Jeff Blacker, Henry Yan and Eamon Kelly look at microinsurance and explain why it is an interesting and rewarding alternative to more conventional areas of insurance
It is also known as impact, inclusive, affordable, or mass insurance.
The most common products are loan, health and accident, disability, funeral, property and agriculture insurance.
The common thread is the aim to include populations that were previously excluded from insurance markets and hence products usually have small policy sizes, minimal administration costs and little or no underwriting or policy exclusions.
Microinsurance provides an important financial service for two reasons.
First, low-income people are generally more vulnerable to risk owing to the types of work, exposure to ill-health, accident, weather and other perils. Second, they are less likely to have access to a social safety net. They rely on family, friends, community and sometimes lenders to alleviate suffering and offset financial loss when help is needed.
If, say, a rickshaw driver who is the family breadwinner has an accident, suffering damage to the vehicle or personal injury, then their whole family could fall into poverty. Low-income people in developing countries have proportionately higher exposure to risk and higher probable loss compared to those in modern, developed economies.
Microinsurance provides an opportunity for actuaries to apply their skills to make a positive impact on people's lives. It is an opportunity to contribute to the social responsibility of the actuarial profession and 'give something back'. It is inspiring and rewarding to see insurance used to help change people's lives and directly protect people from the often-disastrous impact of life-changing events.
While working for a common good, you meet people you would never otherwise have met and visit parts of the world you wouldn't have seen. You work in different contexts, learning from these very interesting markets. There are also greater intellectual challenges to be had through problem solving and creative thinking in different dimensions.
It is useful to be forced to think outside the box and challenge the status-quo. For example, microinsurance products must be designed to allow for quick and easy claims settlements. This can mean solving issues related to data and evidence required to process a claim, product design features to deal with moral hazard and fraud, and how to deal with customers in remote rural areas or who perhaps have low literacy skills.
Simplicity in product design requires a combination of professional skills, operational know-how and empathy.
Growth to come
The volume of microinsurance is large and growing but has yet to reach its full potential.
The Munich Re Foundation has published a number of 'landscape studies', which set out the figures of lives covered, amounts of premium in force and types of products available through time and across geographic region. These show that microinsurance reaches nearly 265 million people, with annual growth of customers insured at approximately 30% in Africa and 25% in Asia and Oceania.
While the growth rates are impressive, microinsurance initiatives face many challenges to achieve scale, sustainability and impact. Barriers to developing microinsurance markets range from concerns of customer acceptance of insurance to sophisticated issues of market development.
One basic concern is the level of customers' trust in insurance providers. Many low-income people simply do not trust insurance, often having heard stories of brokers and agents who abscond with insurance premiums, or insurance companies who do not pay out claims when it seems they should. Consumer protection and customer education can help.
Other low-income people have not had exposure to insurance and simply do not understand it or see a reason for it. On the supply side, insurers need to see the business case to invest in this market. There may be high distribution costs and challenges where the population is spread out.
As the market grows, there is more evidence of the business case and profits to be gained. But it is not obvious what the right level of profit to aim for is in this sector.
Lack of direct and relevant data can be problematic. How can you laterally source data? How would you price a policy without sufficient or reliable data? Once the product is designed and priced how do you test the product and ensure it is properly integrated and managed in the insurer's operations? Application of the actuarial control cycle is a critical skill and something not always understood or applied.
Insurers may also be hindered by a regulatory and supervisory framework that neglects this market, even where microinsurance could potentially apply to a high percentage of the population.
Comprehensive diagnostic studies have been completed in over 20 countries to educate and help national regulators develop an appropriate legal framework in their country, but there is still a long way to go.
So what innovations have occurred in microinsurance markets and what lessons do they have for mature insurance markets?
Mobile phone insurance is one example of innovation in the development of new business models. The 'freemium model' provides free insurance for say, three months on the purchase of a mobile phone or other product or service, after which clients pay a premium if they wish to continue to receive cover.
This model has seen a rapid rise in the number of low-income customers insured.
In some countries, insurance companies are working with the innovators to open these
new markets. Those insurers who do not adapt may find themselves marginalised as their traditional client base is eventually eroded by more innovative operators.
Regulatory frameworks in some countries have been developed by considering the specific nature and needs of low-income people. The concept of proportionality can be applied to microinsurance in terms of capital requirements for insurers. Product disclosure requirements have adapted for clients through development of simple policy design.
An Institute and Faculty of Actuaries event will be held in London on Thursday 12 May 2016 to explain and discuss this emerging area. Topics will include case studies and recent global landscape studies illustrating the fast pace of development and changing business models. The London meeting provides an opportunity to launch the recent book Actuaries in Microinsurance.
This collaborative book was written by 22 actuaries about their microinsurance experience and contains anecdotes that give non-microinsurance experts a personal and amusing sense of what it is like to work in developing regions around the world. It also contains technical material related to actuarial work within the field of microinsurance.
Jeff Blacker FSA, MAAA is an independent consulting actuary and the principal editor for a new book Actuaries in Microinsurance
Henry Yan FIAA, FIA is a pensions and investment actuary and chair of the Institute and Faculty of Actuaries Microinsurance Member Interest Group
Eamon Kelly FIAA is an independent consulting actuary specialising in developing insurance markets. He recently consulted in Uganda and Egypt