Max New York Life's Lesson in Insuring a Rural FootholdPublished: May 06, 2010 in India Knowledge@Wharton
Rajesh Sud, the New Delhi-based managing director of insurer Max New York Life (MNYL), likes targets. This year, he wants his sales team to sell 250,000 Max Vijay products, the insurance line it launched in 2008 designed specifically for low-income households in India. That's a big leap from the 85,000 Max Vijay policies that his team has already sold over the past year.
While MNYL is one of the country's top 10 largest insurers (with US$2 billion assets under management), around 80% of all its policies are sold to urban, rather than rural, customers. Of the total 4.3 million policies MNYL has sold since it was set up as a joint venture between Max India and New York Life Insurance Company eight years ago, 650,000 policies have been sold to the country's hinterland in addition to its Max Vijay products. Sud says, "It's a given" that MNYL is "part and parcel" of the rural India story.
However, it's not a given that MNYL -- or any other companies in India's US$13 billion insurance sector, such as SBI Life, Bajaj Allianz and ICICI Prudential -- have an easy time hitting growth targets in rural India. Insurance isn't a product that many of rural India's millions of poor feel they need, let alone can afford. But the insurance companies need them. By law, a certain percentage of the policies that India's insurance companies write -- which is determined by the number of years an insurer has been operating -- must be based in rural India. In MNYL's case, the requirement is 19%.
Thus far, India's insurers have been taking one of two routes. They either fulfill their legal requirements by simply pushing the same stable of products in rural India that they do in the more lucrative urban markets, without expecting to turn much of a profit or build substantial market share. Or they do what MNYL is striving to achieve: Design a robust, profitable rural business model around new, tailored products and services for customers in the hinterland. But to make the latter plan work, as Sud knows, the likes of MNYL are facing a wide range of challenges, including figuring out how to help their rural businesses reach the right level of scale so that products like Max Vijay can be sold economically and efficiently.
Capturing the 'Loose Change'
The Max Vijay story began in 2006, when Rajit Mehta, its current chief operating officer, attended an international executive management program. Impressed by a presentation about how a company developed a number of new products and services within a niche sector, Mehta returned home to apply what he learned to the insurance business, which hadn't had much success reaching the country's millions of rural consumers. "We wanted to capture their loose change, which was being spent on smoking or other non-essentials," says Anisha Motwani, executive vice president and chief marketing officer of MNYL. But how could it do that?
At the time, according to New Delhi-based National Council for Applied Economic Research, 78% of rural Indians were aware of insurance, but less than 19% of rural households owned a policy. Meanwhile, MNYL's own on-the-ground research found that rural consumers were keen to build up their savings for a rainy day but didn't do it for reasons ranging from uncertainty about the documents needed for opening a savings account to the day-to-day challenges that distracted them from taking precautionary measures for their future. The insurer also learned that this new customer base was not averse to buying insurance, provided policies were easy to understand and didn't require regular payments, while allowing them to withdraw their money for emergencies with little or no penalty and giving them investment opportunities alongside guaranteed life protection.
It also recognized the importance of having a local sales force dedicated to these customers, but with the same focus on volume-based incentives as their urban counterparts. Today, MNYL employs 600 rural and 9,400 urban sales managers, with each having about 10 local agent advisers reporting to him. While the advisers work on a purely commission basis, the sales managers have a variable component in their salary depending on the number of policies his advisers sell. Thanks to all this research, "we saw opportunities from the commercial and corporate social responsibility standpoints in serving the underserved," says COO Mehta.
The result is the Max Vijay range of products tailored to the likes of Dhanaraja Thiruchelvam. He owns a small grocery stall selling betel leaves, bidis (local cigarettes rolled in dry leaves), soaps and prepaid mobile phone cards in the Pulivendala district of Andhra Pradesh state. Earning between US$10 and US$22 a month, he bought a Max Vijay policy last year and has topped it up three times. Thiru, as his friends call him, plans to hold off making further payment for a while as he saves up for English lessons for his 10-year-old daughter. "Max Vijay's 'as and when' payment option doesn't stress me out," he says.
