Tag Archives: microfinance

Microinsurance: A Huge Opportunity

Having worked in and around Asia for the past few years, I have seen microinsurance be a constant topic.

I always found the concept of microinsurance (and microfinance) very interesting. However, I didn’t fully understand it.

Fortunately, Peter Gross from MicroEnsure helped to give me more insights into this fascinating and extremely important concept.

The following article is based on my conversation with Peter.

Who Is Peter Gross?

Peter is currently the director of strategy with MicroEnsure. Peter started with MicroEnsure in 2010 as the general manager in Ghana. Previously, Peter had a variety of management roles in McMaster-Carr.

When I asked Peter about why he moved from a company like McMaster-Carr to MicroEnsure, his answer was simple: “I wanted to work in a social enterprise and use my business skills in a developing context.”

Peter’s wife is also in public health, working for the Centers for Disease Control and Prevention (CDC).

Having an alignment of interests and values is important for any partnership, personal ones included. Hence, moving to Ghana to help with both the protection and providing of care was an easy decision for the couple.

What Is Microinsurance?

One of the comments that stuck with me most during my conversation with Peter is on the definition of microinsurance. He explained that he is trying to get away from that term and refer to it more as “insurance for emerging customers.” The main reason is a desire to get away from the perception of “micro-price vs. micro-value.”

These types of products are specifically designed for an underserved population that typically can’t get access. That is the core of microinsurance.

For people in these markets, Peter said, “Good-quality insurance is very important because they face more day-to-day risks than you and I.…. They get really excited about insurance and the role it plays to protect them.”

Microinsurance is primarily bought in some of the fastest-growing areas of the world, including these six countries from Africa and four from Asia:

Source: https://www.theatlas.com/charts/BJOKD67VG

The blend of under-penetration plus fast growth shows a lot of opportunity for microinsurance in these areas, one which MicroEnsure is very aware of.

See also: A ‘Nudge’ Toward Microinsurance  

What Is MicroEnsure?

MicroEnsure is a specialist provider of insurance for customers in emerging markets and has registered more than 55 million customers in 10 different countries in Asia and Africa.

MicroEnsure designs, builds and operates their business by having products that are simple to understand and with distribution partners that can help to reach the masses. They don’t carry the risk themselves and partner with more than 70 different insurers. Their biggest shareholder is AXA, alongside Omidyar Network, IFC and South Africa’s Sanlam.

Because the majority of the consumers in these markets do not have any insurance, Peter indicated to me that the marketing strategies that they deploy help them to introduce an insurance solution and meet an untapped need.

An example of this was when Peter first moved to Ghana. The company partnered with Tigo Telecom to offer free life insurance. The process worked like this:

  1. Customer dials *123 to sign up
  2. The more the customer spends on telecom services, the more insurance the customer receives (up to a maximum of $500)

Simple, right?

Peter told me that they started seeing customer behavior changing, especially when customers started seeing claims paid. This caused these consumers to not only want to spend more on airtime with the telecom to get more life insurance, but to get coverage for other risks.

This helps to show what has made MicroEnsure so successful:

  • Identify a need
  • Introduce a solution
  • Make that solution readily available and accessible
  • Introduce more solutions
  • Make those solutions readily available and accessible
  • Repeat

What Else Does MicroEnsure Offer?

As with any market, the range of products available to consumers can vary.

Product development typically starts with life, personal accident and hospital. Policies to pay for funeral expenses and protection of property and crops are quite popular, too. Coverage for other risks, such as political violence, can also be marketed, depending on the country.

As more consumers have mobile phones, mobile device cover is trending upward, too.

If the product fulfills the need to the consumer and is simple to understand and easy to market/get access to, then it will be considered.

At the same time, Peter made clear to me that MicroEnsure needs to be extra careful in building its products. Because the risks their consumers face are higher, the risk exposure for them and their insurance partners are also higher. The company needs to ensure that they build in features that are both easy to understand and tougher to game. This can be a tough balance to meet, but one that needs to happen to ensure that they can continue to provide this valuable solution for their consumers.

What Role Does Technology Play?

Good technology is part of the key to MicroEnsure’s success. Peter shared that this is both from a distribution and operational perspective.

For distribution, products need to be able to be offered and distributed through the masses. Making an easy-to-purchase process over mobile or other e-platforms is critical. An application has to be not only simple to fill out but also easy to understand.

From an operational perspective, Peter explained that MicroEnsure needs to assume a lot of mistakes on the data input from the consumer. As such, they need to build in certain tolerances on imperfect data to make it clean. This is crucial, especially for the payment of claims.

Peter said MicroEnsure’s technology is fully API-enabled and can be easily plugged into their distribution partners, whether it be banks, telecoms or others. Their systems are modular, meaning partners can use various components, such as the policy administration system, claims system or messaging system, only as needed.

