Why isnt microinsurance fulfilling its potential? Scott Swanay, April Li, Keith Lau and Tom Johansmeyer look at some of the challenges involved and how they can be overcome
There's an endless collection of microinsurance success stories around the world, ranging from social impact to profitability. However, overall, microinsurance has generally fallen short of market expectations, let alone of the concept's full potential. The principal challenge remains distribution. For microinsurance to scale effectively, this challenge needs solving - while, perhaps, making some compromises along the way.
What's holding us back?
Expectations have usually been a bit unrealistic. A microinsurance programme has to serve two masters: social impact and sponsor profitability. Even in ideal circumstances, this double focus can be difficult to balance.
Microinsurance consortia or partnerships tend to have interests that may be united in overall purpose but have differences over line of business, product structure, overarching strategy, or implementation approac. And managing disagreements at this level - even with shared underlying interest in the greater good - can be time-consuming.
These structural impediments are not new. They have persisted through several iterations of the microinsurance concept, going back more than a decade - and they are not easily solved.
Take, for example, the fact that big global property/casualty insurers don't consider microinsurance a priority. It may be easy to cite the great work done by many in the market - Munich Re, Swiss Re and the Blue Marble Microinsurance consortium members come to mind. But the investments in microinsurance remain a miniscule portion of large organisations that have to consider existing customers and shareholders.
Additionally, microinsurance tends to be seen as low-margin and better as a learning opportunity than as a future centre. It is not unusual for an insurer with a microinsurance programme to use its investment to gain insights that can then be applied to its core business, resulting in a faster return on investment and a greater positive impact on shareholder value. Essentially, microinsurance becomes a research and development facility for the core business. While this approach does provide some near-term benefit for those insured - as well as a foundation for future scheme expansion - it lacks the dedicated focus that would ultimately drive the development of the microinsurance concept.
So, it is possible to gain some near-term benefits from microinsurance market entry, even if it is in the form of lessons learned and applied to the core mature market business. And keeping expectations realistic can facilitate appropriate goal-setting, accomplishment and momentum. However, none of this can happen without clearing the most important hurdle: distribution.
Why is microinsurance distribution harder?
Distribution is among the greatest challenges insurers face. Whether for personal or commercial lines worldwide, new customer acquisition can be expensive - likewise, so is customer retention. And, clearly, efforts to find the right balance between direct business and agency/broker production are an ongoing concern. Insights gained through mature lines of business, however, may not be transferable to the microinsurance market.
Lower wages constrain disposable income. And while insurance may not be seen as a luxury in established markets, the situation changes when one has to choose between food for today and protection for tomorrow. Alternative payment methods, such as loans, become necessary.
Further, financial education can remain a barrier. Simply explaining what insurance is and how it works can take time and effort - not to mention needing a trusted local source of information on the concept. There is no substitute for a 'high-touch' sales process in target markets for microinsurance, which can lead to significant upfront insurer costs that could take years to recoup.
Finally, insurers are stuck with a paucity of historical data for the markets they seek to enter. In mature markets, loss history is available, supplementing the wide range of additional non-insurance information that can be useful to facilitate market entry. Census data, economic information, historical weather activity - this is the oil that keeps the global insurance machine lubricated. In less mature markets, not only is data for decision-making - even proxy data - insufficient, but information related to distribution is altogether non-existent. And where financial information in general is thin, the lack of any sort of proxy only frustrates the analytical process further.
A potential microinsurance market entrant should find an approach that minimises friction and cost while increasing the likelihood of sustainable success. This makes industry-wide partnerships seem an effective way to both launch microinsurance programmes and drive them to self-sustainability and strong profitability.
What makes an effective partnership?
In an April 2012 paper for the International Labor Organization, 'Managing microinsurance partnerships', Kelly Rendek pointed out that for a programme to make sense, it needs to work for both buyers and sellers. In a partnership formed to deliver microinsurance, the distribution arm needs benefits beyond commissions. Further, the partners need to recognise that both priorities and organisational cultures are likely to vary significantly among them. The challenges associated with microinsurance market entry aren't limited to the companies seeking to provide protection. The local market itself can be difficult to navigate.
In many countries where microinsurance products might be effective, language differences represent a large obstacle, and communication is crucial to distribution. Even where there is a local agent who can communicate effectively with both the insurance provider and the prospective customer, direct communication between the provider and customer would have to proceed through an intermediary even past the point of sale. Without this, especially in a programme's pilot phase, trust will not be established within the target market, and the programme will fail.
For a microinsurance programme to succeed and achieve scale, each of the partners in the venture must increase either the programme's value to prospective and eventual customers or the programme's viability, by helping to solve some of the logistical and operational challenges the partnership faces. Additionally, partners should consider that existing sales and distribution networks - such as telecommunications or banking - may not be suited to supporting microinsurance, despite a regular interest in relying on this sort of infrastructure.
With this approach, you can increase the data flowing into the programme and use it to inform decision-making - a practice that is already common in mature insurance markets. Accountability on the part of each partner also drives a mutual learning process in which the partners gain a better understanding of the role each plays, contributing to cohesion and collaboration. As the group comes together, it then becomes more likely to succeed against the four basic critical success factors for microinsurance ventures:
- Clear and consistent understanding of the business problem between all partners
- Alignment of interest
- Trust and long-term commitment
- A product that actually provides value to the target market.
Ultimately, partners need to share in the venture rather than attempt to advance their own interests asymmetrically. Unilateral changes by one partner could be detrimental if they affect the sustainability of the product.
What of frictional costs?
Partnerships entail multiple companies participating in a programme's financial return. The role of distribution in markets that are hard to reach can result in a perceived extra expense that can seem to create a 'greatest partner among equals'. Sometimes it makes sense to swallow the pill, even if frictional costs erode returns in the early years. Consider it an investment in new market entry and new market creation.
A frictional cost is not frictional if it creates value, and that could be exactly the case with a microinsurance partnership's investment in distribution. The cost should cover not just local market take-up but also ongoing credibility, financial education and a foundation for future market growth.
Partnerships and consortia can be formidable in any market, and microinsurance has unique challenges. Expend effort in an effective relationship between the players involved and the rewards can be substantial - at every link in the value chain.
Scott Swanay is assistant vice-president at XL Catlin
April Li is an associate actuary at Travelers
Keith Lau is a senior actuarial associate at PwC LLP
Tom Johansmeyer is an assistant vice-president at the Property Claim Services division of Verisk Insurance Solutions
This article was written as part of a Casualty Actuarial Society working party on microinsurance