Recent years have seen insurance companies gain popularity among the world population. The increasing uncertainty over property and human life has compelled people to ensure that their property and health are covered. Traditionally, insurance was meant for property alone (Dickson, 1960). It dates back to the practice of ancient Chinese and Babylonian traders who would distribute their cargo on several vessels, so that they would not lose all their goods, if one vessel capsized on river rapids. As more people became educated and civilized, institutions began to emerge, which were meant to repay to the property owner in case of a natural calamity. This way, the risk of loss was reduced. Today, property insurance covers fires, accidents, and theft among other scenarios that could result in losses.
With the increase in diseases and economic hardships, people also get health insurance to cover medical bills in case they fell sick (Vaughan, 1997). Insurance companies have diversified their scope of traditional property insurance to health and even death insurance. This has seen the insurance sector grow and become more profitable while facing new risks.
Insurance ventures are very lucrative and have since seen the development of various companies (Vaughan, 1997). With the increasing globalization, they have grown both in number and area of coverage. While some are local, some are global and are present in most if not all continents. Some insurance companies are also diverse in the kind of risks they cover, while others are diversified.
The size and importance of the industry can not be overestimated. As at the year 2009, the volume of worldwide premium amounted to $4.34 trillion, which equals to 6.9 per cent of the global GDP. Of this, life insurance takes up 58.44% of the total income from the premium. Europe provides the largest market for insurance, with North America being the biggest market for non-life insurance. The European insurance market is dominated by life insurance. As at the same year (2009), assets worth about $22.6 trillion were under insurance, equaling to twelve percent of the then global financial assets. It is, therefore, inevitable that the insurance industry has gained popularity and ensured that people and their property are covered to reduce their risk of loss. It has also provided a significant portion of population with white collar employment, which has resulted in an increase in production and per capita income among the world population (Ransom, 2011).
A venture into the insurance industry is usually hard, and insurance companies take long before they take off (Ransom, 2011). This is because they are compelled to use their resources within the first few years of operation when they do not have many customers and must compensate their few customers in case they experience the danger of loss, as covered by their agreement on coverage. With many well-established and highly profitable insurance companies that have many customers, new entrants often face the problem of high competition and losses in the first few years. This is because when an insurance company has many customers, they can reduce their premiums, since the collective income would be eventually high. On the other hand, new entrants have to charge a competitive amount for their premiums in order to entice customers. They also need to use strategies that are popular among people in order to gain a segment of the market. Alternatively, they may look for a gap within the market and try and fill it, instead of imitating what other bigger companies have been doing. However, correct steps and strategies of market entry would let any company get their market share despite tight competition.
Forms of Insurance
There are two main forms of insurance - life insurance and non-life insurance (Ransom, 2011). Life insurance deals with insurance of a person’s health, descendants after one dies, as well as accidents during work among others. Non-life insurance basically deals with such property as cars and houses by covering them against fire or theft. In the recent past, insurance on loans has been developed where one has the difference between the money he/she has paid for a loan paid by the insurance company in case he/she is unable to pay.
The most common form of insurance is motor insurance (Vaughan, 1997). Lately, fire and accident have claimed a high rank just below motor insurance. Different premium rating methods are being used today to determine the manner in which insurers would pay their premiums and the periods that they would follow.
Narnia’s Penetration of a Developing Country
Areas that Need Examination Before the Venture is Made
A global company needs to check the potential of the market in a developing country. This is because insurance outlook may be deceiving, and there are cases where people have easily incurred losses (Ransom, 2011). Once it has been ascertained that there is a prospect of profits in the future, the company needs to determine the best entry points into the market. Currently, it is not doing well and the market penetration is poor. However, if better strategies are used, there is a strong likelihood that the company will establish itself in the market and turn a profit in the long run. However, care should be taken to ensure that only the correct strategies are used, because a failure to do that may result in a failure of penetration.
Before the venture, the company needs to look into the said prospect of profits in Narnia. Since insurance is most profitable when a larger number of people are involved, the per capita income in the country should be examined to determine whether the people would be willing to spend their money on insuring their lives or property. At the same time, the projected economic growth in the country would be vital to determine (Ransom, 2011).
Another important consideration is to determine the viability of venturing into the country by determining the political status of the country. History of ethnic wars and destruction of property would be most interesting for the insurance company, since more people would be willing to insure their property. However, it could also work against the insurance company since it might pay a lot of money in case these wars persist and more destruction is made than projected.
