Through novel technologies and partnerships, microinsurance (MI) has made plenty of news in recent years addressing risk management needs of the disadvantaged and impoverished.
But have these innovative and often high-minded efforts succeeded? Given that success isn’t measured in headlines alone, it remains difficult to tell how many of these fledgling programs have fulfilled their dual mission of generating profits while positively affecting a community.
In considering guidelines by which microinsurance results may be measured, a paradigm emerges with potential to gauge the success of insurance in any market.
Any insurance program, micro or macro, typically aspires to make policyholders whole after unfortunate events. The high stakes of such events can be particularly devastating for the impoverished, making it critical to deliver strong value relative to cost. In a program’s design phase, this may start with a PACE (product, access, cost, experience) analysis to quantify value provided to prospective clients compared with other risk management options. But this is only where the journey begins.
Faith in MI programs
A recent study of MI programs in Africa showed that nearly half experienced loss ratios of 20% or lower. While intriguing, such numbers suggest that coverage may be poorly aligned with risks faced by target populations or that confusion may exist about how to file claims, thereby potentially undermining faith in MI programs. Loss ratios closer to 60% or 70% are more likely to be indicative of a sustainable program.
Many providers experiencing lower loss ratios may consider enhancing benefits. While expanded payout possibilities can improve the policyholder experience, providers may also consider monitoring and addressing other key performance indicators (KPIs) — such as renewal, complaint, and claim rejection ratios — to help improve faith in their programs.
High loss ratios may achieve short-term social impact but don’t necessarily contribute to sustainability. Factors such as donor or government subsidization make discounting MI premiums a tempting way to gain traction with target populations. And yet doing so presents risks down the road if subsidies are reduced or eliminated.
An example of this occurred with a project in Nigeria initiated by a Dutch not-for-profit organization dedicated to improving access to quality healthcare in Sub-Saharan Africa. The organization gained market penetration with heavily subsidized rates, only to meet policyholder resistance when later phasing out discounts.
Subsidies may be more effectively focused on marketing or technological efficiencies, as opposed to offsetting underwriting losses. High social investment can help facilitate adoption of products by educating a target population in principles of risk management, which include not only education on the mechanics of MI (to help providers’ top line) but also loss prevention (to help the bottom line).
Making a bigger impact
Scale is the next challenge for many providers wishing to strike the difficult balance between value and viability. A program that operates profitably but fails to scale is at risk of being insufficiently diversified. For example, one MI program in Senegal managed to scale to only 400 policyholders and was rendered insolvent by a single claim.
Many property MI programs often face particular challenges to expand and diversify because of natural hazards such as droughts, which can affect the entire population of a region. Many consider programs uninsurable when more than 40% of risks are exposed to the same hazard.
Ceding a greater portion of risk to reinsurers, government agencies, or nongovernment organizations (NGOs) can effectively reduce concentration, because the entity providing the backstop may be more diversified. NGOs, for example, may already be involved in the distribution of MI. Even so, given the thin margins sometimes initially associated with MI, sharing profits with others may reduce incentives for many providers to grow.
There are few hard and fast rules for an acceptable growth ratio, since it is often dependent on factors such as strategy, size, and age of the program. At a minimum, positive growth ratios suggest that policyholders that are dropping out be replaced, which is critical because higher-risk policyholders may be more likely to renew than lower-risk ones.
Where to tighten the belt
It's estimated by some that the property/casualty industry in the United States spends hundreds of dollars per second on advertising. By contrast, effective MI administration often requires an austerity commensurate with that of the target population. Expense ratios of approximately 20% (of already micro premiums) are viewed as best practice. When combined with the loss ratio recommendations above, this estimate implies combined ratios of approximately 90%.
As with many traditional products, a large portion of MI expenditure may prove to be acquisition costs. This is particularly challenging for target populations that are unfamiliar with or skeptical of insurance, may be in remote or areas difficult to reach, or may not have agents experienced in selling. Common methods of expense management include leveraging partner relationships and technology for distribution, bundling with financial (a loan) or other (e.g., airtime) products, and automating evaluation and payment of claims (indices).
