Succeeding at Microinsurance through Differentiation, Innovation and Partnership

Microinsurance is a concept whose time has come.

In a fairly short space of time, microinsurance has advanced from being something of an oddity in the insurance world to a very significant long-term business opportunity. Who would have thought customers earning a few dollars a day were worth courting, or that policies priced at 50 cents a month could be profitable?

Today, more than 30 international carriers are offering microinsurance products in various parts of the world, and many more are planning to get involved. While there is yet no widely accepted strategy, the common ingredients include differentiation, innovation and key partnerships.

Microinsurance targets the population in the middle of “the base of the economic pyramid” or BOP. The extremely poor, living on less than two dollars a day, have too few assets and need humanitarian aid, while the wealthier, living on more than US$8 dollars a day, can often access traditional insurance products.

Microinsurance is typically defined in terms of the income of target customers, the limits on the amount of premium or the size of the benefit set by the local regulator, or a combination of these criteria. For example, the South African regulator views microinsurance as providing a maximum benefit of R50,000 (US$6,400) per insured life, per insurer for any insurance related to a death event.

The World Bank estimates that there are between 4 billion and 5 billion people who live on an income with a local buying power of less than $8 a day. A little over half of these are so poor that they require aid and effectively fall outside of the commercial financial market. That leaves about 2.3 billion potential consumers of microinsurance services.

To date 135 million, or 5 percent, have insured themselves, their property or their crops. The potential market is estimated to be 3 billion –4 billion policies generating between $30 billion and $50 billion in annual premium revenue. Total demand is growing in excess of 10 percent a year, with premium increases outstripping those in the developed markets.

The obstacles that confront the insurer that seeks to develop and market a successful microinsurance product are numerous and daunting, including extremely low annual premiums, lack of product knowledge among the target markets and a non-existent distribution network. The solutions to all of these challenges will be bundled into an effective operating model—which will look unlike any model the insurer has developed before.

A diverse array of trends are combining to boost demand for risk protection among low-income consumers-; business people and farmers-; and to encourage the development of suitable products and effective operating models. The most important of these trends is the growth of the economic
segment or merely type of consumer who, while poor and unaccustomed to insurance, has an income and assets which need to be safeguarded. This is supported by robust growth in those countries which have the largest number of low-income citizens, as well as continuing urbanization—with all the risks which this entails for the individual.

Developing and marketing a successful microinsurance product will require a completely new business model. This model will include the participation of an unlikely group of local partners, selected for capabilities or assets which may have nothing to do with insurance. It will feature differentiated products which have been specially customized to meet the needs and expectations of local customers who have modest means and scant experience (if not mistrust) of insurance.

It will comprise innovative distribution, financing and partnering mechanisms, and will be geared for scalability as the offering proves itself. And it will be structured to comply with local regulations and government incentives while simultaneously pursuing financial sustainability if not profitability.

There are four key areas where the effectiveness of the operating model will be tested:

• Product development—
  To develop products that appeal to customers with no experience of insurance and limited affordability, insurers need to work closely with partners in the public and/or private sector who have a deep “grassroots” understanding of their constituents. As the product takes off and more data becomes available, analytics can be used for predictive modeling that points the way to product modifications and other changes to the operating model.
• Marketing and distribution—
  The insurer’s partners play a vital role in establishing trust and credibility, especially when they have their own, established distribution network. This network can be leveraged to communicate with and educate prospects, and to bundle the microinsurance product with the partner’s products (e.g., short-term credit).
• Claims and administration—
  As with all insurance, the credibility of microinsurance depends on the settlement of the claim. This is a particular challenge for insurers, given the difficulty of screening prospects, accommodating pre-existing conditions and evaluating individual loss. However, by combining the perceived professionalism of the corporation and the trust of the local agent, insurers can achieve the essential consistency between the sales message and the claims outcome.
  

  Risk and regulation—
  The essence of profitable underwriting is understanding the risk. The novelty of microinsurance, the absence of data, and most insurers’ unfamiliarity with the circumstances of their potential customers, make it very difficult to evaluate the risks that are being covered. These obstacles can be mitigated in a number of ways: by collaborating with partners to conduct research that approximates a community’s risk; by pooling risk across multiple markets and regions; by offering short-term products that limit exposure; by partnering with the public sector to share losses which exceed an agreed amount; by sharing data and expertise among insurers; and by utilizing analytics to make the most of the information that is available.