A special report from A.M. Best Co., “The Potential of Microinsurance,” suggests insurance programs for the world's lowest-income individuals have challenges ranging from adverse selection to lack of profitability, but insurers “increasingly are inclined to include microinsurance in their long-term strategies.”

The programs are similar to low-cost transactions, simple-risk coverage and low-net-worth clients that were once found in home-service or industry-life policies around the turn of the 20th century in the United States and United Kingdom, the ratings agency says.

The lowest-income individuals in developing nations are in need of insurance programs the developed world has long embraced, the report notes. Those coverage needs involve illness, natural disaster, livestock disease, accident and property loss.

While there is a strong need, it does not necessarily mean that there is a growing demand for insurance products, the report adds. Many societies still choose alternative risk-management tools such as informal risk-sharing agreements, savings or borrowing—usually at exorbitant rates.

Today, the dominate use of microinsurance is for death and accident coverage.

Insurance for low-income individuals often cannot be afforded without the help of some subsidy either from the government or a non-government entity. However, for there to be long-term sustainability, the insurance industry must “survive without such direct assistance,” A.M. Best says.

One way to achieve this is by reducing costs by partnering, for example, with cell phone companies or grocery stores to sell insurance products cheaply and efficiently.

Sales can also be done by community members as the traditional door-to-door salesman once did in the United States.

To reduce claims-administration costs, A.M. Best suggests such things as allowing property coverage to be paid when a particular event reaches a certain threshold (such as earthquake magnitude), regardless of the damage.

Some carriers that have gone into microinsurance have managed to be profitable in this space through the use of business models that “diversify risks, increase brand awareness and enter a market at its most nascent stages,” notes A.M. Best.

Going forward, a combination of technology advances and innovative corporate and partnership structures will allow insurers to penetrate deeper into the developing world market at the “lower echelons of the income pyramids across the globe,” the report concludes.

Special Reports /

Microinsurance in Evolutionary Stage in Developing Nations

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