Products that initially bundle complementary MI with other services, such as airtime, efficiently typically achieve penetration. But they can face challenges later on when up-selling more profitable paid services to customers.
One service provider that works with local insurers and other stakeholders in the agricultural insurance space bundled a simple benefit with Zimbabwe’s Seed Co. that reimbursed the cost of the seeds if no rain fell within 21 days. Even with this incentive, less than 5% of buyers registered for the coverage due to a combination of factors, including illiteracy, confusion and/or superstition.
Climate indices and other automated triggers are often used to improve efficiency of MI payouts. This can give rise to basis risk, or misalignment between the index and actual policyholder losses. A 2012 study of 318 weather-insurance products in India showed a negative 13% correlation between an area’s average yields and indexed claim payouts.
Improvements in drone and satellite imagery as well as sensor technology may heighten the relevance of index products but may also increase program expenses. Quantification of basis risk has been characterized as “a fundamental problem of index insurance and yet [is] underexplored in literature,” making it ripe for future research.
Word of mouth sells
Overcoming the distributional and claims-handling austerity that can be associated with MI often involves development of an excellent product. Consider how in developed markets, “InsurTech” companies incorporate communal elements into offerings such as “peer to peer,” where relatively small affinity groups can share profits. Some of these start-ups could be viewed as more efficiently addressing well-served markets than affecting underserved ones, but the basic approaches aren’t dissimilar from how the impoverished may traditionally manage risk or rely on the kindness of relatives and friends after unforeseen events.
Anecdotal examples of MI programs may miss this mark. Health MI products with pricing and coverage based on the cost and nature of care at traditional hospitals (rather than the informal medical practices commonly used in underserved communities) is one example. Such products may be unaffordable or impractical for those with the greatest need for coverage, and therefore, may not be conventionally “micro.”
KPIs that measure how well a product connects with the underserved include poverty and rural outreach ratios, which consider the percentage of a program’s clientele that meets desired criteria in targeted population segments.
Quality of life
Ideally, the purest methods to quantify MI’s impact would focus on a target population’s quality of life. Unfortunately, it can be difficult to measure improvement in associated factors, including educational opportunities, entrepreneurship, or resiliency, due to long return periods, insufficient data, or conflating exogenous factors.
Several studies have been conducted — although a recent “study of studies” deemed most of them insufficiently robust to draw firm conclusions. Promisingly, analysis of the 21 strongest studies suggests positive returns for MI in a number of areas of importance to the underserved.
KPIs reflecting transparency may serve as a leading indicator of impact. High ratios of transparent sales, where the consumer is fully informed at time of purchase, may indicate a product that aligns with insureds’ needs. Moreover, value-added services made available in connection with MI products — such as complementary phone consultations with medical professionals — present an opportunity for policyholders to better understand not only the product but their own risk. This may in turn help prevent the types of unfortunate events that (should they occur) will likely look to be indemnified.
It pays to do the right thing
It’s sometimes easy to forget that behind insurer numbers are real people experiencing hardships for which insurance may bring a saving grace. As such, subjective analysis likely holds a more prominent place in MI than a dogmatic reliance on metrics. Actuaries in mature markets crunch profitability and retention numbers in Excel and R, but to achieve success in MI, insurance professionals often must evolve their skills into new areas such as product design and rollout.
By becoming involved in MI or bringing a “micro mindset” to their own work, many insurers have an opportunity to measure and influence impact and in turn create exceptional products and experiences for consumers. When all is said and done, developing a social conscience and concern for insureds may be a reliable road to ROI.
Jim Weiss, FCAS, MAAA, CPCU, is director of analytic solutions at ISO, a Verisk Analytics (Nasdaq:VRSK) business. This article was written as part of a Casualty Actuarial Society working party on microinsurance.