Mapping the Landscape of Microinsurance

Mapping the Landscape of Microinsurance

Mapping the Landscape of Microinsurance

Katharine Pulvermacher reflects on a decade of Landscape Studies – and suggests how we can improve data collection to drive better insurance services. By courtesy of the Micro Insurance Network. 

Katharine Pulvermacher is Executive Director of the Microinsurance Network.  

The Microinsurance Network (MiN) has been tracking the evolution of microinsurance since 2007, starting with the publication of The Landscape of Microinsurance in the World’s 100 Poorest Countries. [1] Back then, the project team identified 7.8 million people who were covered by microinsurance in Latin America and the Caribbean (LAC). According to the latest report, coverage in the same set of countries stood at 17.6 million individuals by the end of 2016 – an increase of 126%.[2] Argentina, Brazil, Chile and Mexico, which were not part of the original 2007 study, together add another 34.1 million people.

Progress is indisputable but inclusive insurance remains a low priority

Clearly, there has been a significant increase in the number of low-income people in the LAC region with insurance cover of some kind. The variety of insurance products and services has also increased and now extends well beyond mandatory credit-life insurance. Uptake of life and non-agricultural property insurance has grown fastest since the last LAC Landscape Study in 2013. Encouraging though this is, however, the low-income market remains a low priority for insurers in the region. They cite lack of demand, inadequate distribution channels and insufficient market data to inform product design as key reasons for their lack of enthusiasm.

Insurance services targeting low-income consumers still represent a tiny fraction of national insurance markets in the LAC region when measured by premiums. For example, Figure 1 (overleaf) shows that in 12 out of 17 countries for which data was available, microinsurance premiums represented less than 1% of the total, and in a further three countries it was only slightly more than 1%. Guatemala and Ecuador were the only countries with a significantly higher percentage, at 4.1% and 5.3% respectively.

Scale is essential for a sustainable business case

Microinsurance walks a tightrope to maintain a balance between affordable insurance products that are accessible for value-conscious, cashconstrained target customers, yet that can still break even in the face of high transaction costs per dollar of premiums collected. Narrow margins make scale essential, and as a result the barriers to entry may prove high, especially where successful implementation requires significant investment in back-office technology for efficient premium collection and claims processing. Successful implementation is a long game, and even patient investors must prioritise their capital. Impact investors, including public sector investment funds, remain critical to ensuring that microinsurance programmes get the necessary time to reach maturity and become self-sustaining.

Market prioritisation is therefore key. The poorest countries are not necessarily the largest markets for microinsurance, or the most promising. Firstly, per capita Gross Domestic Product (GDP) cannot tell us how many individuals or households are potential microinsurance customers. Over the years, both project teams working on the Landscape Studies and commercial players seeking to come up with a measure for target market size, have concluded that consumers spending between US$2 and US$10 a day, in terms of purchasing power parity, are likely microinsurance customers. This excludes the very poor and clarifies the focus of microinsurance: to ensure that people emerging from poverty are able to develop resilience in the face of risk, so that when bad things happen, they do not simply fall back into deep poverty.

Figure 1: Cross-country comparison, LAC region, 2017 Landscape Study

The environment may matter more than size

Microinsurance regulations do not make markets, but enabling environments do.[3] Peru and Colombia serve to demonstrate this point, since both countries have relatively successful microinsurance markets, with double-digit coverage ratios. Specific microinsurance regulations were introduced in Peru from 2007 and have undergone successive reviews since then to improve financial inclusion.[4] In Colombia there is no specific microinsurance regulation, but there is explicit government support for financial inclusion. An extensive case study of Colombia published in 2008 found that “the current insurance regulatory framework generally does not hamper microinsurance”.[5] However, it was specific players in the private sector, attracted by significant potential for profit from low-income segments, who were driving the market forward using innovative distribution channels such as utility companies to reach customers.

From a late 2018 perspective, as the term ‘microinsurance’ moves out of vogue, it is clear that the naming of regulation is less important than what it does. Discussions at a series of Consultative Forums organised by the MiN in partnership with the Access to Insurance Initiative (A2ii) and the International Association of Insurance Supervisors (IAIS) strongly suggest that an enabling environment does not result from just one set of sectoral regulations. Policy coordination between sectors is increasingly important to facilitate innovative partnerships and emerging technology solutions that contribute to better customer service and economic viability. There is no ‘one size fits all’ – each country has its own policy legacy and specific political economy. However, policy makers’ concerns that consumers should be protected and served with value-added products and services is common across the whole sector.

Markets are made by motivated champions

The significance of motivated champions is underlined by early movers such as Peru and Colombia, where the critical mass needed to kickstart the market was achieved by just one organisation offering a single, simple product. In Peru this was a single entity offering mandatory credit life insurance, while in Colombia, a single provider sold funeral insurance. Similar examples can be found in other markets and regions.

If data isn’t measured, does it exist?

