Tawanda Chituku discusses his experience pricing microinsurance products in Zimbabwe
In 2019, a team of IFoA Council members visited Kenya, Nigeria, Zimbabwe and South Africa to undertake a field study of microinsurance in these countries. In Zimbabwe, they met with two life insurance companies and the National Social Security Authority. As an actuarial practitioner who has been at the forefront of designing, pricing and promoting microinsurance in Zimbabwe, I felt proud that the IFoA had noticed there was something unusual brewing in Africa and wanted to understand it.
Microinsurance is an insurance product meant for the low-income sector. Debate has raged on about the suitability of low-income products; some argue that a benefit designed for the ‘poor’ is a poor benefit design. However, it should be noted that most measures of prosperity (such as GDP, BOP, exchange rate etc) can disproportionately favour developed nations, which leads to a misunderstanding of African and, to an extent, developing nations. These measures sometimes fail to capture a significant amount of undocumented economic activity among rural populations.
However you define microinsurance, and whatever the arguments for or against it, the point remains that microinsurance has boomed in Africa.
My journey as an actuary in Zimbabwe’s microinsurance revolution started in 2014 with Econet Life, a subsidiary of the global telecoms giant Econet Wireless. We identified three areas to focus on:
How to make people save more, given that Zimbabwe has a large informal sector
How to cushion families from funeral expenses, given the significance of funerals in African culture
How to fund healthcare and the purchase of medical drugs.
We resolved to try to design products covering funeral expenses and healthcare. When designing the products, we needed to understand the people the benefits were for – typically a group who operate in fast-paced, informal markets and want convenience. The benefits therefore had to be simple, flexible and easy to access. There would generally not be a chance to do any extensive underwriting of microinsurance policyholders, so exposure limits had to be set with this in mind. The same went for claim payments, which needed to be settled quickly and without much validation.
How did we make these constraints work? A phased approach makes sense for microinsurance, whether it’s for health or funeral products. Customers must start with a basic product and, if higher exposures are required, then rules for transition must be set. In a sense, you underwrite as you go, so you put in some clever rules on exclusions (but note that they will probably make the regulators uncomfortable). You need to make sure that the boundary conditions for the products leave enough room for the providermto respond quickly to the underlying group’s as-yet unknown experiences, so keep it short term – very short term!
In our case, a policyholder onboarding would be eligible for the lowest product with a sum assured of US$500, and would have to migrate to the highest layer with sum assured of US$5,000. It would take 12 months for the policyholder to migrate from the low-level package to the highest.
The engine will eventually settle, and then you need to start thinking about sustaining the customers. Add-on products help to embed a culture of loyalty.
The biggest challenge in pricing microinsurance is gaining the appropriate data – in most situations, you are dealing with a risk pool that does not have any documented experience. The logical starting point is to go to population-level data to find mortality and morbidity rates. The local statistical agency, the UN Population Division and the World Health Organization are all good places to start.
Another key thing to understand is the rate of lapse, migration or transition. Microinsurance customers are not very loyal, primarily because the premiums are meant to be very affordable and the onboarding is easy. You should therefore expect plenty of transitions in a short period of time, and this complicates the analysis.
A flat rate premium will be most suitable because there is very little scope for underwriting. Pricing must start by obviously targeting the aggregate pure risk premium rate; once that is set, you can move to other aspects. In my experience, cash-flow modelling and then stress testing are more useful than
incorporating loadings in the normal actuarial sense. Software packages such as Prophet will probably not handle the pricing techniques required. There are many more factors to test thoroughly, such as business volumes, lapses and the migration rate across packages. At Econet, one of the things I had to think deeply about while on the pricing desk was targeting the desired age-gender mix, as well as the policyholders’ geographical spread. These became post-launch underwriting strategies targeted at the whole book.
The distribution ecosystem
Microinsurance markets work in an ecosystem involving serious third-party dependencies for payment platforms. That ecosystem will determine the acquisition costs, premium collection, claims payment and communication with customers. In our case, we used a mobile network operator that had a mobile payments platform, so alignment was attainable in a natural way. Without this alignment, a lot of microinsurance proposals will fail dismally.
Design and pricing outputs
Communicating results to the board should be done in the simplest manner, with a lot of visuals to emphasise the key success points. At this point, it should involve less of the actuarial methodology discussion, instead emphasising practical considerations. For example, show the board that solvency will depend on business volumes (Figure 1) and on mortality experience (Figure 2).
I was fortunate to witness the success of microinsurance at Econet Life; our peak numbers were 2.8 million lives covered after three years. We started with a simple funeral product and then moved on to address healthcare cover, accident cover, education, savings and so on. As expected, when things go slightly sideways, the numbers can fall off – to the magnitude of 30% in a month – and then swing back up again. You must avoid playing with the pricing, as this sector is very price sensitive.
It remains to be seen whether microinsurance can fit into a conventional life insurance company, or if it has to operate as a standalone business due to the vagaries of this untypical sector.
Tips for creating successful microinsurance products
- Think about the people you are providing cover to – aim to understand them as though they are your own family
- Design the benefits to be simple – start with small cash parcels and then add more complex benefits as you go
- Think about where you will get the data to price from
- Think about the business and not just the product. Microinsurance operates in an ecosystem with other third-party providers
- Do you have control of the distribution platform, and across that entire chain? It has to be a trusted platform that you ride on – otherwise, save your coin on marketing
- Quick reactions are fundamental, but be sensitive to the culture of the covered population.
Tawanda Chituku is the general manager for Atchison Actuarial Services in Zimbabwe
Image Credit | Getty