Microinsurance: Collective gains

Annette Houtekamer explains how mutual insurers and reinsurers can work together to provide affordable insurance for small-scale farmers around the world

More than two billion people worldwide are unable to obtain insurance, which contributes to financial hardship and permanent poverty. Large commercial insurers do not offer suitable products, and often do not want to do business with this group.

Microinsurance can fill the gap, but those who design solutions need to understand the challenges people face, such as the impact of natural disasters and climate change, or healthcare issues. For example, small-scale farmers often lack information about the availability of seeds that are suitable for dry areas, or do not receive early hurricane or flood warnings. This causes them to make the wrong decisions.

Poor quality seeds and animal feed, for example, cause nutritional deficiencies in farmers’ families and livestock. Lack of proper storage facilities means everybody’s harvest is put on the market at the same time, resulting in low prices. Banks are reluctant to lend to small farmers because there is no collateral and, if the harvest is lost, loans are not fully repaid. Lacking insurance, farmers who suffer damage sell properties and take children out of school.

The insurability of poor people can be increased, as shown by risk pooling through mutual insurance schemes and mutual benefit programmes. Mutual solutions require less solvency and enhance co-operation in the community. They balance financial possibilities with the needs of the poor. Through mutual solutions, it is possible to design tailor-made solutions that cater to these needs in a sustainable way.

Microinsurance is a fast-growing sector, but there are a number of challenges for microinsurers and mutual benefit providers. These include the lack of underwriting information, local insurance expertise, legal and financial services infrastructures. There is also a huge demand for capital, and the high opportunity cost of premiums. Growing microinsurers need clear governance structures and more human resources, as well as the backing of reinsurers.

The role of reinsurers

The challenges faced by insurers who are developing appropriate insurance solutions for low-income people in emerging economies include moral hazard, anti-selection, correlated risk, administration and mediation costs, and fraud. This is why local insurers often choose to offer only credit life insurance. Non-life insurance for crops or livestock, or for healthcare, is rare.

The development of index-based products in co-operation with reinsurers has led to a breakthrough in microinsurance, such as for the insurance of livestock and weather risks.

Reinsurers are interested for a variety of reasons: the large volumes of potential business; interest in new developments; potential for alleviation of poverty; portfolio diversification; the gaining of inspiration for traditional and conventional (re)insurance; and the potential to differentiate themselves from competitors. Reinsurers recognise the risks involved in microinsurance. These include: microinsurers operating without an insurance licence; war and terrorism; and the small size of microinsurers. So, what would it take to increase their appetite for such business? They generally seek viable, long-term partnerships, professionalism, scalability of microinsurance activities, well-developed software for underwriting (claims handling and financial administration), and – crucially – confidence in the people they deal with.

Features of mutual insurers

Most mutual insurers are owned by their member policyholders, who act in their collective best interest. This results in them striking a balance between profit maximisation and high-quality services, thereby treating all members equally and with a high level of transparency.

Principles such as ethics, democracy and the active participation of member-policyholders take priority over short-term profitability. This is not only sought after in management activities but also in, for example, the creation of new products.

Mutual insurers do not need to focus on stock market prices and have no shareholders to remunerate. They are immune to takeovers, so they can manage their business deliberately and constructively on a long-term basis while observing rules of good management. These characteristics, combined in some cases with intermediary-free distribution, allows mutual insurers either to propose very competitive cover that offers excellent value for money, or to redistribute profits to member-policyholders via rebates.

Board members are responsible for their actions through national legislation, but they also have a moral responsibility to the member-policyholders who elected them.

When these schemes are operated in small communities, they usually lower the costs associated with administration and those stemming from fraud, moral hazard and adverse selection. This is generally due to an informal and frequent flow of information.

These schemes can retain the benefits derived from their social capital for as long as members share a feeling of ownership.

The downside of such schemes is their smaller size: as small groups experience larger variance in claims, they are more exposed to outlier and catastrophic costs. This can be alleviated through federation with other like-minded groups to pool risks and resources, or through reinsurance.

Risk management and risk transfer require a holistic approach, and mutual insurers are perfectly situated to provide this. In order to improve the resilience of smallholders and family farmers, the UN’s Food and Agricultural Organisation recommends the evaluation of multiple impacts (economic, social and environmental) resulting from sustainable smallholder agriculture, with a special focus on women and youth. It also recommends the development of technology and research that blends traditional knowledge and modern science, adapted to sustainable small-scale producers. In addition, it wants to see the rehabilitation of local seeds for biodiversity and to save local species close to extinction, for both self-reliance and climate adaptation purposes.

The role of technology

Inclusive Blockchain Insurance using Space Assets (IBISA) is an insurtech start-up headquartered in Luxembourg. Its technology platform enables mutual and other insurers and co-operatives to define, distribute and manage parametric insurance products for agriculture – products where the insurance does not indemnify the pure loss but, based on forecasts, agrees to make a payment upon the occurrence of a triggering event, such as a natural catastrophe.

IBISA uses blockchain and satellite earth observation technologies that enable profitable agriculture crop protection products and reduce the costs typically incurred by traditional models. It aims to re-engineer the business process and business model to reduce costs and enhance resilience and transparency.

Agriculture microinsurance is a key factor in ensuring food security, which in turn contributes to resilience and generates prosperity, but traditional insurance has not penetrated this market efficiently.

In India, IBISA partners with People Mutuals’ Development of Humane Action Foundation (DHAF) in order to provide mutual crop insurance to two million smallholder farmer members. DHAF utilises the IBISA platform to build mutual pools and share the drought and excess rain crop risks between smallholders. In July 2020, the first payouts were triggered, and the fourth season of protection started in October 2020. Currently, 91% of participating farmers are women; for many of them, this is the first time they have taken out insurance.

People learn about the benefits of insurance through experience. A community’s uninsured people see the benefits that others gain from insurance, which convinces them of its value.

When mutual insurers and reinsurers join forces, they can unlock the benefits of mutual microinsurance as a socially impactful and financially sustainable solution for smallholder farmers.

Annette Houtekamer is co-founder of IBISA

Image credit | Alamy