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The Actuary The magazine of the Institute & Faculty of Actuaries

Microinsurance: Gathering pace

Microinsurance could serve 
four billion low-income clients worldwide but penetration remains modest, with only about 140 million people currently having access to some sort of insurance cover. The UK Actuarial Profession, together with the Munich Re Foundation and the Microinsurance Network, held a one-day event at Staple Inn Hall on 30 June attended by actuaries and other insurance experts, development experts, academics and policy makers to showcase the latest advances in microinsurance, with a particular focus on actuarial issues.

Craig Churchill, team leader of the International Labour Organization (ILO)’s Microinsurance Innovation Facility and chairman of the Microinsurance Network, introduced the event, cautioning that “microinsurance is not just a scaled-down version of regular insurance. The product and processes need to be completely 
re-engineered to meet the characteristics and preferences of the low-income market”.

Efficiently managing distribution and gaining the trust of clients are among the key barriers to the progress of the microinsurance market. New distribution channels, such as those utilising small retailers’ pawn shops or mobile phones, may allow increased outreach

Professor Stefan Dercon, a development economist at the University of Oxford, states that at any one time around 
one third of Ethiopians below the 
dollar-a-day poverty threshold are suffering from transient poverty. Over a ten-year period their consumption is above the dollar-a-day poverty threshold, but in the year of measurement their consumption is below the threshold.

Insurance against the four main risks — health, mortality, agricultural production and prices — could smooth away large adverse shocks with long-term consequences. Professor Dercon also argued that “the success of microinsurance should not be assessed by measuring uptake, but by measuring the actual impact”, which would allow governments, policymakers and donors to make informed decisions about allocating resources to microinsurance as compared to other pro-poor interventions, such as microsavings, microcredit or 
social protection.

In many microinsurance environments, the availability of actuarial expertise is low. “I personally know only about 40 actuaries working in microinsurance, and I doubt that there are more than one hundred worldwide,” said Howard Bolnick, chair of the International Actuarial Association’s Microinsurance Working Group. “Considering the number of potential clients, this has to increase substantially.” Questioned by the panel, actuary and microinsurance expert Peter Wrede described the importance of using 
actuarial principles as part of an evolutionary learning process in the presence of limited data and how, in his experience, one of the key contributions of the actuary was to “help people understand the concept of risk pooling and why some demands are unreasonable”.

The potential of and demand for microinsurance is huge, but is it profitable? 
Surveys carried out by the ILO’s Microinsurance Innovation Facility on profitability showed that some microinsurance products are profitable but others are not — a result not fundamentally different from developed insurance markets. Whereas mandatory credit life or basic accidental death cover have in many cases delivered high profits, other examples such as health have shown that failure to reach scale and insufficient control of adverse selection may lead to high claims ratios and thus to unsustainable business. But what exactly does profit mean?

According to Brandon Matthews, head of Zurich’s emerging consumer division, there is more than just short-term financial profit. “Microinsurance is likely to have higher risk-adjusted returns. It also is good for reputation, and increases the ability 
to innovate.” 
Client value should be a key concern of microinsurance providers — without a balance between client value and profit, there will be no sustainable business.

Microinsurance can play an important role in fighting transitory poverty and, combined with subsidies from governments or donors, can also provide a cost-effective and potentially profitable way to reduce chronic poverty. However, 40 or even 100 actuaries are not enough to meet the demand for microinsurance.

The UK Actuarial Profession, together with the Munich Re Foundation, the University of Oxford and the Microinsurance Network will continue to support this process and continue the Learning Sessions on microinsurance in 2012.

Interested in learning more? Join the UK Actuarial Profession’s microinsurance member interest group.

Dirk ReinhardDirk Reinhard is vice-chairman of the Munich Re Foundation, and a member of the executive committee of the Microinsurance Network.


Daniel ClarkeDr Daniel Clarke is a lecturer in actuarial science at Oxford University, and a member of the UK actuarial profession’s working party on microinsurance