The regulations and taxation policies within the developing country would also be important to determine before the venture is made (Ransom, 2011). This is because high taxes and very strict regulations on foreign companies might discourage the venture. Some countries attempt to discourage foreign companies through their regulations in order to encourage local industries.
Competition and the already existing insurance companies must be determined before the company starts its operations in this developing country. While some developing countries are poor and have less developed insurance industry, some have well-developed insurance industries accepted by their population. In case there is a well-established company in that country, there is a strong likelihood that there would be challenges of market penetration. In this case, the company needs to come up with highly sophisticated strategies that would popularize the company within the first few years of its entry. These strategies ought to be very effective in order to ‘snatch’ some of the markets from the existing and well-established company. The strategies should also ensure that any new customer would prefer the new company to the already existing one. It should be noted that it is hard for a customer to move from one insurance company to another for the same coverage. Therefore, new entrants into the market should introduce a new product or target new customers who have never used insurance services (Ransom, 2011). The former is a more appealing strategy, since new customers may be few, especially in developing countries. However, the already existing insurance customers would be a better target, and since they can rarely move from their companies for the same coverage, the only way to entice them into the new company would be through the introduction of a completely new product or package it in a different way that would be appealing to them as compared to the already existing insurance providers. This coverage would be made at fair prices for the first phases of introduction, so that more customers are attracted.
If all these conditions are met, the company can look into the strategies that it would use to successfully enter the market. If the competitor is not as strong as the company, the venture would be easier and less complex. However, if the competitor is as competitive as the company, a thorough analysis of the competitors’ strengths and weaknesses must be carried out (Ransom, 2011). The strategies that they have used to become successful in the country would be examined and an improvement would be made, so that better and friendlier strategies are used on the population to entice them to insure their property and lives. This is very important, as the company will be able to determine market entry strategies. The performance of the already existing insurance companies in the country would be examined and popularity of the industry determined. If the industry is not very popular, the prospect of becoming popular and timelines would be examined, and if it is already popular, the reasons for many or few insurance companies in the country would be determined. Further, answers as to why the market gap that the company wishes to fill has not been identified by other companies and whether anyone had tried to fill it but failed in the past. If the latter happens to be true, the reasons of failure would be carefully analyzed to determine whether the venture remained viable.
Entry into a new market would require explicit steps that would ensure that there is enough information that would eventually help the company establish itself in the new market. A thorough examination of the market needs to be done in order to determine the best ways for the global company to venture into the new market. Poor entry methods would mean poor performance and the company may never be able to bolster its status in the new country. Therefore, the global insurance company management team should first determine the current status of this new market. The company has a large capital base and a global insurance outlook. It has a wide range of experiences in the wide range of areas it operates in including other developing countries. Given the fact that the company faced similar challenges in those countries, the methods of entry would not be very new but will be slightly similar to those used in other countries. Therefore, a large capital base, experienced and highly competent strategists and marketers, as well as global reputation, will enable the company to venture into the market and succeed, as long as the said market gap is actually there. However, several examinations have to be carried out, and once the gap is identified and ascertained, a go-ahead for the venture can be given.
Motor insurance is the main form of non-life insurance in the new country, but fire and accident have in the recent past risen to significant levels. Life insurance is there but it has a very low status, which is negligible at the moment. Before investment is made in this country, it should be noted that the population is poor and may not be willing to insure their lives. However, there is a general perception that the market has a significant section of population that would be willing to put money in insurance. Though non-life insurance seems to be well-developed, life insurance is not as well-developed. There is only one life insurance product known as Term Assurance, which has not been doing very well. In order to reach out to potential customers, the company should use these strategies to capture and retain their market share in this country.
First, the company needs to determine their target group of customers and analyze their demographics. This would help determine the best ways of reaching the identified group of people. If a target group is not identified from the beginning, there is a strong likelihood that the whole marketing process will be a failure. On the other hand, proper understanding of the target group and their needs will result in the development of a precise and effective marketing process. In most developing countries, the percentage of young population is high and it has started to take up earning positions. They also have not had earlier commitment with other insurance companies and, therefore, would be the best group to target in this country. The best way to target the population in the long term is by using workshops and outreaching to universities and other learning institutions. The company could even increase its popularity among the population through the use of its large capital base to finance projects in universities and offering employment opportunities among university graduates. This way, the ideas from the company would be more acceptable than a strategy than only attempts to boost sales. Graduates from these institutions would be employed and could decide to invest in insurance. Though this may not deliver instant results, it could produce exemplary results after four to five years. It is, therefore, a very viable strategy to pursue, since it would provide long-term sustainable results.
