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Meet BancoSol in Bolivia. Zurich Insurance, one of our primary clients, are supporting it via the Zurich Bolivia Group. Their Solsalud and SolSaludPlus policy provide in-patient and out-patient care, surgery, hospitalization, out-patient care, immunizations and preventive care, consultations, maternity, transportation. Health insurance is offered for a mere $5/ month. Their policy is only 2 pages long and requires no medical examination.
To a traditional insurer, this would seem baffling. This is going against the established practices in the insurance industry as both had come to know it. In reality, BancoSol is simply providing microinsurance.
Microinsurance is both a challenge and an opportunity for the insurance industry at large. An opportunity because as of yet, it is a hugely untapped market. A challenge because the traditional modus operandi of insurance won’t work in these areas.
So, why should insurers look to invest in it? What is it exactly and who is it for? The A to Z of it is answered below.
What is microinsurance?
According to the International Association of Insurance Supervisors (IAIS), microinsurance is: ‘protection of low-income people against specific perils in exchange for regular premium payments proportionate to the livelihood and cost of the risk involved.’
The microinsurance market is, thus, for the low-income demographics. Specifically, insurers are targeting people in rural India, South Africa, Brazil, and China.
For people living in the cities, insurance can seem like ‘just another thing’ or a necessity, depending on how we rate its importance. But, for those with little money like a farmer in India or a new settler in a South American village, microinsurance can either seem like a gift from the Gods or something to be mistrusted. If the importance and intent are conveyed properly, though, microinsurance can help protect people’s livestock, crops, protect them against natural disasters, and help to grow their businesses.
Herein, we highlight the main differences between traditional insurance and microinsurance:
|Policies||Complex policies with many exclusions||Policies are written in a simple language with few or no exclusions|
|Client nature||Low risk in an established culture||High risk and vulnerability in a weak insurance culture|
|Premium calculation||Individualistic based on age and other factors||Price sensitive market with group pricing and higher premium to cover ratios|
|Premium collection||Monthly/ yearly payments through debit/ invoice||Irregular payments depending on client's financial situation|
|Claims handling||A complicated process with lots of document verification||Simple and fast procedures|
Almost everything that is done in the microinsurance industry, is the direct opposite of traditional practices and set ways. That is why it is called a challenge.
Opportunities in the microinsurance market
A natural question after learning about the nature of microinsurance is: how is an insurance business to make money then if the premium can be a few hundred dollars only? How do you make insurance understandable and accessible to someone who has never heard of it? How to adjust claims in remote parts of the world?
This can be understood in terms of opportunity and long-term gain. In developing countries, the market for microinsurance is estimated to be between 1.5 and 3 billion policies. These policies are required and in demand for health, agriculture, property, and disaster cover. As of yet, microinsurance policies already provide coverage to 135 million people which is actually just 5% of the potential market. The remaining percentage is still to be roped in.
According to The MicroInsurance Centre’s estimate, the market could grow to a whopping 1 billion policyholders in the next 10 years which is 7 times more than today’s estimated market size.
Who will be responsible for making these strides? Currently, the main providers of microinsurance are commercial insurers. Those who are international providers and reinsurers are involved in microinsurance initiatives and direct offerings of products. Governments, NGOs, donors are the facilitators who are working to further expand the microinsurance market through direct/ indirect efforts.
Requirements for establishing a sustainable microinsurance market
Since the primary markets for microinsurance are low-income and largely third world countries, it benefits the providers if they keep their products, policies, and processes simple. People there do not have experience in dealing with complex entities. It will be harder to create a market for something as new as microinsurance if people discover it’s taking too much energy to understand and not providing value for their money even.
Innovative distribution channels
What works in the city will most likely not work for microinsurance. Community-based and informal insurance schemes will be effective innovative channels for establishing the roots of the microinsurance market. Commercial insurers will also need to work with NGOs, community-based organisations, MFIs, and governments, to truly expand the reach of their services.
Developing an insurance culture
Not everyone will accept or trust insurance early on. This is why it is important to work at the grassroots level and spread the importance plus benefits of this offering among the people. Again, working with other organisations and the government to understand the market landscape will produce more efficient results.
Benefits to insurance providers
Here’s what insurers reap on sowing the seeds of microinsurance offerings:
- Portfolio diversification- by entering a new market with new products and new processes. This can positively impact overall business health.
- Reputational benefits- being associated with development efforts for low-income people will bring positive associations to your brand name
- First mover advantage- and an early entry in a developing industry to gather market insights as early as possible for enabling business growth
- Taking on corporate social responsibility- by improving the lives of people and adding value to them
The microinsurance market is still in its infancy stage. Insurers to take the leap to establish their footing will benefit in the long run. Not only will they be the early pioneers in this market, but eventually, they’ll also be able to gain the trust of the people they are insuring. They’ll also help to reduce poverty and contribute to uplifting the living standards of these people. Corporate and social benefits can be reaped together.
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