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June 6, 2018

Microinsurance and Insurtech

Summary:

Insurers used to define microinsurance policies as social responsibility projects. With insurtech, the picture is changing rapidly!

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Until insurtech, insurance companies were defining microinsurance policies as social responsibility projects. With the magic touch of technology, the picture is changing rapidly!

Microinsurance is a type of micro financial activity, which protects low-income people and communities with low premiums and limited coverages against risks. The main objective is providing financial protection for all low-income members with pooling risks and financial resources. The target customer group is quite big, as well. More than 2 billion people are potential customers of micro insurance worldwide.

Microinsurance enhances financial security and peace of mind, supports social security systems in poor or developing countries and provides a high-level risk management system. For long-term investors, microinsurance stabilizes and develops financial markets in developing and poor countries and provides considerable liquidity for critical times.

See also: Microinsurance: A Huge Opportunity  

Four features are crucial for penetration by microinsurance:

  • Premiums should be affordable for low-income households
  • Products should be very basic and easy to understand and cover limited risks
  • Underwriting, claims and collection processes should be operated with high effectiveness
  • Products should be distributed effectively and with minimum distribution cost

With insurtech, the picture is changing rapidly! Insurtech is converting microinsurance into a very profitable area.

The first rule of insurance, the law of large numbers, is now valid for microinsurance business. The number of insureds is widening, and this makes claims more stable and predictable for insurance companies.

The first impact of insurtech in micro insurance is on UW processes. Because of the low premiums, operational efficiency is the key of success in projects. Insurtech allows insurers to have their own automated UW decision-making processes for fast and low-cost policy production. The key to success, management of operational risk, is reduced significantly. The products are simple, do not require any financial literacy and are very user-friendly.

Target customers purchase policies without location restrictions via digital distribution channels. Premium collections, claims notifications and all compensations activities are performed with digital tools that were developed and perfected by insurtech.

See also: A ‘Nudge’ Toward Microinsurance  

For now, microinsurance projects mainly focus on personal accident, health and agricultural activities, but new products are being developed promptly. With all its components, like artificial intelligence, machine learning, chatbots and the Internet of Things, insurtech is becoming the new leverage for microinsurance — not just diversifying and absorbing risks for individuals, but also providing very strong preconditions for other productive activities for policy owners.

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About the Author

Zeynep Stefan is a post-graduate student in Munich studying financial deepening and mentoring startup companies in insurtech, while writing for insurance publications in Turkey.

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