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Nippon Life Insurance Company Japan - The Emerging Middle Class

Nippon Life Insurance Company Japan

The second trend across Asia is the rapidly changing complexion of life insurance customers. This is a trend that is more prevalent in the nascent markets of China, India, Indonesia, and Vietnam, and describes the expansion of the insurance market into previously untapped territory. The numbers are staggering: There are 110 million households earning US$10,000 per annum in the 12 countries we studied; by 2012 there will be over 200 million. In the US there were 107 million households with the same income level in 2007 and is expected to increase to 113 million in 2012 the same year, there will be slightly more than 110 million US households with that same income level. This translates to an influx of approximately 200 million new customers into the Asian market over the next five years.

Where do these new customers come from? As Asian countries become wealthier at their breakneck pace of growth, a large middle class is emerging in many of these markets. In China, for example, where 99 percent of urban households were considered "poor" in 1985, by 2005, 22 percent of urban households were considered "middle class," and it is projected that by 2025, about 80 percent of urban households will be in that category. In absolute terms, that means an additional 250 million middle-class households in China! Similarly, in India, the middle class currently only constitutes 5 percent of the population but is expected to be more than 40 percent of the population by 2025.

It is important to note that middle class in Asia does not connote the same absolute wealth levels as in the developed countries. For reference, a household that makes between US$3,500 and US$14,000 a year is already considered middle class in China. The United States Department of Health and Human Services set the 2008 poverty guideline for a four person family at US$21,200. That is to say, all households who fell into the "middle-class" definition in China would be considered poor in US. Nippon Life Insurance Company Japan

However, when accounting for purchasing-power parity, a household income of US$14,000 would buy a Chinese family the same lifestyle as that of a household earning US$40,000 in the United States. For these consumes - Chinese, Indians, and Vietnamese - this growth in wealth means they will, for the first time, have money to spare for items beyond the basic necessities. We are already seeing spending patterns shifting towards discretionary items in both India and China.

Continued urbanization is a key factor driving the creation of this new middle class. In China, the McKinsey Global Institute estimates that by 2025, there will be over 200 cities with over one million inhabitants, compared to around 120 today; in Europe today, there are only 35 cities of that size. Consequently, China's urban population will grow by more than 350 million within 20 years, which is roughly the same population size as the United States today. By 2025, it is estimated that two-thirds of China's citizens, or nearly one billion people, will live in cities. Even with conservative assumptions, urban GDP will more than quadruple between 2005 and 2025, reaching around US$8,200-9,600 per capita from today's figure of less than US$3,000.

What is the impact of this rapid urbanization and emerging-middle-class customers on life insurers? We believe there are two main implications.

The first implication is access - how can insurers get to these customers before everyone else? Since many of these new middle-class households will be first-time buyers of insurance products, a large sales force with a strong focus on consumer education will be needed. Our proprietary survey results showed that many consumers are seeking financial advice and are not receiving it. Nippon Life Insurance Company Japan

In Indonesia, for example, agents reported to us that explaining the features of insurance products is a big part of their selling process. At the same time, a large sales force will be required to capture market share, given that many of these customers will have relatively small policy amounts.

Building these large sales forces is no easy task - with an 80-90 percent turnover rate in many instances, scaling up quickly is a massive endeavor and probably one of the most critical issues facing many insurers today. This is further complicated by the fact that much of this growth will come from second- and third-tier cities. Simply building sales forces in a few major cities won't be sufficient to capture the growth of the middle class.

Second, our market research shows the increasing complexity within the middle class is creating several distinct segments of customers. For example, the growing number of professionals and white-collar workers, the small-business owners, and the aging savers, are all categories that will fit into the middle-class definition but have very different needs. Increasingly, life insurers will need to understand the various segments of the middle class in order to serve them better. 

While this is at an early stage, there are already a few insurers that are creating products and channels catering to the increasingly divergent segments. For example, some insurers have found success with remote, direct channels such as outbound call centers for customers who are comfortable with such methods. Others have focused on investment products with sophisticated investment structures for those who seek more adventurous returns. 

In any case, insurers will need to improve their game and find their competitive edge in order to compete for the subsegments within the middle class. To find out more, you can check out Nippon Life Insurance Company Japan.