Microinsurance represents a dynamic and growing opportunity for insurers and distributors worldwide as new geographic and customer market segments emerge. While microinsurance is generally an emerging market phenomenon, developments elsewhere may lead to increasing opportunity for both carriers and distributors in the U.S.
Microinsurance typically involves simple property-casualty and life-related micro products with very small premiums for the working poor who are emerging from or hovering near severe poverty. These people depend on assets such as livestock, agricultural crops, small businesses or sole wage earnings; if they lose them, then they will slip back into severe poverty without a clear path to recovery.
Because it is difficult to achieve high profit margins, efficiency and scale are hallmarks of distributing micro-insurance. Low premiums, far-flung communities and the high number of insureds have made this market difficult for agents and brokers to serve. This has resulted in the emergence of alternative distribution approaches, such as using non-governmental community organizations, large banks or other commercial and non-commercial partners.
The market for microinsurance is growing quickly, and is estimated to include approximately 200 million people on all six populated continents. Based on global demographics, the market has the potential to grow to between 10 and 20 times that size, according to “Microinsurance: Risk Protection for 4 Billion People,” a December 2010 study by Swiss Re. As a result, microinsurance has formally caught the attention of major carriers domiciled in the U.S. and abroad.
Read related: "Swiss Re says microinsurance market huge potential."
The microinsurance market is not likely to include the approximately 1 billion people worldwide who live on less than $1 per day and do not have significant assets or wages to protect. However, there is great potential for microinsurance with the 2 to 3 billion people who live on roughly $1 to $4 per day, according to the Swiss Re study.
Accordingly, it is clear that opportunity exists in the near, medium and long term. Even without government mandates, insurers have already developed viable market niches, proving that well-designed and operated product/distribution/servicing schemes can generate profits in short period of time.
In the medium term, the requisite technological and operational advances (such as simplification and automation) that promote profitability in constrained, emerging market environments can eventually be applied to more developed markets and facilitate a follow-on wave of potential margin expansion. Moreover, in the long term, serving developing communities helps grow middle-class populations that represent a future market for traditional insurance products and services.
Innovative thinking throughout the value chain plays a key role in the development of these markets. From products and pricing to distribution to claims, new approaches are increasing the viability of microinsurance.
As a case in point, the government of India has been promoting cattle insurance for more than three decades, but relatively high premiums—due in no small part to fraud—have prevented many livestock owners from participating. Consequently, the percentage of cattle covered has remained below 10 percent, according to IFMR (India), Center for Insurance and Risk Management, Technical Roundtable on Livestock Risk Management (Chennai, Feb. 26, 2010).
But now, insurers in India are starting to use technologies such as radio frequency identification (RFID) implanted behind the ear to keep track of cattle and cut down on fraudulent activity. Owners can no longer hide cattle and claim them as a loss due to natural calamities or theft. Developments such as these have started to lower premiums, expand the market, and spark further use of such techniques.
Products and pricing
Simple product design is the hallmark of microinsurance. Easy-to-understand coverage descriptions help those new to insurance know exactly what is covered and what is not. Simple and affordable pricing schemes also help those new to microinsurance to understand products. To ease rating complexity and make up for a lack of historical actuarial data, pricing initially tends to be done on a group profile basis.
Read related: "Microinsurance defined."
Marketing and distribution
As is the case with certain products in developed markets, it is ideal for trusted sources to market microinsurance to prospective customers. In emerging markets, there is a general lack of knowledge about the concept of insurance. Unlike micro-finance, where organizations provide funding to customers upfront with an agreement that the customer pay it back, microinsurance requires the customer to pay upfront in return for a promise of future potential repayment. It is best for a trusted community partner to communicate this kind of promise.
Distribution tends to rely on well-known third parties with an existing, low-cost infrastructure. Considering the geographic spread of many rural microinsurance opportunities and the desirability of utilizing people who already have relationships with potential customers, leveraging non-governmental organizations (NGOs) or high-efficiency commercial distributors can improve efficiency and effectiveness.
Servicing and claims
To promote ease and promptness of coverage, new business setup tends to use straight-through processing with simple forms or wireless handheld tools for collecting information and initial premium. To ensure accurate claim eligibility, mobile applications can transmit critical data to insurers’ systems quickly from remote areas.
To promote profitability and quickly aid claimants in need, claims processing must maximize "yes/no" decisions. Simple product design can facilitate this, as can new tools and approaches. An example is the use of advanced data visualization, which can aid in difficult claims situations, such as satellite imagery for mass property claims; this approach can detect damage from fire, flood or other catastrophes, and help drive effective decision-making on thousands of claims instantly.
While the outlook for microinsurance growth in emerging markets is very optimistic, what are the implications of microinsurance for more developed—and slower growth—markets such as the U.S.? Could the uninsured potentially become customers of a new domestic micro-insurance scheme? The answer is "yes."
- Devising new products that feature less complex health-related coverages, simpler language and pricing, easier claims decisions and less costly management to provide access to coverage for Americans who do not have health insurance.
- Utilizing advanced technologies, such as telematics applications that capture real-time data about driving behavior, to enable variable rate micro-insurance schemes for lower-income drivers.
- Increasing agents' and brokers' use of new handheld tools, such as in emerging markets, along with new web technologies and social media to more easily illustrate and compare products for better customer understanding, thereby facilitating new growth in a traditionally under-penetrated life insurance sector.
While microinsurance currently is viewed as having greater potential in emerging markets, it actually could help expand the top and bottom lines of the U.S. market beyond current expectations of single-digit growth.