No, Microinsurance isn’t just insurance sold in smaller amounts
A strong stable world economy depends on having everyone included in the formal economy. In far too many corners of the world, informal financial services are all anyone has access to. The base of the financial pyramid is the pathway or bridge that will help many transition from informal to formal financial services. The layers of the pyramid discussed thus far have outlined this road from safe storage of value, to payment services, to microcredit and microsavings. Here I discuss the last step in the journey toward traditional financial services: microinsurance.
Microinsurance provides tailored protection against the unique risks faced by those new markets that were previously excluded from the formal financial market; including low-income households and the working poor. Consequently, microinsurance products typically have low premiums and coverage amounts, are sold in higher volumes, have shorter terms and are distributed in unconventional ways. Thus microinsurance (like most microfinance products) is not simply traditional insurance sold in smaller amounts.
Currently, many traditional insurance companies are already offering or are developing microinsurance products. In addition, many traditional banks are adding microinsurance to their current microfinance portfolio to leverage the synergies between microcredit and microinsurance. In order to succeed, formal financial institutions must do two things. First, they must create products tailored for this new low-income target market. Second, they must find nontraditional partners and creative ways to distribute these new products. The question is now whether traditional financial institutions have the market insight to create and distribute viable products.
Providing Tailored Protection to Non-Traditional Consumers
Moving into a market with minimal financial literacy means that products must — above all — be simple. Products need to be based on easily understood concepts with clear choices. Premiums must also remain small with a clear (but flexible) payment schedule. And products need to be tailored to meet the unique needs of this new market. While life and health insurance are familiar and in high demand, other customized services are needed. These include: agricultural insurance that includes the coverage of crops and livestock; funeral insurance that covers the disproportionately high cost of funerals and frequency of occurrence; and even political unrest insurance that covers damages caused by protests or looting.
With most new clients in need of coverage for multiple risks, bundling is also a key to success. If one policy can cover multiple risks, then clients will not have to tie up income by holding multiple policies. It is also cost-effective for the provider by lowering the cost per service and reducing overall risk. The risks faced by low-income individuals are highly correlated. Thus providing one kind of coverage reduces the risks accounted for in other coverages. Regardless of the exact product description, the point is that new product designs are required that take into account the unique needs of this new client base.
Distributing to the Far Corners of the Earth
With more than 50% of the population in emerging markets living in rural areas, the typical microinsurance customer is hard to reach. Thus, new partnerships and technology are required. Currently most local partners used for distribution are microfinance institutions (MFIs). However, while MFIs are a logical choice, many other alternatives are currently being explored such as supermarkets (in South Africa, funeral insurance is sold at retailer Shoprite) and utility companies (in Colombia, life, accident and other policies are sold through electricity provider, Codensa). In some cases, a partner’s product can be a channel for distributing policies (in India, personal accident coverage is sold on bags of fertilizer). Putting it simply, it is not profitable for the insurer to be the distributer. Partnership with a distributer that has a solid reputation and established relationships with a large client base is necessary.
Beyond partners, use of new technology, particularly mobile technology, is necessary. In Ghana, mi-Life, uses the SMS-based MTN Mobile Money network to allow consumers to buy insurance and manage their policies on their phones. In India, local agents use mobile devices to wirelessly transmit new policy and claims information. Beyond mobile, technology has been applied in a variety of ways. Remote data collection for weather index-based crop insurance. RFID tags for insuring “mobile property” such as cattle. Biometrics for identification in providing health insurance to the illiterate. Each of these innovations can help reduce expenses and bring premiums into the affordable range. The key is designing highly efficient products and claims handling processes.
Oh, and Microinsurance Can Save Lives
I have spent most of this post trying to avoid discussing the social benefits of microinsurance for its low-income target market. I did this because I feel it distracts from the true business opportunity that exists and makes the whole microfinance field appear to be in the domain of development. However, it is not an understatement to say that microfinance changes lives. One illness can throw a whole family into poverty for multiple generations. The typical cost of a funeral can exceed a family’s yearly income. One bad season can ruin years of investment and leave a family destitute. Health insurance, funeral insurance and crop insurance can all protect against these all too common tragedies and keep people out of poverty.
Microinsurance is powerful in poverty alleviation due to both its protective function and its enabling function. In the lives of the poor, every day has a high probability of being that rainy day for which insurance is designed. While many teeter on the poverty line, microinsurance provides the cushion needed to end the cycle of poverty. Microinsurance is also a true enabler. It is not surprising that many of the poor are risk-averse when consequences include starvation or death. However, with microinsurance coverage, entrepreneurs are able to risk expanding their business and accumulating assets. Buying that extra dairy cow is now a safe investment, when before that money would have been saved (or already spent) in case of illness. The peace of mind provided by insurance allows people to take the calculated risks necessary to take that first step out of poverty.
Microinsurance is already saving lives. As those with low incomes begin to understand and trust in a microinsurance provider, they are taking that final step toward financial inclusion. And as traditional financial institutions begin to learn and understand the needs of this new market, they are taking a final step to providing a profitable service to billions of new customers.
I encourage you to continue exploring the rest of the financial pyramid with:
- Climbing the Financial Pyramid
- How Mobile Money Helps Meet Basic Financial Needs
- Moving Towards a Cashless Society
- Microcredit v Microsavings — Meeting Short Term Goals
In 2011, I spent time in Kenya researching the impact of the M-Pesa system on financial inclusion. This research fed into CSC’s Connected Consumer report and a series of blogs on the financial pyramid. While so much has changed since then, especially since the emergence of blockchain and cryptocurrency, I wanted to republish this blog series as so much of the fundamentals should still be examined as we push into the next era of technology. Minor edits were made.
