frictionless insurance products of all kinds—life, term, health, crop etc. Such a product would need fast KYC (know your customer; a way to authenticate and identify customers), a great auto-debit facility, and easy mobile phone-based setup. In other words, it’s the perfect use case for the IndiaStack, which, according to its website is “a set of APIs” that allows for the use of “a unique digital infrastructure” to solve problems. With the advent of e-mandate in UPI (Unified Payment Interface) 2.0 auto-debit will also become seamless, thus reducing the cost of both on-boarding and servicing new customers manifold. And when the cost of customer acquisition and servicing drops so precipitously, it makes it possible for companies to serve high-volume, low-ticket size (and hence low margin) customers profitably.
I can’t wait for the day where insurance products advertise themselves with a daily premium: “A daily premium of just 1 rupee can buy Rs5 lakhs of coverage!” Opting in would become a tiny, yet life-saving decision. The same could apply for savings. Being able to invest Re1 per day in an index-linked fund could generate returns of around 15% on an annual basis. Which is not too shabby considering savings accounts yield 4%, and chit funds don’t do much better. Sachetization when applied to investments and insurance can become a powerful wealth builder, with the potential to secure the future of millions of households in Bharat.
Nobody likes to feel poor. But that’s exactly how Bharat feels when faced with formal finance instruments. By imposing onerous documentation requirements, complex terms, and a language they don’t understand, India’s regulators and financial services institutions have let her people down so far. However, the recent build out of public digital platforms such as Aadhaar, and the IndiaStack have set the stage for companies, both old and new, to annihilate the status quo in insurance, and investments. Now if only someone would step up and take a little piece of the action. After all, big things come in small packages.
Sahil Kini is a principal with Aspada Investment Advisors. The Bharat Rough Book is a weekly column on building businesses for the middle of India’s income pyramid.