Microinsurance: novel challenges call for innovative solutions

Lloyd Richards contributed to the writing of this blog

Mainstream commercial insurance has for a long time been unattainable for a large proportion of the world’s population.

Those from low-income backgrounds simply cannot afford the standard premiums and as such are not protected against the very real risks they face in their lives.  For countries which have no social security, quite often natural disasters or the passing away of a key earner can in a single blow leave people unable to earn a basic living wage.  Enter microinsurance; the provision of insurance products to those with the lowest incomes.

For readers with an understanding of microfinance, this is the analogous concept in terms of insurance.  Products offered are similar to those in mainstream insurance with particular focus on life, health, agriculture and property.  There are however unique aspects to microinsurance with regards to the models, provisions and most importantly the challenges faced by this relatively new market. Lloyd Richards has been talking to MicroEnsure and the Microinsurance Innovation Facility about how insurance is brought to those most vulnerable to risk.

Challenges

The most interesting aspects of microinsurance come from the unique challenges it faces. For instance: how do you go about collecting premiums from people who don’t have a bank account; who may trade their produce for the goods they need each day and as such have nothing we would recognise as an “income”? Before you even get to that stage, how do you explain what insurance is and how it can help?

Many of the people who would benefit from insurance simply aren’t aware of its necessity, nor do they understand how it works.  The lack of education means that many people are unable to read a policy document, and require a verbal explanation of what they are buying. Products must therefore be simple to understand, and insurance inherently isn’t. On top of this, people are sceptical as to whether they will actually be paid if they make a claim. In some areas surveys have revealed that people trust loan sharks more than they do insurance companies – at least with a loan shark they know what to expect. Further, every financial decision made by those in poverty has a stark consequence on their lives.  When being asked to take out insurance, many find it difficult to justify paying for something that they might only need in the future when they have an immediate and very real need for the cash right now.

Insurers therefore need simple products which are easy for the policyholders to understand, serve an immediate need in a cost-effective manner and enhance the reputation of the insurer.

M-Insurance

Whilst people in developing countries have little faith in insurance companies, they do trust their telecom provider. For many, mobile phones are a sole connection to the modern world, and serve as far more than just a communication device. Consider Kenya’s M-Maji (mobile-water) database, which provides up-to-date availability and prices from water vendors, eliminating the frustrating and time-consuming daily search for clean water. Or the application Peek (Portable Eye Examination Kit) which can scan eyes for cataracts, check for eye disease and e-mail the results along with a GPS location directly to doctors. Trust inevitably develops for those who provide such life-changing tools, and equally as importantly mobiles are a method of access to an otherwise rural and spread out population. Insurance products sold through mobiles is known as M-Insurance.

One of the leading microinsurance consultancies, MicroEnsure has worked with various telecoms providers encouraging them to partner with an insurer who can underwrite the cost of providing free insurance to customers who top up above a certain threshold. The advantage to the telecoms provider is reduced churn and increased customer loyalty, i.e., profit. It compares in essence to reward schemes we are all familiar with from our providers, but instead of priority tickets to climb the O2 Arena customers are being offered a life-changing benefit from a company they know and trust.

So how do you sell insurance on a mobile?

M-Insurance allows insurers to reach a huge population and offer a product through a trusted intermediary, but it means an already complex product has to be sold on a tiny screen. To this end, MicroEnsure has introduced a policy document where all the details of the policy were contained in just three text messages (or 480 characters). Peter Gross of MicroEnsure argues that life insurance policies can be as simple as "pay...die...get", and documents should remove needlessly complicated terms and conditions to allow customers to fully understand the product.

In terms of the actual provision of M-Insurance, three of the most popular methods are Freemium, Airtime deduction and Mobile Money:

Freemium is where the service provider offers base cover for its users and additional cover for those who make more use of their mobiles. There is therefore no premium; the costs of providing cover are met with profits from increased customer loyalty.

Airtime deduction allows the policyholder to pay for the added benefit of insurance from the service provider. This is simply added as a charge in the same way as a call or text.

A popular new phenomenon which extends far beyond the purposes of insurance is the use of Mobile Money. This is effectively like having a bank account on your mobile phone which can be used to pay for premiums directly.  Many users find this to be a safe and more effective method of transaction.

Moving Forward

In this blog we have introduced the concept of microinsurance and its unique challenges.  We have discussed the highly innovative solution of M-Insurance as well as its methods of provision.  Our next steps will be to explore microinsurance in greater depth; look out for our future blogs which will:

• Address each of the challenges in greater detail
• Look at the need for actuarial involvement in microinsurance
• Examine the various models for provision
• Discuss the future of this exciting market.

Microinsurance is still in its infancy but as we look to the future, the potential for this industry is vast and there is no doubt that it will change the lives of millions.