Earlier this year, a group of eight leading insurers and brokers established a consortium to promote microinsurance ventures in developing countries, unsurprisingly called Microinsurance Venture Incubator (MVI). Together, AIG, Aspen Insurance, XL Catlin, Guy Carpenter, Marsh & McLennan, Hamilton Insurance, Transatlantic Reinsurance and Zurich plan to launch 10 microinsurance ventures over the next 10 years.
While conventional insurance targets middle to high-income urban dwellers, microinsurance targets rural residents living on the edge of poverty. Most popular are microinsurance products that offer life, health, accident or property insurance.
However, to really be the "can-do" coverage for the poor, it is not enough for microinsurance to be affordable and accessible; it also has to be tailored to the unique environment in which it is being offered. After all, context is king.
So with the context of "poor people deserve innovation too," here are five examples of innovative microinsurance schemes that target different risk pools:
1. The Use of Technology to Combat Fraud
Insurers providing livestock insurance in India have been struggling with high claims ratios, mostly because of fraud. Typically, to get coverage, a veterinarian would place an external plastic tag on the animal's ear as an indication that that specific animal is insured. However, this produced zero controls in place, and insurers learned that these plastic tags somehow made their way to dead cattle, way too frequently.
Nowadays, India’s IFFCO-Tokio (ITGI) insurance company is using radio frequency identification (RFID) chips that are injected under the skin of the animal (which is less painful than tagging!). These chips are accessible through a reader, which allows an insurance official to easily verify that the RFID reading coincides with the identification number on the policy, when a farmer reports a claim. This results in fewer fraudulent cases and faster claim processing.
Almost a fairy tale ending if it wasn't for the high price of these microchips. Nonetheless ITGI is using a combination of external plastic tags and RFID chips to control their costs yet still prevent excessive fraud. It's working.
2. Forming Index-Based Insurance to Build Trust
Another promising innovation is index-based insurance, where an external indicator triggers payments to clients rather than the traditional "I'm calling to report a claim."
Kilimo Salama, AKA Safe Farming, combines mobile phone payment system with solar powered weather stations to offer farmers in Kenya "pay as you plant" insurance.
Here's how it works:
- A farmer goes to an approved dealer and buys a bag of fertilizer, which he pays 5% extra for to get climate coverage.
- The dealer scans a special bar code, which immediately registers the policy with the insurance provider and sends a text message confirming the insurance policy to the farmer's mobile phone.
- When data transmitted from a particular weather station indicates drought or other extreme condition is taking place, the farmer registered with that station automatically receives payouts via a mobile money transfer service.
- Similarly, a more recent entrant called ClimateSecure says it will “work hand-in-hand with [its] clients, meteorologists, financial experts and other brokers in order to build indexes that most accurately reflect [their] clients’ risk."
3. Targeting the Cash Poor by Relaxing Liquidity Constraints
In China, pork composes roughly 48% of livestock production, with most pigs generally raised in small numbers by rural families in their backyards, forcing Chinese hog farmers to face the risk of hog diseases. Yet, despite the obvious benefits of microinsurance products, the demand is still low because of cash constraints and a lack of trust in insurance providers.
Yet a pig insurance scheme, which offered credit vouchers that allowed farmers to take up insurance while delaying the premium payment until the end of the insured period, coinciding with when pigs are sold, saw their insurance premiums go up by 11%.
By the same token, telecommunications companies embed insurance premiums in their service contracts, with the advantage of offering (oftentimes free) coverage as part of a pre-existing plan. In Africa, for instance, free insurance is linked to phone data usage; the more airtime one buys, the more coverage he/she gets.
4. Product Bundling to Attract Customers
The 2014 winner of the prestigious Hult Prize, NanoHealth, is a social enterprise that not only offers microinsurance but also tackles chronic diseases by providing door-to-door diagnostics via its network of community health workers, which it equips with a low-cost point-of-care device called Doc-in-a-Bag. This startup is slowly but surely creating India's largest slum-based electronic medical record system and disease landscape map.
5. Coverage Within Reach via Garbage in, Coverage out
Forget bitcoin, garbage is the new currency with this Indonesian startup called Garbage Clinical Insurance (GCI), which was founded by a 26 year-old doctor named Gamal Albinsaid. Through GCI, community residents are encouraged to recycle and get healthcare coverage at the same time because trash is translated to funds that can later be used to pay for medical insurance.
In sum, in this micro world of microinsurance, where only 260 million of the world's low-income citizens are covered, words like big data and claim history could not matter less. What matters is how quickly an insurer can scale, how low can its margins go and how clearly can it communicate its offering to the low-income farmer all in the name of for-profit social enterprise.
Expect more entrants.