Swiss Re’s latest sigma study “Microinsurance - risk protection for 4 billion people” - emphasizes the relevance of microinsurance as an effective and viable risk management solution for low-income individuals. Microinsurance, which has the potential to cover up to 4 billion people, concentrates on few risks today, but its scope is broadening. The interest of insurers in microinsurance lies very much in its future potential.
Microinsurance refers to insurance products especially designed for low-income individuals. The premiums and coverage are kept at a low level in order to make the products affordable and attractive to those policy holders, yet remain commercially sustainable. Currently, the risks covered by microinsurance are heavily tilted towards credit life insurance, but the market could expand to cover areas such as health, agricultural insurance, term life insurance, affordable pension products and other savings products.
Microinsurance supports socio-economic development and insurance growth in emerging markets
By reaching many individuals who were formerly excluded from insurance, and thereby reducing the vulnerability of low-income individuals and protecting their income streams, microinsurance helps to improve social stability and supports broad-based economic development.
Amit Kalra, author of the new sigma study stated: “For insurers, microinsurance creates an opportunity to tap into new markets and build a strong brand value that can be used for selling conventional insurance products in the future.” Kalra added: ”It is a win-win situation: Insurers help those who urgently need access to insurance. This in turn supports the long-term economic goals of insurers.”
Huge untapped market potential at the bottom of the pyramid
The microinsurance market could generate premiums of up to USD 40 billion. Over the last decade, insurers, NGOs, mutuals and community organisations have launched microinsurance programmes across product lines and major markets. The key drivers supporting this activity's growth have been increasing microfinance penetration (in particular microcredit), the active involvement of government in certain markets and need-based product offerings.
Kalra said: ”The Asia-Pacific region is the fastest growing and the largest microinsurance market. Microinsurance has also grown considerably in African and Latin American countries despite these being relatively smaller microinsurance markets at present.”
As the microinsurance industry expands, organisations must increasingly cope with rising risk exposure and risk accumulation. This will lead to additional needs for capital and reinsurance solutions that leverage both traditional products and tailor-made innovative solutions. The latter includes, for example, weather derivatives and parametric nat cat solutions.
Market potential and challenges
While credit life, a mortality cover bundled with microcredit, is the largest selling microinsurance product, there is a strong need for a higher and broader level of protection that can be met with savings/term life, health and agriculture microinsurance.
Some of the challenges that microinsurance faces are: Insufficient infrastructure, the absence of specific regulatory provisions for microinsurance, and the lack of exposure and risk data. Insurers must also find suitable partners for distribution and claims management. Products must be adapted to client needs as well as the cultural background of the prospective microinsurance buyers.
Governments can foster the development of microinsurance through favourable regulations and public private partnerships
The key objectives for governments and policymakers in this regard should be:
1. improving access to financial services for the low-income population;
2. the development of a sound regulatory framework;
3. lowering of barriers and developing efficient markets; and
4. increasing awareness and ensuring consumer protection.
Kalra further said: “Policymakers can deploy multiple approaches to develop the sector, including adopting specific microinsurance regulations, providing financial support and sponsoring insurance schemes targeted to the extremely poor population.”
Governments in partnership with private players can offer effective alternatives
For the extremely poor population or markets which otherwise are not commercially viable, governments through public private partnerships (PPP) can effectively channel subsidies through microinsurance programmes by fully funding or subsidising premiums. Kalra added: ”The governments contribute to developing comprehensive natural disaster solutions and formulate collaborative approaches – such as PPPs – to effectively deal with the financial consequences of large-scale natural disasters on the low-income population.”
Kalra added: ”NGOs, international developmental organisations and donors have played an instrumental role in aiding the development of the microinsurance sector. The contribution of social-minded entrepreneurs in the field of microfinance and microinsurance has also been influential in encouraging private players to participate in the socially-driven businesses and thereby create new market opportunities for the bottom of the pyramid population.”