Consider the population of the United States in three segments:

Which segment do you think accounts for the most overall consumer expenditures?

In fact, each segment accounts for essentially equivalent shares of consumer expenditures, about $1 trillion each, according to MetroEdge, a Chicago-based market research firm that specializes in urban markets.

If you thought that “C” would account for the least in consumer expenditures, you wouldn’t be alone.

There are a lot of misconceptions about lower income markets, says Andrew Nutney, a consultant with The Research & Advisory Group, New York City, another firm that specializes in marketing to ethnic and urban markets.

Among the most pernicious of those misconceptions, he says, is the notion that insurers can only market in inner-city areas out of some sense of social obligation, that they must suspend their ordinary expectations for profit.

Nothing could be further from the truth, says Nutney.

“Show respect for the market,” he said in a presentation during an October meeting in Chicago of the Urban Insurance Partners Institute (UIPI), an organization devoted to expanding insurance availability in urban markets.

“You’re running a business,” Nutney told attendees. “If you change that [orientation], you’re assuming that a market is less worthy.”

In fact, said Nutney, “leading urban underwriters have experienced staggeringly positive underwriting ratios in these markets.”

A tale of two carriers

To illustrate how misconceptions can lead to bad results, Nutney compared the experiences of two national carriers.

One initiated an urban marketing strategy on a broad, countrywide basis with its primary goal to establish a countrywide presence, and overall revenue leadership, in urban markets. The program was effectively exempted from the company’s standard metrics for measuring business success.

Another company chose a distinctly different approach, targeting select urban markets and using “systemic benchmarking” to measure operating results.

Within a few years, the first carrier had to retrench its program, as the desire for positive public relations was no longer strong enough to sustain support for a program with subpar returns, by company standards.

The second carrier, in contrast, was poised to expand its profitable program to new markets.

All too often, Nutney said, urban insurance initiatives “display a confusion of commercial and community or compliance objectives.”

Initiatives launched without rigorous attention to their return on investment tend to “waste money, frustrate colleagues, get shut down, and create industry inertia.”

“Do not undermine normal corporate risk metrics,” Nutney added. “Accept the challenge of becoming a superior profit center.”

Unrecognized wealth

Perhaps the principal misconception insurance companies and other financial services have about urban and low-income markets is that the money to sustain profitable operations simply isn’t there.

In fact, “There is tremendous wealth and opportunity in emerging neighborhoods that goes unnoticed by most businesses and investors,” said Darice Wright, director of financial services for Metro Edge, who also spoke at the UIPI meeting.

According to Wright, “It is hard to find accurate and relevant market information about underserved areas.”

Too often, she said, businesses rely on census projections about personal income in deciding how to spend marketing dollars and where to place customer contact facilities, such as bank branches or insurance agencies.

“Conventional methods of market analysis tend to underestimate the potential of the inner city,” said Wright. “A good example is the common focus on median income as an indicator of buying power.”

According to Wright, income is not a good indicator of spending power because the less income a household reports, the greater percentage of income it spends, in general.

Amazingly, households reporting less than $10,000 in income are projected to spend more than 2½ times that, suggesting that the reported income is supplemented by unreported income and assistance from family, community organizations, and government.

Economic diversity

Beyond that, census projections of mean or median income do not capture the economic diversity of urban neighborhoods.

To illustrate the point, Wright used examples from Cleveland and Chicago, two prime markets for Shorebank.

A typical analysis of metropolitan Cleveland will show, as expected, that the percentage of households with incomes greater than $50,000 is much greater in suburban communities than in Cleveland itself.

If you count the raw number of households with incomes greater than $50,000 in metropolitan Cleveland, however, you will find that most are still concentrated in the central city, a reflection of its greater population density.

Within the city of Chicago, Wright compared the household economic profile of the lower income “South Shore” neighborhood to the city as a whole. While South Shore had a far greater percentage of poverty-level households and a far smaller percentage of high-income households, the percentages of South Shore households in middle income categories tracked very closely to those in Chicago as a whole.

Those who haven’t been following the right indicators may have missed the growth in home ownership--and insurance opportunities--in central cities and among historically disadvantaged ethnic groups over the past decade.

According to data from the U.S. Census Bureau, the rate of home ownership in central cities grew 7.0% over the past 10 years, from 48.5% of central city households in 1994 to 51.9% in 2003. This compares with 6.25% growth in the U.S. home ownership rate overall.

More striking was the growth in home ownership rates among African-Americans, 11.8%, and Hispanics, 17.0%.

“Home ownership rates are rising to record or near-record levels,” Wright said. “Because you can’t buy a home without insurance, insurance must be available and affordable to millions of Americans of modest means and all ethnic groups.”

Product innovation

While insurers should hold urban business to the same profit standards as other lines, making coverage available requires innovation and flexibility in product design and delivery, said Werner Kruck, executive vice president and COO of American Superior Ins. Co., Plantation, Fla.

As an insurance executive, Kruck was instrumental in developing an urban homeowners insurance program marketed in Philadelphia.

That program included an innovation that permitted agents to exclude coverage for leakage of water through a roof, which had become a major cause of loss in Philadelphia neighborhoods with flat roofs.

“Most standard companies were either withdrawing their HO-3 products or increasing their rates dramatically as a result of winter storm losses,” Kruck recalled. “The customers were not given a choice by those companies.”

Too often, said Kruck, the product development process for urban markets starts with a presumption of what the final product will be, rather than what the market needs.

“Many times, the product process starts with [a statement] like ‘we are going to develop a limited form replacement cost homeowners program for homes under $100,000 in low-income areas,’” he said.

“We have already concluded [what] form and coverage will be offered,” he added. “This leads to analysis and research that looks to justify the answer.”

Out of the mold

“The people developing products and making decisions are typically not from the urban market,” Kruck continued. “Not only have they not lived there, in many cases they view it with fear and misunderstanding.”

Kruck told the group that while he managed the Philadelphia program he frequently heard underwriters comment that “we can’t insure this, I would never live there.”

Standard and preferred auto programs typically require that an insured not have a lapse in coverage for more than 30 days. If there is such a lapse, the insured is typically moved to a much higher priced non-standard program, regardless of driving record.

“For people with less discretionary income, auto insurance may be one of those things that can be put off while food, rent, and children’s expenses are paid,” Kruck said. “This does not make them poor driving risks, but it does mean they do not fit the mold standard products and services were designed for.”

“If we did a simple needs analysis, we might [find] that insureds would like the ability to buy, however many days of coverage they can afford. When that lapses and they come back to pay, they would like to be treated as a valued customer. They should not be penalized for lapses in coverage.”

Considering homeowners insurance, Kruck said that “Innovation to satisfy the needs of the customer might entail providing a low interest secured loan to be paid in installments with the insurance premium,” to fund home improvements needed to meet underwriting criteria.

“That is not an insurance product, but it is a solution,” he said.

Companies that are open to such innovations yet serious about making money will find that “urban areas already display the income and risk characteristics to support strong product sales,” said Nutney.

“[Urban] household premium

volumes actually tend to be higher than for the U.S. as a whole,” he added, “and cross-sales propensity approaches or surpasses market norms in some cities.”