Microinsurance Defined

Microinsurance is seen as a way to bring people out of poverty. Low-income individuals are significantly more impacted by loss of critical life-sustaining elements than mid-income individuals. For example, loss of livestock or a crop can send a low-income family into total poverty, with no financial resources to sustain them. The functional beginnings of microinsurance were with the microfinance companies that wanted to assure that they would be able to recoup the loan amount if the borrower died. Given that collateral was not available, a life insurance policy was the answer. However, that life insurance policy had to cost only a few dollars or the individual would not be able to afford it. Thus the microinsurance business was born.

Microinsurance is generally distributed through non-traditional means; for example, feed and grain co-ops, or local village markets. Government agencies, social service groups, banks, and microfinance companies are additional examples of distributors. Recently, some of the largest global players — Swiss Re, Munich Re, Zurich, Allianz, and New York Life — have gotten into microinsurance. Not only do these organizations support the philanthropic nature of microinsurance, but they also understand that the growth of a middle-class in many developing nations requires them to establish brand recognition now in order to capitalize on it when wealth accumulation occurs.

Because microinsurance is predominantly in countries dominated by agriculture-based societies, for example the African nations, India, and China, many of the policies are based on crop and livestock losses. Additionally, because loss of a primary breadwinner can be totally devastating, life insurance is the most common product. An example of a microinsurance policy is loss of a corn crop due to flooding. Or loss of a corn crop due to drought. In India the important product could be the flood policy and in sub-Sahara Africa, drought. The key to success in the microinsurance world is developing insurance contracts that address a very unique, specific cause of loss that impacts a very focused and finite financial asset. Successful microinsurers really know their customers and clearly understand the specific issues that impact their ability to flourish. There are no cookie-cutter answers to needs in microinsurance.

How does the adjustment process differ for microinsurance claims?

There is virtually nothing about the claim adjustment process in microinsurance that resembles the processes with which we are familiar. Several issues drive a different adjustment process. First is simply driven by expenses. When you consider that the policy premium size is only a few dollars or less, supporting claim operations as we have them in North America or other developed geographies would not allow for a profit. This alone would drive a new claim business model.

Additionally, the sheer size of the countries involved is a big issue. If you look at the geographical expanse of India, China, Brazil, and many of the African countries, it would be very difficult to dispatch a claim adjuster to most insured locations — it could take days! Planting several thousand claim offices all over these large countries also does not make economic sense.

The next issue is transportation and communication infrastructure. In most emerging nations, it is challenging to travel between towns and villages because roads are not adequate. Thus, even in smaller nations, getting from one location to another would be prohibitive. Additionally, landlines do not exist outside of a few primary cities in each country, so even a telephone adjustment process is not feasible.

Despite the differences, there is a similarity, and that is fraud. Microinsurers have a significant issue with fraud. One of the primary forms it takes is identity fraud. It is particularly problematic with health insurance. Without procedures to assure that the claimant is the person covered under the policy, whole families can obtain medical treatment for the price of a single person. On the livestock coverage side, it is difficult to disprove that a cow or sheep has not died when the herders are largely nomadic, or range over unenclosed farmland.

All of these factors mean that successful microinsurers must take a different approach to claim settlement and the key is how the policies are constructed.

In your report, you state that no investigation is needed when it comes to paying microinsurance claims? How is that possible?

Here in the U.S., we are so accustomed to multi-page insurance contracts with complex coverage descriptions and eight pages of exclusions that we do find it difficult to imagine that claims would be paid without investigation. For two primary reasons, microinsurance contracts are written so that they can be paid.

The first reason relates to the demographics of microinsurance. Insurance is not a familiar concept in most emerging nations. In fact, the largest ethnic group in Kenya, the Kikuyu, does not even have a word for insurance. Because the principles are not familiar, insurance contracts must be very straightforward and clearly state exactly what will be paid for and how much that payment will be. The contracts are generally only a page or two long (there is something to be said for brevity!).

An additional demographic factor relates to the financial condition of the insured populations. Considering that microinsurance covers low-income individuals, money is very precious, and nothing is ever bought unless it is extremely clear what will be covered and to what extent. Insurance contracts with exclusions would not sell in the microinsurance world.

Microinsurers employ a number of strategies in order to contain exposure and payment. One tactic is to write short-term policies. An example would be a life insurance policy that only covers death during the two months of the harvest. Further reining in the exposure is specifically stating the cause of loss. In the prior example, the contract would be written for two months with cause of loss being overturn of a vehicle and wild-animal attack. Overturn of vehicle due to poor roads and older vehicles, and wild-animal attacks in fields are the two primary causes of death during the harvest. This narrows the exposure so that a death certificate can reasonably assure that payment should be made.

