LATAM disruption

ITIJ 202, November 2017
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Lindsay Lehr identifies the opportunities and challenges of entering into, and operating in, the Latin American travel insurance marketplace
 
The rise of e-commerce has transformed most B2C industries in Latin America, predominantly air travel. Airlines were some of the first companies to sell their products online; today the online channel accounts for 20 per cent of airline ticket sales in the region, compared to three per cent in retail sales. One of the biggest impacts of e-commerce is that it offers airlines and others an efficient way to sell direct to consumers, cutting out middlemen like travel agencies. This trend is occurring in almost every product vertical, disrupting the traditional sales flow of vendor-agent-consumer. In Latin America, the travel insurance industry is just starting to feel this disruption.
 
Travel industry alive and well
Despite decelerated GDP growth and currency declines in Latin America since 2014, the travel industry has continued to grow. From 2014 to 2016, the number of international trips by Brazilians, Mexicans, Argentineans and Colombians all increased. The most startling increase was Colombia, up 20 per cent since 2014, in direct response to its currency stabilising in late 2015. [Fig.1]
Domestic travel has increased also, in large response to economic pressures. While the most affluent still venture abroad, in the face of a weakened peso, many Latin Americans travel domestically. This jet-setter attitude is made possible in part by interest-free installments made available to consumers by the airlines. In many cases, customers can pay for a flight in up to 12 interest-free installments. The financial cost is built into the final price, of course, so everyone ends up paying interest whether or not they opt to parcel out the payment. A hugely common phenomenon, interest-free installments account for up to 70 per cent of total sales in some cases, especially in the travel industry. 
Simultaneous to the growth of the travel industry, Latin America is experiencing booming growth in e-commerce, at an average of 30 per cent annually. These two ingredients create a ripe environment for disruption in travel-related services.
 
E-commerce causing digital disruption 
The travel insurance market in Latin America today is tiny. No official market size figures are available, but insurance providers estimate total penetration of international travellers to be only 10 per cent. With an average policy price of $96 for a one-week trip, the total current market size comes to an estimated $192 million. Considering a probable 20 per cent margin of error, maximum market size might reach $230 million. But with only 10 per cent penetration, this industry has exponential room to grow, with a total addressable market size of up to $2 billion, even more if we include the domestic travel market.
[Fig.2]
Travel insurance penetration among international travellers 10 per cent
Average price for one-week insurance plan $96
Current marketsize $192 - $230 million
Potential addressable market size $2 billion
E-commerce has the potential to transform the travel insurance market and push the current market size toward its potential. Today, most insurance companies in Latin America do not sell direct to the consumer, but rely on agents. For travel insurance, these agents are mostly airlines and travel agencies, as well as banks. Currently, the direct-to-consumer online channel accounts for only eight per cent of total sales, or $15 million. But this channel is growing much faster than any other, at 60 per cent annually, compared to 13 per cent overall market growth. This will put the value of online travel insurance sales at a startling $63 million by 2020.
[Fig.3]
The online channel is attractive to insurers for a number of reasons. First, it provides unlimited flexibility. Insurers can adjust pricing according to seasonality, offer promotions, generate customer loyalty, and tailor offerings to each individual customer. It also promotes brand recognition, since the online channel allows insurers to interact directly with customers. Finally, it forces insurers to offer a truly valuable product, since it requires customers to willingly opt-in. In many cases, when airlines sell travel insurance to customers, the product is automatically included in the ticket price, and customers have to manually opt-out if they do not want it. This can cause buyers to feel swindled by insurers and tarnish the reputation of the industry in general. The online channel gives insurers the opportunity to engage customers directly, understand their values and preferences, and offer them a product they truly want.
Additionally, the online channel will experience organic growth as the travel industry matures. Latin American travellers are becoming increasingly sophisticated, and with increased affluence generally comes greater value placed on security. As this occurs, customers desire more control over value-added services, and banks and travel agencies do a poor job communicating customers’ options with regards to insurance. 
 
