Major Opportunities in Microinsurance
Microinsurance in developing countries is not just a reduced-cost coverage for poor people: It’s an innovative way of selling insurance in a customer-centric approach… and the insurtech wave has a big role to play!
Microinsurance already covers around 135 million people, which represents around 5% of the entire market potential, with an average of 10% annual growth. The risks covered by such solutions are the typical ones of the traditional insurance market: life insurance, health insurance, accidental death and disability and property insurance.
Developing countries have economies that are generally based on farming and agriculture. and they can’t cover all the needs of a growing population exclusively with the goods they produce. Approximately 70% of the world’s 7 billion people live in poverty. In such a context, there is significant demand for a certain range of insurance products from health and life, agricultural and property insurance, to catastrophe cover. The potential market for insurance in developing countries is estimated to be between 1.5 and 3 billion policies.
Microinsurance presents a different type of business potential in comparison with the microfinance and microcredit current. Microinsurance is not just a reduced-cost and specific-risk insurance coverage for people in developing countries. It is an innovative way of selling insurance that is aligned with customer expectations while covering a specific need, at the right moment, at the right price, in a customer-centric approach. This type of insurance could help close the protection gap both in developed countries and underdeveloped ones.
Microfinance instead can be defined as “a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high-quality financial services, including not just credit but also savings, insurance and fund transfers.” Microcredit (generally considered to have originated with the Grameen Bank founded in Bangladesh in 1983) means providing credit services to those with low income. It is an extension of very small loans to impoverished borrowers who typically lack collateral, steady employment and a verifiable credit history.
Provided that people with low income are offered the right products, means and knowledge, they will become effective consumers of financial services. The MicroInsurance Centre estimates that in the next 10 years or so, the microinsurance market could grow to 1 billion policyholders.
An important concept is that insurance demand should not be taken for granted. This is because of the often negative connotation it is being given in the developing world, which stops it from reaching more people. The market needs an innovative approach based on customer education and incentives.
Insurance benefits have to be clear in the mind of potential customers and, for that to be achieved, trust has to be built. This can be done through new and engaging approaches like plots in TV and radio programs or even through literacy campaigns. To create demand, other types of incentives can be used: tax exemption, subsidies or compulsory cover. For microinsurance to function in a developing country, the products and the processes have to be simple and the premiums need to be low. A change of mindset is needed from insurers, alongside a more efficient administration strategy and distribution channel.
The key question that insurers have to pose to themselves is: How do you sell insurance to someone who never had to deal with such a concept before? How to generate revenues from a policy where the premium is just a few dollars per year?
These questions show the essential challenges of microinsurance that insurers need to tackle in a quick and cheap manner to provide cover for people who have little money. New solutions for developing countries are starting to emerge on the market; for example, in some parts of Asia pre-pay cards provide insurance cover for flood damage.
Insurers will have to find the right business model and partners when approaching such markets and consider less common mechanisms for controlling moral hazard, adverse selection and fraud. For example, proxy underwriting, group policies and waiting periods mitigate adverse selection. At first, investing in microinsurance might seem a bit reckless, but the returns do exist: starting from reputational gains in the short term, knowledge in the medium term and growth in the long term.
If indeed microinsurance will start to grow at its true potential by entering developing economies, then there are some critical areas that need more thought: starting from product innovation and technological solutions that are adapted to low-income markets, to choosing the right partners to work with (NGOs, community-based organizations, international reinsurers and so on) and understanding which are the risk factors that will affect the region in the future (for example, economic development, climate change or population growth trends).
The direction in which technology is heading indicates that developing countries will fast forward straight to mobile, skipping desktop computers, which are less feasible as communication tools. Already, more than half of the world’s population is using a mobile phone, and almost 25% is using internet regularly as fewer and fewer people use fixed telephone lines. Mobiles are the dominating means of communication, even in the Third World, with smartphone ownership and internet usage on the rise. According to a survey by Pew Research Center, in the last two years there has been a significant increase in the number of people from developing nations that declare they use internet and own a smartphone.
Moreover, in nearly every country, millennials are much more likely to be internet and smartphone users compared with those over age 35. This phenomenon is a characteristic of both advanced and emerging economies. In spite of these trends, less than 5% of people with low income have access to insurance or to covers that they actually need, which makes underdeveloped countries an ideal market to explore.