The microinsurance industry, which offers cover to the world’s poorest people, is growing fast and is predicted to double in size over the next few years. Policymakers and aid experts see its development as playing an important role in offering millions of people around the world greater financial peace of mind and a stepping-stone out of poverty.
Microinsurance provides some protection to those people who are often the most exposed to risk but have the least resources to protect themselves from a fate that could prevent them from feeding themselves or earning money.
It also may offer them a hand in escaping from their current circumstances. Farmers living in areas exposed to floods, typhoons or drought may find it hard to borrow the money to buy fertiliser or seeds. But weather microinsurance policies linked to such loans can give farmers access to the credit they need to grow, and therefore earn, more.
Protection for families
Insurers are increasingly springing up in developing countries that lack a social welfare system to provide protection against a family’s main breadwinner falling ill or dying or offering cover for their home, crop or animals.
For the microinsurance industry to take the next leap in its development it needs to be able to offer good value products at prices that make sense for the insurers in areas such as health and property.
But with a growing number of insurance industry giants, including AIG, Allianz, Zurich and Lloyd’s, taking an interest in microinsurance, the answer to that conundrum may be just around the corner.
“It will only be a matter of time before this becomes a viable and sustainable commercial market,” says Alex Bernhardt, who runs Guy Carpenter’s microreinsurance initiative.
“The global poor population has collective spending power of about $5 trillion and the existing financial system doesn’t reach them at all. The poor have proven to be viable economic citizens, so long as you can tailor products to suit their needs.”
Microinsurance potential is massive
For big insurers, facing intense competition in their established markets, developing countries have become an increasingly attractive proposition. By establishing a foothold in these markets now they hope to be rewarded as the country becomes wealthier and people’s spending power increases.
The potential market for microinsurance is massive: up to 4 billion people live on less than $2 a day, but at the moment less than 3% of those have any form of cover.
Growing interest from major industry players has helped kickstart a rapid growth in microinsurance that could see it catch up with, and even overtake, the longer-established microfinance sector.
“Microcredit has taken a long time to get up to speed, because they had to prove the model worked. But, having proved that, they still have to fight to get their hands on capital to lend to poor people. There’s no big-brand bank willing to set up a microfinance branch,” says Richard Leftley, President and CEO of MicroEnsure, a specialist microinsurance intermediary.
“Microinsurance, on the other hand, has been able get off the ground much more quickly, because there has been a desire on the part of big insurance companies to offer their products to poor people,” Leftley adds.
Market set to grow 100% in 5 years
Around 78 million people have microinsurance, a 2007 report by the Microinsurance Centre found. But a survey of microinsurers in the report predicted the market would grow by 100% over 5 years. That isn’t hard considering the very low numbers of people who have cover right now.
But small sums insured mean tiny premiums and low profit margins for the insurers that could easily be consumed by their operating costs.
In several developing countries, markets have grown up for simple term-life policies – the original microinsurance product – that have proven to be both sustainable and profitable for insurers.
But other markets remain some way from being sustainable for private insurers.
“The big challenge that microinsurance is grappling with at the moment is health insurance. Generally it isn’t thought it can be commercially viable. But it’s the thing that the people want most,” says Craig Churchill, of the International Labour Organization, a UN agency.
Thriving markets for simple hospitalization policies exist in several developing countries, but finding ways of extending policies to include outpatient care – thus reducing or even alleviating the need for hospital treatment – without making the premiums prohibitive remain elusive.
Simple policies for large numbers
Products to cover against damage to property, crops and livestock are also being developed. To make any money, insurers have to offer simple policies to large numbers of people that are cheap to administer. But how insurers sell such small-sized policies to enough people without swallowing up all their profits remains a conundrum.
Technology is likely to play a crucial role, both in distributing products to the masses but also in keeping a tight lid on cost.
With more than half the world’s population estimated to have access to a mobile phone there is huge potential to sell financial services at a low cost via the telephone network.
“There may be another technological leap in the next few years that will bring costs even lower and allow us to go out into the market and sell to individuals,” says Leftley.
“Microinsurance is the furthest frontier of insurance. People are still working out how to get distribution right and how to keep costs low,” says Leftley
Microinsurance can provide a laboratory, says Churchill, for international insurers to find ways to bolster their profits margins in their saturated core markets in which price is the main differentiator.
“If you can figure out how to get your costs down through technology to allow you to do business at the bottom of the pyramid then that may offer valuable lessons for your mainstream business,” concludes Churchill.