See also: Big New Role for Microinsurance  

Other Insurtechs to Watch in Microinsurance

I asked Peter who some of the other insurtechs in the space are to take a look at. He gave me three:

  1. BIMA, which just had an investment of $100 million from Allianz
  2. Ayo
  3. Acre Africa

Summary

This was a fascinating conversation with Peter, and I learned a lot from it.

I have a ton of admiration for the work Peter and MicroEnsure are doing. I’ve worked in mature markets as well as emerging ones (I would say Malaysia is right in the middle).

There are complexities in both types of markets.

What interested me the most from my conversation is the combination of being able to provide coverage for the un/underinsured, focusing on their specific needs and making them excited to be getting insurance.

I feel that insurance is a very important product, for all people. In places like the U.S., insurance can often be looked at by consumers as boring and an unnecessary evil (until they need it, of course).

Insurtech is helping to change that perception in the Western world and mature economies.

For those in emerging markets, insurtech helps with access and a level of coverage that many have never experienced before in their lives. Now that is something exciting and meaningful.

This article first appeared at Daily Fintech.

Major Opportunities in Microinsurance

Microinsurance in developing countries is not just a reduced-cost coverage for poor people: It’s an innovative way of selling insurance in a customer-centric approach… and the insurtech wave has a big role to play!

Microinsurance already covers around 135 million people, which represents around 5% of the entire market potential, with an average of 10% annual growth. The risks covered by such solutions are the typical ones of the traditional insurance market: life insurance, health insurance, accidental death and disability and property insurance.

Developing countries have economies that are generally based on farming and agriculture. and they can’t cover all the needs of a growing population exclusively with the goods they produce. Approximately 70% of the world’s 7 billion people live in poverty. In such a context, there is significant demand for a certain range of insurance products from health and life, agricultural and property insurance, to catastrophe cover. The potential market for insurance in developing countries is estimated to be between 1.5 and 3 billion policies.

See also: Big New Role for Microinsurance  

Microinsurance presents a different type of business potential in comparison with the microfinance and microcredit current. Microinsurance is not just a reduced-cost and specific-risk insurance coverage for people in developing countries. It is an innovative way of selling insurance that is aligned with customer expectations while covering a specific need, at the right moment, at the right price, in a customer-centric approach. This type of insurance could help close the protection gap both in developed countries and underdeveloped ones.

Microfinance instead can be defined as “a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high-quality financial services, including not just credit but also savings, insurance and fund transfers.”  Microcredit (generally considered to have originated with the Grameen Bank founded in Bangladesh in 1983) means providing credit services to those with low income. It is an extension of very small loans to impoverished borrowers who typically lack collateral, steady employment and a verifiable credit history.

Provided that people with low income are offered the right products, means and knowledge, they will become effective consumers of financial services. The MicroInsurance Centre estimates that in the next 10 years or so, the microinsurance market could grow to 1 billion policyholders.

An important concept is that insurance demand should not be taken for granted. This is because of the often negative connotation it is being given in the developing world, which stops it from reaching more people. The market needs an innovative approach based on customer education and incentives.

Insurance benefits have to be clear in the mind of potential customers and, for that to be achieved, trust has to be built. This can be done through new and engaging approaches like plots in TV and radio programs or even through literacy campaigns. To create demand, other types of incentives can be used: tax exemption, subsidies or compulsory cover. For microinsurance to function in a developing country, the products and the processes have to be simple and the premiums need to be low. A change of mindset is needed from insurers, alongside a more efficient administration strategy and distribution channel.

The key question that insurers have to pose to themselves is: How do you sell insurance to someone who never had to deal with such a concept before? How to generate revenues from a policy where the premium is just a few dollars per year?

These questions show the essential challenges of microinsurance that insurers need to tackle in a quick and cheap manner to provide cover for people who have little money. New solutions for developing countries are starting to emerge on the market; for example, in some parts of Asia pre-pay cards provide insurance cover for flood damage.

Insurers will have to find the right business model and partners when approaching such markets and consider less common mechanisms for controlling moral hazard, adverse selection and fraud. For example, proxy underwriting, group policies and waiting periods mitigate adverse selection. At first, investing in microinsurance might seem a bit reckless, but the returns do exist: starting from reputational gains in the short term, knowledge in the medium term and growth in the long term.

If indeed microinsurance will start to grow at its true potential by entering developing economies, then there are some critical areas that need more thought: starting from product innovation and technological solutions that are adapted to low-income markets, to choosing the right partners to work with (NGOs, community-based organizations, international reinsurers and so on) and understanding which are the risk factors that will affect the region in the future (for example, economic development, climate change or population growth trends).