It is costly and sometimes nearly impossible to obtain robust representative data on the number of lives covered by microinsurance and the related gross written premiums. Aside from the issue of trust, and in the absence of a legal requirement, insurance providers have little incentive to share such information other than an interest in supporting an industry-wide benchmark. When it comes to data to provide better insights into the quality of products – such as claims ratios, time to settle claims and other key performance indicators – there is even less incentive to share, and the systems to collect it may not exist internally. This is by no means a specifically Latin American problem.

The goal of the Landscape Studies and World Map of Microinsurance is not simply to provide a snapshot of how much insurance is out there. The raison d’être of the programme is driving better quality services. To that end the 2018 Landscape Study, which focuses on the Africa region, will trial a new methodology to be implemented globally from 2019. Partnership is inherent in the new approach, which seeks to work with insurers to identify which data is needed, which data is missing and to develop solutions for filling the gaps.

 

[1] Roth, J., McCord, M. and Liber, D. The Landscape of Microinsurance in the World’s 100 Poorest Countries, (MiN, 2007). Available at www.microinsurancecentre.org/ resources/documents/unknown/the-landscape-of-microinsurance-in-the-worlds-100-poorest-countries-inenglish.html [2] https://microinsurancenetwork.org/groups/landscape-microinsurance-latin-america-and-caribbean-2017 [3] With the caveat that in India, for example, regulatory changes introduced in 2002 obliged insurance companies to ensure that a minimum percentage of their premiums consisted of products sold in specific rural areas. This fuelled the growth of microinsurance but the quality of products sold, in terms of their value to the poor, may have been compromised. [4] Wiedmaier-Pfister, M. and Chiew, H.L. Regulatory Impact Assessments: Microinsurance Regulations in Peru and the Philippines, ILO’s Impact Insurance Facility and Access to Insurance Initiative (A2ii), (ILO, 2017). Available at http:// www.impactinsurance.org/sites/default/files/MP49.pdf, accessed on 6 September 2018. [5] Cáceres, M. and Zuluaga, S. Making insurance markets work for the poor: microinsurance policy, regulation and supervision. Colombian case study. Cenfri/A2ii (The Centre for Financial Regulation and Inclusion, 2008). Available at https://a2ii.org/sites/default/files/reports/colombia_country_diagnostic_2008.pdf, accessed on 6 September 2018.
Impact Investment for Inclusive Insurance

Impact Investment for Inclusive Insurance

Impact Investment for Inclusive Insurance

Author(s): Anonymous – published on MiN Blog

When Leapfrog Investments sold 90 percent of its stake in mobile insurance leader BIMA to Allianz last year for an impressive US$96.6m, many in the industry saw it as vindicating the business case for impact investment in inclusive insurance. As Leapfrog partner Stewart Langdon said at the time, “BIMA is a stellar example of a digital financial services firm that has scaled quickly and profitably.”

Traditional investors in inclusive insurance have included multilateral institutions and development finance institutions. More recently, impact investors operating in the financial inclusion space, such as Leapfrog, have shown it is possible for microinsurance to provide a good return on investment.

The potential for investors is huge: according to the World Bank’s International Financial Corporation, micro, small and medium enterprises (MSMEs) account for more than more than half of all employment worldwide.[1] The potential growth of this market, coupled with insurance tied to microfinance products such as loans should be tempting, but uptake of microinsurance by clients of microfinance institutions has often not matched expectations.

MicroEnsure is another company attracting private money – suggesting that impact investment can give inclusive insurance the big push it needs to have impact at scale. As MicroEnsure’s insurance products have gained popularity and demonstrated financial viability, it has attracted private sector investors including Omidyar Network and AXA. Omidyar likes to invest in companies and start-ups that use pioneering technology to increase reach, usage, and scale impact of financial inclusion solutions – so far this amounts to more than US$600 million.[2]

Would-be private investors need to be convinced the inclusive insurance market will grow quickly and significantly. That means tackling constraints to growth such as lack of consumer trust; the need to scale up low-margin, high-volume products; products designed without consumers’ needs in mind; inefficient distribution; and business models which fail to maximise each part of the value chain. Furthermore, there is often little incentive to invest in insurers launching new products or business models in challenging and untested markets.

To answer some of these questions, the Microinsurance Network is hosting an interactive workshop at the forthcoming European Microfinance Week (e-MFP) in Luxembourg from 14-16 November 2018. The interactive workshop, Making insurance markets work for the poor: is financing the binding constraint? will look at what puts traditional investors off and how targeted, innovative funding mechanisms and InsurTech could help fill the gap. The session will also explore whether responsible investment and responsible exit strategies may also create obstacles.

Both BIMA and MicroEnsure are essentially insurance distribution channels – the next challenge is to get investors to put their money into InsurTech companies and to build capacity in developing markets. As ever, scale is the big obstacle. Emily Coleman, an insurance expert with the International Fund for Agricultural Development (IFAD), says that “to attract the private sector without the need for donor support for ever more, it [microinsurance] needs to be delivered at a large scale, for it to be sustainable. If it can’t wash its own face, it won’t last.”

