There might be a gap in the market, but is there a market in the gap?
By Matthew Rosenberg, Corporate Manager, Specialist Classes
Renasa Insurance Company Limited
Whether it be the transport of rice in ancient China or astronauts to space in the 21st century, risk transferring devices have always been essential. The question here is whether the supply and demand equilibrium relating to a specific risk results in a viable insurance product, with an explicit focus on niche markets. This is exactly what managing a Specialist Class Division requires; an understanding of these innovative insurance products and the demand for them.
Niche products are a solution to the market’s cry for a specialised type of insurance. Historically niche markets would have relied on other types of risk mitigation mechanisms; for example the financial market. However, over time, insurance companies have become more inventive in their offerings - now providing insurance policies for numerous types of atypical risks. In contrast to traditional insurance products, price may not be the single or even the principal driving force behind these products. While the local short term insurance market is dominated by large homogenous portfolios primarily managed by a handful of elite players competing on price, the profitability of niche products relies more on understanding the specific market and being able to satisfy it.
The unique nature of these products means that they are able offer a higher return on investment and, therefore, do not necessarily require a large portfolio of clients. Consequently smaller/start-up companies, unable to compete with the volume-driven bigger companies, may be enticed to enter this segment of the market. The lack of substitute products allows for these companies to establish themselves, while their niche offering could be a major catalyst for growth within the industry.
However, a novel idea does not necessarily mean a specific product will be a success. Understanding the market requires the ability to determine which products, despite being innovative and interesting, are unlikely to succeed. This aspect is of paramount importance and if a product is to succeed it is important that a prudent demand analysis is carried out and that access to sufficient technical market knowledge exists. It is crucial that the demand analysis focuses on both current and future market trends.
Niche products run the risk of being a fad as, should these products be deemed unsuitable, the market may regress towards relying on habitual methods of mitigating these risks. The demand as well as the longevity of the product is, therefore, a vital consideration. Technical market knowledge is certainly an essential aspect in deciphering the niche market and developing/maintaining an appropriate product and insurance companies offering niche products often rely on resources that possess specialist technical knowledge and underwriting experience in a specific discipline.
Whether the insurance company relies on a specialist division, a specialist class broker or, as is common in South Africa, a UMA (or Underwriting Management Agency), these agents of the insurance company are where the market related expertise exist. Frequently managed by individuals with firsthand experience of the specific market, these agents possess a thorough understanding of the technical aspects of the relevant market. This also ensures that the attitude of the target consumer is properly understood and that not only is the product developed correctly, but its distribution is handled appropriately.
Even the most innovative and attractive product offering is unlikely to succeed without a proper distribution network. So, whilst a market may well exist within the gap, if adequate market knowledge does not exist it may not appeal to, or even reach, the intended consumers. Lastly, despite all analysis done and expertise involved, there will always be an element of luck behind success in a niche market. Being in the right place at the right time, and of course knowing the right people are also all vital components of a products success.
Given the characteristics of the South African insurance market and the fact that it has matured into a highly competitive and regulated oligopoly, a movement towards providing innovative products to a niche market could certainly become vogue as companies look to enter uncharted territory with the hope of achieving higher returns and avoiding direct competition with the elite insurers. However, this is not a “get-rich-quick-scheme” and, as already highlighted, it is also a road riddled with its own complexities and barriers to entry.
Renasa Insurance Company Limited
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