See also: 5 Innovations in Microinsurance  

The direction in which technology is heading indicates that developing countries will fast forward straight to mobile, skipping desktop computers, which are less feasible as communication tools. Already, more than half of the world’s population is using a mobile phone, and almost 25% is using internet regularly as fewer and fewer people use fixed telephone lines. Mobiles are the dominating means of communication, even in the Third World, with smartphone ownership and internet usage on the rise. According to a survey by Pew Research Center, in the last two years there has been a significant increase in the number of people from developing nations that declare they use internet and own a smartphone.

Moreover, in nearly every country, millennials are much more likely to be internet and smartphone users compared with those over age 35. This phenomenon is a characteristic of both advanced and emerging economies. In spite of these trends, less than 5% of people with low income have access to insurance or to covers that they actually need, which makes underdeveloped countries an ideal market to explore.

Microinsurance Has Macro Future

“‘We’ll all be rooned,’ said Hanrahan….”

So goes the famous Australian bush poem by John O’Brien about the plight of farmers going from drought to flood to bush fire – one extreme weather situation after another. And though we are nearly 100 years on since that poem was written, we seem to be no further along in being able to predict weather with any certainty more than a few days into the future. In fact, extreme weather seems to be hitting more frequently and with greater ferocity because of the apparent effects of global climate change. The extended 2013 winter in Europe cost the economy there more than $7 billion – that is just from being cold for a month longer than usual.

Extreme weather events have dominated the headlines, especially where they impinge on highly developed insurance markets such as North America and Europe. But from the perspective of the impact on human lives, the greatest risk lies in Asia and Africa, where a vast majority of people depend upon subsistence farming and there is very little penetration of traditional financial services. A number of governments in the region, in partnership with semi-government, educational institutions and private organizations, have established a range of programs to foster the development of sustainable microfinance and microinsurance services for the most at-risk segments of their communities. In India alone, there are more than 700 million farmers and farm workers who struggle with extreme weather risk every season.

Building sustainable programs, now there’s the trick!

In one program in India that ran from the mid-’80s through to the end of the twentieth century, the cumulative premiums were $80 million, while the cumulative claims were $461 – hardly a sustainable proposition. In another program, a World Bank study showed that the microinsurance proposition was advantageous to farmers only in very extreme situations, so in most cases it was uneconomic for farmers to buy the insurance.

From 2001, the Indian government has ensured the growth of microinsurance through a regulatory framework set up as part of the entry of private insurers into the market. Popular products in the sector are weather index policies, where payouts occur if rainfall is below a trigger level, in a particular area. The premium for these types of policy have proven to be expensive, but, with government subsidies and an education program, awareness and acceptability of this kind of financial service have grown in communities in rural India. Governments in China, Bangladesh, Indonesia and the Philippines are following suit, by introducing their own agricultural insurance programs.

The major problem for insurers writing this kind of business is getting a good handle on the risk, to enable correct pricing. For the most part, insurers have to rely on historical data, which really only establishes a wide range of outcomes; with extreme weather trends continuing, insurers tend to be very conservative in risk pricing.

This is where big data and analytics come in.

In the commodities sector, at least one player has marketed reports that help predict the price of commodity futures. A case in point is the recent U.S. drought. By using National Oceanic and Atmospheric Administration (NOAA) and NASA remote Earth-sensing data, and coupling with advanced climate predictive analytics, the U.S. drought was predicted three months in advance of the U.S. government’s declaring drought. The model enabled the assessment of the weather impact on particular areas of the U.S., as well as the impact on the particular commodity crop grown in that area (corn), and, consequently, a prediction of the price of the commodity at harvest time based on the expected overall yield, with drought factored in.

Currently more than 15 petabytes of public data is produced annually that is global in nature, and the amount of data is set to increase to more 300 petabytes as more satellites come on line over the next few years. The computing power and technology to cope with huge data sets continues to improve each year with big data solutions.

These rich data sources and new technology solutions represent an unparalleled opportunity for governments and communities to turn microinsurance from a subsidized, unprofitable activity, to a sustainable model to spread economic stability and prosperity. By enabling the weather risk to be more accurately modeled, underwriters will be able to price policies on a more accessible basis.

Studies are showing that, where microinsurance is in operation, microfinancing is supported, as farmers can have certainty around being able to meet their loan commitments. These financial services are being used by farmers to improve their farms’ yield by investing in appropriate weather risk mitigation (irrigation, soil moisture conservation, etc) and productivity enhancements (planting automation, genetically modified seeds, fertilizers, improved pest control, etc). This virtuous cycle lifts this sector from depending on subsidies and government programs to being commercially viable and self sustaining. Definitely a win, win, win proposition.

Far from the pessimistic, doom-mongering of Hanrahan, I see a world more in line with Peter Diamandis’s vision as outlined in his book Abundance: The Future Is Better Than You Think.

I don’t know about you, but I for one would love the bragging rights to say my industry is helping to improve the lives of billions on planet Earth, while still making a commercially reasonable profit.

Hey, I wonder if it’s going to rain today?