The Future of Microinsurance: Notes from New York

Providing insurance to protect the world’s most vulnerable people seems like a no-brainer, but putting microinsurance into practice is easier said than done. A recent event co-hosted by FAI and Allianz SE – a leading global financial services provider – shared new and practical insights from the insurer’s perspective about the challenge of desigining effective insurance products for the poor. 

Held at the Allianz Global Investor headquarters in New York City on September 22, the discussion was moderated by Robert Schiff and Tony Goland from McKinsey’s Social Sector Practice. Heinz Dollberg and Michael Anthony of Allianz discussed the barriers and opportunities for larger players in the microinsurance market and about Allianz’s experience following Cyclone Nisha in 2008.

The session began with an assessment of potential markets for the Allianz group. Michael Anthony stressed that emerging markets, especially India and Indonesia, but also including Egypt, Senegal and the Ivory Coast in Africa, and Brazil and Colombia in Latin America, were particularly attractive because of growing populations and an awareness and demand for insurance products. 

Three types of products are typically offered in each of these countries – simple credit life insurance; accident / life insurance products which are linked to savings; and new products that address the specific needs of people in developing countries. 

FAI’s Jonathan Morduch put the demand side in context.  There’s real potential for the spread of micro-insurance, but take-up of new products has tended to be low.  He cited studies in China, Nicaragua, and India, all with the same conclusion: demand for products and retention of clients pose greater challenges than anticipated.

One reason for low demand is that households already have informal mechanisms to cope with exposure to risk, emergencies, disasters, and large, unexpected expenditures. Microinsurance products developed by commercial players must thus be flexible and robust enough to effectively and safely substitute for the tools already used by households to manage risks. 

In addition, financial literacy and the creation of trust were outlined as ways to increase poor households’ understanding and acceptance of formal products – though the jury’s still out on the efficacy of literacy programs and how to best provide them. 

About failures in insurance product design, Anthony noted that there is a demand for microinsurance and a capacity to pay for it, but there is limited supply at scale.  he argues that we need to work backward from the barriers to microinsurance. We need low cost, simply-designed products, and we need to understand what creates value for different customers. We need proper channel partners to overcome distribution issues and we need to create repeat sales as opposed to one off purchases so that there is renewal of policies.  

The need for profitability while maintaining a double bottom line was stressed because in order to grow the nascent market for microinsurance, other private players had to see a positive bottom line.

As with any other products, convenience, affordability (or at least good value for money) and trust in providers is a key to building the microinsurance market. To cover distribution costs, larger players are teaming up with organizations already present on ground (e.g. Bajaj Allianz and CARE). Partnerships like these leverage the trust that existing grassroots organizations have already developed in communities and help to determine local needs for an insurance product.

Morduch noted the paradox that the priority for insurance should be coverage of rare, costly events.  But if events are rare, customers seldom make claims.  And, because of that, it’s harder to build trust through repeated interactions.  One response is to cover less rare events too, even if the pure economic argument is less compelling.
 
Drawing to a close, the discussion turned to how commercial providers can achieve both scale and impact in emerging markets. The role of technology is essential in providing large players access to greater volumes of customers, e.g., through the use of mobile phones, credit cards and so on. Technology can also help in product sophistication and customization and also in fraud prevention. 

Impact is measured by the extent to which providers can ensure financial access for people who otherwise may not have had the opportunity to access financial services. Put simply, microinsurance cannot just be about expanding to new markets – customers must also see clear benefits in their lives.