Unlike with most other insurance products, Max Vijay doesn't require policy holders to make monthly, quarterly or annual payments. Rather, to accommodate their erratic income flow, customers can invest as little as US20 cents of their surplus cash whenever they can. Among the three offerings -- Max Rajat, Swarna and Heera -- the enrollment premium ranges between US$20 and US$50 for 10-year coverage, and at the end of 10 years the customer receives a final balance as a maturity benefit. The life cover is five times the amount invested in case of natural death and 10 times for accidental death.
What's more, the actual process of purchasing and managing Max Vijay products is easy. They are sold over-the-counter at small, local retail stores, much in the same way that units for mobile phones are sold.
The good thing about a Max Vijay product is that "it's designed for a touch-and-feel customer base," says Rohan Sachdev, a financial services partner at Ernst & Young in Mumbai. "It's a simple, tangible product delivered to your doorstep."
For sure, as other companies catering to rural India are learning, "simplicity is always a virtue, but more of a virtue for low-income families," says Jeremy Jacobman, professor of business and public policy at Wharton, who has helped insurers such as ICICI Lombard and non-profit organizations develop micro insurance in India.
Putting the Customer in Control
MNYL's Max Vijay has been a catalyst for "a huge paradigm shift for India, where most insurance companies largely tweak or transplant their urban products for the rural terrain," says S. C. Dash, professor of rural insurance at the National Insurance Academy (NIA), the country's apex training institute in Pune, Maharashtra. "Now it's time for reverse engineering, working backwards from the customer to the product."
Yet as well intentioned as it might be, such "reverse engineering" in rural India can be hard to get right. COO Mehta says Max Vijay's "disruptive business model" was expected to "create a movement where consumers would flock to buy the product." But that hasn't been the case yet. "We overestimated our ability to create 'pull,'" as opposed to the traditional push practice of distributors and suppliers driving consumers to the products. The company initially was aiming for US$33 million of first-year premiums in its first three years, but it's been a struggle. The targets were based on economies of scale because margins for such products typically range from 2% to 4%, compared with the margins of 14% to 16% of unit-linked insurance plans. Mehta declines to say what the revised targets are but notes that Max Vijay is now focused on a four-year break-even.
Part of the reason why Max Vijay missed early targets is that it lacked a substantial distribution network. Its main distribution partners have been local rural banks whose networks are limited. Unlike most major insurance companies in India, MNYL is not owned by a big banking parent, which serves as a distribution springboard as, for example, ICICI Lombard and ICICI Prudential do when they leverage the 1,615 branches of parent company ICICI Bank.
"Often, when you have such low volumes, there is very little money left for distribution," says Jacobman. "My observation is that finding effective partners already working in villages brings down marketing and distribution costs considerably."
MNYL agrees, which is why it initially took a multi-pronged distribution approach. It enlisted the help of a plethora of partners that already had a foothold in the hinterland so it could explore every way of reaching low-income households. "It is a people-intensive business, and choosing the right candidates is critical, particularly for a rural business" whose customers value local knowledge and a familiar face, says Motwani. But MNYL learned that not all of the partners -- such as a milk marketing company and Mahindra Finance, the financial arm of auto and tractor maker Mahindra & Mahindra -- were as focused on the parts of the underserved market as it was.
Things also didn't go smoothly with the non-government organizations (NGOs) it began working with. NGOs typically target people below the poverty line, while Max Vijay wanted to aim its marketing efforts at a customer segment one notch above. The lack of skills among its NGO partners was also a concern. The NGOs "didn't have the capability to train people about when to sell and how to sell the product," says Motwani. "The product was ahead of its time."
Today, Max Vijay has dropped the NGOs from its distribution channel. The brief romance with major retail chains -- like Reliance Retail in northern India -- was also nipped in the bud. "The low margins didn't justify the effort that went into selling to consumers," says a Reliance Retail manager.
After nearly two years, does MNYL consider Max Vijay a success from a business standpoint? The jury is still out. COO Mehta says at least one more year is needed for the products to gain traction. Still, the challenges do not seem to have dampened MNYL's enthusiasm for rural growth. As tough as the effort has been, MNYL's CEO Sud insists, "It's worth it."