Secondly, the company needs to come up with a well-packaged description of their product. When doing this, they should keep in mind the target group identified earlier. The packaging would be USP, or a unique selling proposition, and this would result in a better and more pronounced marketing strategy. Young people under the age of forty years in developing countries are in most cases self-employed. The company should take into consideration these low-income group and have several classes of insurance accordingly. This class of people has ventured into informal businesses and some of them do not have the information regarding insurance. The company should, therefore, devise methods to reach out to these informal self-employed young people who would otherwise not seek insurance services. The benefits of the insurance services would be vital at this point in relation to the targeted group of people. The company has a well-organized manpower that will be able to come up with an appealing package which the target population would appreciate.
Another strategy that can be used is changing methods used for premium rating. The companies are presently using traditional premium rating methods which may not be appealing to the new generation of employees. These traditional methods look unattractive and repelling to the youth who would be the best target group in developing countries. Modern premium rating methods would be better, since they are not fixed and could be classified according to earnings and the extent of cover. The company has a large capital base and a good reputation and it can outsource any of their desired experts. This gives the company an advantage that they can achieve any strategy they can settle on, as long as their experts have decided it is the best one to achieve a specific task.
Another strategy that could be effective is publicizing the product by using available and more prospective channels. The use of magazines, for instance, would work better than the use of radio. This is because most of the youths who read magazines can afford to invest in insurance as compared to those who only listen to the radio. However, some radio stations could be used where the importance of such products is emphasized. The use of the modern and popular ways of reaching out to the target group of people would also work best. Such methods include the use of such social networks as Facebook and Twitter among. The advantage of social networks is that they are cheap and can be used to reach out to a large population within a short period of time and at a very low cost. However, their success is highly determined by the way they are designed and how appealing the format of presentation of information is to the target group. If the targeted group is not excited about the information provided, the marketing strategy may be unsuccessful. If, on the other hand, it is appealing and plausible among the viewers, the idea is highly likely to be embraced by the targeted group. It is, therefore, important to carry out a thorough investigation of the trends in these social networks to determine what the target group enjoys to read. The information regarding the insurance product should be in line with these trends in order to attract the targeted group. The process of publicizing should start by letting the people know of the existence of such a product and then enticing them to purchase it. The ability of the company to use celebrities in a particular country would help them achieve their advertising goals. When advertising is done properly, it would result in better reception of the product when it finally reaches the market (Timothy, 2009).
Distribution of Narnia’s insurance services is currently tied to insurance intermediaries in the developing country. This has resulted in high premiums to cover up for the cists incurred through the use of the intermediaries. In this case, fewer people would be willing to invest in insurance. The use of bank assurance would be better, since a good understanding of financial institutions would result in well-organized and effective methods to run and manage insurance products. This could also be a better way of dealing with the public, since they will be assured of the safety of their money. In the long run, the suspicion that has developed in these developing countries, regarding conmen, would be reduced to insignificant levels.
Since HIV/AIDS in the developing countries remains a big threat to young people, a product that would insure the youth against this malady could be attractive to the young people in the country in question. Other conditions, such as injuries that occur in workplaces in the informal sector, would also be attractive insurance options. Other conditions that the young population could be easily convinced to be insured against is young and promising businesses whose owners have no fallback plans in case their businesses failed to perform as expected. Another new product that the company could start in the developed countries is the raising of children born out of wedlock. This could be very appealing to young mothers who might not be willing to get married due to their job commitments.
Hiring of highly competent advertisers would be an advisable strategy to enter into the market. However, the current staff of the company would do a good job of determining the needs of the customers in the new market. The company is endowed with social and psychological gurus who would help it develop far-reaching and effective advertisements that would be easily accepted by the targeted population. The design of an advertisement has far-reaching effects. A well-designed advertisement is expensive and only companies that have many ventures can afford it due to the risks involved in case the advertisement fails to market the product. However, young companies may not have the fallback financial bases that would allow them to risk expensive advertisements. The global company can, therefore, risk this and have the audacity to restructure a series of adverts, in case the first one fails.
A new acquisition of an already established company within this country would be appropriate for an easier entry and acceptance in the market. ABC Insurance Limited would be a better company to use, since it has been operating in this country for some time and has been able to establish itself. The company is well-known and has its customers who would be willing to invest in newly introduced products, rather than invest in an absolutely new company. A completely new company would obviously face resistance, especially in countries that encourage home industries and companies; thus, a global company may not receive the best reception (Timothy, 2009). In developing countries political interference in development is also very high and it would be easier for a company to enter the country through acquisition rather than through its new and independent entry. The ability of the global company to purchase a new business is solely based on the financial ability. This is a big strength that the global company possesses and it would be important that they use it to enter the new market.