Understanding Latin American online behaviors
Of course, selling online requires climbing a steep learning curve. For a traditional industry like insurance, e-commerce may seem antithetical. When attempting to develop a direct-to-consumer online sales channel in Latin America, insurers must learn a few key lessons:
  • For many, the Internet is still a place to browse and learn about products, but to not to transact.
  • Many consumers are fearful of putting their credit card information online for fear of fraud.
  • Credit card penetration is only 30 per cent region-wide and even some affluent Latin Americans do not have credit cards. Even when they do, limits tend to be low (average of $500).
These realities have several implications for online insurers. First, insurers should have a call centre in place to take phone orders. It is very common behaviour for Latin Americans to browse and select a policy online, and then pick up the phone to place the order. Allianz, a leading travel insurer in Mexico that has invested heavily in online sales, receives 50 per cent of its ‘online’ orders over the phone.
Secondly, insurers should consider enabling non-card payment methods, such as cash vouchers. Cash payments are very common in e-commerce in the region; the customer selects the cash payment method in the checkout process, prints out a voucher, approaches an agent at a bank or convenience store, and makes the payment in cash. This payment method is popular for all types of consumers – those who are afraid of credit card fraud, those who do not have a credit card, and those for whom an online credit card purchase was attempted but failed. In Mexico, cash payments make up about 35 per cent of all e-commerce purchases. In Brazil, this figure is around 25 per cent. Local payment service providers, such as PayU or MercadoPago, can enable these options for online merchants.
Thirdly, while the online channel is growing rapidly, insurers should not neglect their traditional sales channels which, after all, still make up around 90 per cent of total sales. Analysts predict that, except for Brazil where regulations and consumer protections are already strong, regulatory shifts in the insurance space will be made in the next five years, and sellers will be required to implement an opt-in structure for insurance sales. This will initially make life more difficult for insurers, but in the long run will reward transparent companies who truly deliver value, weeding out those trying to dupe customers. This provides the opportunity to work with sales partners to offer legitimately valuable products. 
 
Perception of value
Across all channels, customers are looking for reliable, transparent insurance vendors. In a region where banks are generally despised, insurance companies are considered with skepticism at best and disgust at worst. Generally, international companies are better regarded than local players; thus the reason that leading players in Latin America, including Allianz, MAPFRE, April and AXA, come from outside the region. Argentine Assist Card, however, has been able to obtain decent regional penetration, positioning their product not as travel insurance but rather travel assistance. This change of semantics shows how some home-grown companies with local knowledge can outwit their international competitors.
When customers choose a travel insurance policy, insurers report that one single factor is the key decision influencer: direct payment to providers, especially in the case of medical emergencies. In an overly bureaucratic and uncompetitive industry, Americans have come to accept terrible service from insurers, in which they receive reimbursements for out-of-pocket expenses only after filing copious amounts of paperwork. In Latin America, where consumers mistrust financial institutions, there is no patience for such nonsense by insurance providers. Additionally, Latin Americans mostly travel to the US, where medical expenses are exorbitant and direct payment by the patient to providers is literally impossible. Thus, easy payment directly to medical providers should be a key part of messaging to consumers in any channel.
 
Taking baby steps
The travel insurance industry in Latin America is ‘in diapers’, as they say in the region – immature, growing, and with massive potential. Insurers who want to stay competitive must come to terms with the reality that the direct-to-consumer channel is becoming more relevant everyday, creating a more educated, savvy consumer base. This is good for everyone, except for shoddy insurance providers. Service will improve, prices will go down, and the market will grow. It will not be an easy transition, since selling online requires an entirely different strategy, both conceptually and technically. The transformation is coming nonetheless, however; shrewd industry players best get prepared. ■
 
 
Author

Lindsay Lehr is a specialist in market and competitive intelligence in Latin America and an emerging thought leader in the payments industry. As senior director at Miami-based market intelligence firm Americas Market Intelligence, Lindsay has spearheaded over 75 consulting engagements in 20+ LATAM markets since 2012. Her industry specialisation is cards and payments, with experience in e-commerce, mobile money, digital wallet, mobile payments, POS technology, payment networks and aggregators, financial inclusion, prepaid cards, and corporate and personal credit cards. 

 

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