Microinsurance is an industry that keeps building momentum. Changes in the global economy have created an emerging middle class that has been underserved by traditional insurance models — and microinsurance offers a needed solution.
For people in developing countries, who in many cases live on just a few dollars a day, traditional insurance is too costly. Constrained finances and limited awareness act as a significant deterrent for purchasing traditional, risk-mitigating insurance products. However, when loss events like those stemming from Hurricane Maria or workplace injury occur, insurance is necessary to rebuild communities and individual lives. Considering that nearly 6.5 billion residents live in emerging and developing countries like Ghana, the Philippines and Vietnam, the scale of this opportunity exceeds virtually any other single opportunity in mature insurance markets.
Much of the (re)insurance market’s recent attention has centered on global natural-catastrophe losses, which have exceeded $500 billion since 2017. Many communities around the world were dramatically affected by these losses, forcing prominent insurers to understand the best way to serve those communities.
Why Micro Makes Sense
The increased buying power within these developing communities confirms there’s an opportunity for microinsurance to grow. A World Bank study found that, from 1985 to 2017, Vietnam’s per-capita GDP jumped by nearly 10 times from $230 to $2,343. Such gains encourage significant interest and investment specifically focused on microinsurance product development.
Allianz, for example, has doubled down on its commitment to the field by joining forces with FPT Group to build insurance products for Vietnam and purchasing micro insurer BIMA for $290 million. In addition, LeapFrog raised $400 million for microinsurance product development and distribution, proof that sophisticated parties believe in the value of microinsurance products.
For new markets where skepticism toward high-premium private products exists, microinsurance offers a low-cost option to mitigate risk and grow trust with corporate insurance brands. However, when viewed in the aggregate, there remains a mismatch between high-growth areas in terms of population and income — Latin America and the Caribbean, Asia and Oceania and Africa — and insurance penetration in these areas, which currently sits at only 7%.
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The challenge for investors and the insurers they support is simple: educating communities, developing relevant products and establishing trust in these products; all of which is typically expended before the first premium dollar is collected. The challenge is exaggerated by the high-volume, low-margin nature of individual products, which, in some communities, carry average microinsurance product annual premium of $14.
While the economics of microinsurance will continue to challenge penetration and premium capture, insurers can overcome significant hurdles related to education and distribution by presenting simplified and relevant products to prospective insurance customers, and developing and executing a distribution strategy through a multidisciplinary team.
How Insurers Can Solve the Microinsurance Quandary
Insurers can position themselves for success in the microinsurance market through a couple of different approaches.
Chief among those is to streamline their services. Microinsurance is a product of its time. Technology allows all kinds of consumer services to provide hyperpersonalized care, which means insurers need to offer products that are as simple and relevant as possible.
To accomplish this goal, insurers must keep the end user in mind during all phases of product creation. Companies need to understand what customers need, how they prioritize those needs, and where their gaps in coverage lie. By identifying these factors, insurers can offer products that clearly spell out the relevant advantages to customers. This clarity can help engage customers and increase the odds that consumers will purchase the coverage.
Customers don’t want to pay for coverages they don’t need. Insurers, therefore, must seize any opportunity to create granular products that are simple and affordable. Not only does this approach provide more useful products to buyers, but it also helps insurers limit how much information they must collect during underwriting.
Additionally, insurers should build cross-functional teams internally to assist with distribution. Getting the right insurance product to the right customer at the right moment takes a coordinated team of experts. Those who distribute these products need to understand the environments in which they sell and have a stake in the profitability of the product.
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These distribution partners must also learn to describe to consumers the differences among products. It is not enough to sell: Distributors must be educators who teach customers that insurance can be as trusted as the local brands they know and rely on. To do that, the distributors and the people they serve must be supported through association with charitable and regulatory organizations.
Finally, technology must be leveraged to effectively monitor and mobilize the distribution force and insureds alike. To that end, software developers must build and test features on the basis of real customer feedback and adapt quickly to optimize the products. When the back-end team gives distributors a product that people want, distributors can sell a product that brings clear and tangible benefit to the developing world.
Microinsurance will continue to grow as the needs of the global population continue to evolve. Everyone in the insurance industry, from distributors to developers, is responsible for overseeing the growth of this new niche. Only by collaborating to offer a relevant product will insurers successfully earn their share of this new and burgeoning market.