Factors to Consider Before the Acquisition of ABC Insurance Limited
As the company attempts to venture into the new market in the developing country through the acquisition of ABC Insurance Limited, several factors and performance of the company need to be taken into consideration. First, the value of ABC Limited should be determined effectively. This would help the management team determine the amount of money they should not exceed while paying the company. If more is paid, the global company would suffer a loss and the minimum acceptable amount to the global company should be spent on acquisition. However, companies still go for highly valued acquisitions due to their collective values apart from the book value alone. This value would include the goodwill and other intangible factors that could be more important than the cash value of the company to be acquired. Many companies in this case would be valued much higher than their book value.
Apart from the money the global company should bear in mind when paying for ABC Ltd., there are other more important factors that analysts should take into consideration before the acquisition is made. This is because the company may be valued too low, only to get poor results or even fail to help the global company establish itself in the new market. Among these important considerations is the future of the business that the company to be acquired has operated in. ABC Ltd. is an insurance company and the future of the insurance industry in the developing country where it operates would be important to examine. The popularity of their products would be important and the future prospect on the market of these products would be important to consider. This way, it would be easy to determine the sustainability of the business, in case the new products that the global company wishes to introduce fail to become successful immediately after their launch. This would result in better the sustainability of the company as the new products start to reach the market.
Another factor that needs careful consideration is the position of ABC Ltd. in the insurance market. Some companies perform poorly and have little influence in the market (Timothy, 2009). This perception of potential customers would be injurious to the new products that the global company may wish to launch in the developing country. In the long run, this would result in poor reception of the new corporation and utmost failure to establish itself in the new market. If ABC Ltd. held a high position in the market, it would be a positive acquisition to make in order to penetrate the new market.
Another important factor that the global company needs to consider before the acquisition of ABC Ltd. is the effect revenue streams of ABC Ltd. after the change of ownership. Every time the ownership of a company is changed, there is a high probability that the revenue streams would be affected. It should not always be assumed that the effects would be solely positive, since they can be negative as well (Timothy, 2009). A thorough examination of the effects would be highly important, as this would result in a holistic determination of the performance of the merged company both in a short- and long-term perspective. If the merger has negative long-term effects on revenue, it would be advisable to look for a better company, rather than continue with ABC Limited.
The company should also determine the cash outflows that the company can handle, in case the company incurs a new debt. The NPV changes should also be well-analyzed in order to estimate the cash flow effectively (Timothy, 2009). Among the best methods to carry out this process is the use of the tree model, which has been plausible in most of the processes related to this kind of valuation.
Finally, the financial leverage of ABC Ltd would be important to examine. This would ensure that the correct projections are made. Before the acquisition is made, it should be noted that higher financial leverage of ABC Ltd would result in its lower average cost. In case the company to be acquired has low financial leverage, the acquiring company would have limited ability to borrow resources in order to strengthen the company’s performance. The cost of a company includes financial return expectation, exit strategy, deal structure, cash flow, asset type and the ability to pay debts.
A venture into a new region or country needs caution and extreme consideration of all the factors that could lead to the failure of the venture. This is especially true of industries that target more advanced sections of population, especially in economic terms. Insurance is among the fields that are perceived to belong to the economically able class. It is, therefore, not as popular in the developing countries as it is in the developed countries of Europe and the United States. If an insurance company decides to venture into the insurance industry in a developing country, it needs to develop strategies to ensure that they do not make the wrong ventures. Such ventures would require the acquisition of new companies that are better known in these respective countries for an easier market penetration. During such an attempt to penetrate the market, the company needs to use all its resources, including its financial and workforce ability to convince the willing people to insure their property or lives through the company despite the new introduction in the country.
Insurance accounts for a significant value in property risk management, yet the population in the developing regions may not be freely willing to invest in the industry, except for the motor industry where the law in most countries compel motorists to only use insured cars due to the high level of risk, as well as probable effect on other people in case of accidents. Life and health insurance are not popular among the larger population, but may be popularized through the use of extensive advertising and other marketing strategies.
While entering such markets, a clear-cut target population has to be identified so that the best strategies to reach out to this population can be developed and implemented. If one fails to identify the target group correctly, there is a high possibility that there would be poor reception and eventually the success of the strategies. However, when a target population is identified correctly, and the correct strategies to reach out to this population are put in place, the chances of success increase dramatically. At the same time, determining the area where the youth population would easily get interest would help increase the ease of penetrating the market.