 

Sources

[1] International Trade Centre, 2017. MSMEs and the 2030 Agenda for Sustainable Development. [Online] Available at: http://www.intracen.org/MSME-Day-2017/SDGs/ [Accessed 3 November 2017]. [2] http://ventureburn.com/2018/06/omidyar-1-3bn-investments-few-exits/

This article has been previously published on the Micro Insurance Network blog. You can find it here.    

How inclusive insurance can help beat poverty

How inclusive insurance can help beat poverty

How inclusive insurance can help beat poverty

Poverty remains a significant global challenge

Author: Katharine Pulvermacher, Executive Director of the Micro Insurance Network

Since the turn of the century, the concerted effort to reduce poverty around the world has generally seen significant success, although as of 2015, 3.4 billion people – 46% – were still living on less than $5.50 a day.1 There is little room for complacency. In Latin America and the Caribbean, for example, the percentage of the population living in poverty has actually increased since 2015.2

Households that emerge from deep poverty are fragile

When a household succeeds in emerging from deep poverty, relatively ordinary events – that ordinary middle-class families in wealthier countries could take in their stride thanks to access to credit, savings, effective social security and more affluent social networks – can be enough to destroy this fragile success. Things as simple as a family member falling ill can and often do engender difficult choices: to pay for medical care or to pay for school fees, or supplies to be sold in a market.

Insurance can help prevent them falling back into poverty

People living in rural areas – who rely on farming to survive – are still more likely to be poor, and poorer, than their urban counterparts. Because of this, natural disasters and adverse weather conditions can see crop yields fall dramatically or even see harvests completely destroyed.

Solutions based on insurance principles offer an obvious way to mitigate such situations.

Microinsurance focuses on solving these problems

Such solutions, which aim to meet the needs of low-income households, have commonly been referred to as microinsurance. They are typically simple insurance products with relatively low premiums that may be collected at higher frequency than traditional insurance products. In some countries, microinsurance is governed by specific regulatory frameworks that take into account – more or less successfully – the special purpose and special needs of products and services targeting low income people.

The effectiveness of some microinsurance products leaves room for improvement

In practice, microinsurance evolved as the microfinance sector expanded and became more sophisticated, and credit-life insurance still represents the largest share of the market. Often, this type of insurance is required as a condition of granting a loan (microcredit). And in many cases, the client may not even be aware that she or he has the insurance, which may only cover the amount of the loan that is outstanding at the time a claim is made.

Best practice products serve to protect lenders against non-performing loan risk, while offering additional protection to borrowers, e.g. insuring more than just the amount of the loan that is outstanding. Crop insurance may include technical assistance to reduce the risk of low yields. Micro-health insurance may include hospital cash benefits and access to a medical helpline.

Insurance for emerging consumers can be challenging for service providers

Emerging consumers present some particular challenges to insurers and distribution channels seeking to provide them with services:

  • Hard – and therefore costly – to reach (many live in rural areas for example, or in urban areas that may be less accessible)
  • Margins may be thin – reaching scale can be difficult
  • Lack of data on risk may result in inaccurate pricing, with products that are too expensive or under-priced
  • Lack of data on low-income consumers may result in unsuitable products that do not resonate, with low take-up
  • Existing (traditional) business models may not be “fit for purpose”

The Microinsurance Network exists to limit and remove these constraints

The Microinsurance Network is a not-for-profit organisation that brings together a community of experts from around the world in order to share and develop knowledge around best practice. We believe that access to insurance is essential to sustainable development and that the world’s poor will not achieve lasting prosperity without it. Existing access is insufficient and approaches based on insurance principles are the best way to provide access to risk management tools. The collective action by Network members provides the critical knowledge to the organisations that drive improvement to yield lasting prosperity for the billions of people and small businesses who need it.

A track record of concrete action

The Microinsurance Network has a track record of more than fifteen years, pre-dating its launch as an independent organisation in 2012. In collaboration with highly respected partners such as ILO’s Impact Insurance Facility, the Access to Insurance Initiative (A2ii), the International Association of Insurance Supervisors, global, regional and national insurance companies, universities, think tanks, development agencies, policymakers and cutting-edge start-ups, we organise knowledge-sharing events around the world and produce key reports and data to support the development and use of effective insurance services designed to mitigate the risks faced by low-income households. In addition to 30 individual members, we represent more than 70 institutions working in more than 50 countries: a total of 375 experts.

Sources

1 World Development Indicators, Poverty headcount ratio at $5.50 a day (2011 PPP) (% of population)

2 Economic Commission for Latin America and the Caribbean (ECLAC) reported that 30% of households in Latin America, representing around 186 million people, were living in poverty, up from around 25% in 2015. See https://www.cepal.org/en/pressreleases/poverty-increased-2016-latin-america-and-reached-307-population-percentage-seen

This article has been previously published on the website of Micro Insurance Network. You can find it here.