Microinsurers that provide medical coverages frequently contain exposure by specifically stating the exact medical conditions for which payment will be made. (For example, diabetes, pregnancy, AIDS/HIV.) Further defining the contract limits can be the exact treatments that will be covered. Because microinsurers know their customer base so well, they can provide value by affording coverage for the causes of loss that most frequently impact a population and contain the cost by providing coverage for only the course of treatment most frequently employed.

Another strategy is to write coverage where the cause of loss can be absolutely determined through methods other than individual investigation. An example of this is flood coverage. A policy would state that loss of a crop would be paid if flood waters hit a certain pre-determined level, measured against established criteria, such as a flood gate. If the waters breach the gate, then it can be assumed that all of the policyholders in the affected region lost their crops and the losses are automatically paid, no questions asked.

This practice probably sends shivers up the spine of any seasoned claim adjusters in developed countries, but this type of coverage, called indexed insurance, is growing in popularity. Technology enables the expansion of this type of coverage.

Speaking of technology, what role do you see mobile devices playing? Are they essential to the process? What about other technologies as they relate to microinsurance?

Before diving into mobility and technology, it is important to understand that microinsurance is a very complex subject. For every success, there are multiple examples of failure. Products that work well in one country may not work at all in another. The nuances of the microinsurance industry are as diverse as the populations they serve.

Particularly when discussing technology, the following examples are best practices and not standard operating practices. What we can all learn from leading microinsurers is the use of innovation and thinking outside the box, two things for which the traditional insurance industry is not wildly famous.

All that said, mobile devices are key to the expansion of microinsurance. Because landlines are not available in most emerging nations and electricity is spotty and unreliable, mobile devices are the most common form of communication. In fact, according to the United Nations Conference on Trade and Development, in 2008 the subscriber base in emerging nations was 2.64 billion, and the rate of growth is enormous and exponential. For example, subscribers in China more than doubled between 2003 and 2008.

Successful microinsurers use mobile devices for enrollment, premium payments, and claim payments. Some medical insurers actually send alerts to customers via their mobile device to remind them to take a critical medicine.

Mobile payments are a huge opportunity area because it matches a primary insurance product distribution point — local markets where pre-paid cards are available. Using kiosks that provide insurance contracts, the prepaid cards are used to execute the contract. Local markets frequently have cell phone charging stations so a number of tasks can be completed all at once. On the claim payments side, the money can be electronically transferred to the customer's bank and then gained access to via a mobile banking application and a debit card.

I mentioned earlier that indexed insurance products are gaining traction. Technology is an important component of these products in determining the trigger point for an event payout. For example, geospatial technology and satellite technology are used to determine when a condition is present that would destroy crops. Using geospatial technology, farmers are grouped around a weather station. The weather station is monitored and results are transmitted back to the monitoring hub. If, for example, a freezing weather event is detected, one that would certainly kill the surrounding crops, it is presumed that all of the covered farmers were impacted and the contract value is automatically paid. This is the high art form of writing an insurance contract that is designed to pay.

Technology is also used to combat fraud. Identity fraud is managed through the use of smart cards. Specifics about covered individuals are imbedded in the card, thus aligning services with those individuals who should be covered. Policy details can also be imbedded in the card so service providers have those details immediately at hand. There are microinsurers that employ radio transmitter tags attached to the ears of livestock to track their whereabouts. This curtails the creative urge to claim that a cow or sheep has been dispatched by some other animal or disease when in fact it is happily grazing in another part of the farmland.

At a higher level is high-speed computing, which is critical to large-scale microinsurance growth. MicroEnsure, the largest global microinsurance intermediary, is rapidly approaching 21 million customers. Clearly, they cannot economically process the related volume of transactions and data on old legacy technology; high speed computing is mandatory.

While large-scale operations — such as MicroEnsure and the jumbo global players previously mentioned — have technology capabilities, a large number of small- and mid-sized microinsurers and distributors do not. Many of these organizations recognize that they need technology in order to sustain and expand operations, yet cannot pull it off themselves. Enter software as a service and open source tools. SaaS and open source tools that facilitate policy administration and claim management technology capabilities will allow the small and mid-markets to match the service and growth capabilities of the large and jumbo players. This market development is critical for the continued growth and development of the overall microinsurance industry.

While all the above technology examples have been grounded in what might seem to be some fairly atypical claims and business processes for us here in North America, I firmly believe we should flip over these technologies to support the North American claim environment to improve customer experience and help the expense picture.

Karen Pauli is a research director in the insurance practice at TowerGroup, a research and advisory services firm. She covers a wide range of topics in p/c insurance, specializing in distribution, underwriting, claims, predictive analytics, core systems, and business optimization.