When Dr. Martin Hintz of Allianz asked industry stakeholders gathered in Manila in November 2010 for the 6th Munich Re Foundation and Microinsurance Network Annual Microinsurance Conference if their microinsurance programs were profitable only a handful of the hundreds of practitioners in the audience raised their hands.
Why were there so few positive responses? Microinsurance is widely assumed to have great potential to be profitable for insurers and delivery channels, but we know little about when a business case actually exists. Like microcredit, microinsurance is often seen as an opportunity to tap into a large new market at the base of the pyramid. Under what circumstances can the unique and often costly challenges faced by microinsurance in product design, marketing, delivery, and claims administration be overcome? The MILK project is attempting to answer these questions.and help gain a better understanding of when and how a business case for microinsurance exists for insurers and delivery channels..
We began with a detailed landscape review of existing literature related to the business case for microinsurance. This research gives us a fairly robust “how to” but provides few conclusive answers about “whether” there is a business case for microinsurance or “why” a profit motivated firm should enter the field. Through the landscape review, we began to develop a framework for assessing the business case for microinsurance. The following are some key lessons gleaned from existing research that will inform MILK’s approach as we move forward to provide concrete answers to the question of business case over the next three years:
- Measuring Business Case. Accurate, detailed financial metrics on variables such as income, enrollment, expenses, and claims are vital to understanding whether and when a business case exists. Many insurers do not track this data or do not segregate microinsurance data from other lines of business, though promising new efforts may help to fill this gap in coming years. A comprehensive analysis of business case requires combining these quantitative measures with subjective, qualitative learnings to understand the many variables at play and the motivations of various stakeholders.
- Thinking About Microinsurance as a Unique Set of Product Lines. Microinsurance is a distinct line of business, facing its own unique challenges and opportunities. It is not simply a downscaling of traditional insurance products. Because the target clients are different they require different products, marketing strategies, delivery channels, and claims administration processes. Additionally, microinsurance is not an extension of microcredit, although it is often sold to similar clients, because it serves very different financial needs.
- Designing Products. Effective product design requires balancing the need for simple products that are easy to understand and market with the limits, exclusions, and customizations that can mitigate risk and enhance demand and profitability. Marketing (which often includes an education component) is crucial for both mandatory and voluntary products.
- Looking at the Entire Value Chain and Engaging All Stakeholders. A true understanding of whether and when microinsurance can be a sustainable, profitable business requires insight into the operations of insurers, intermediaries, and distributors. A sustainable business case for any link in the chain requires a business case for all. Discussions about enhancing the business case for microinsurance should engage all of these parties as well as other stakeholders, including donors, governments, and regulators.
MILK will move forward by conducting original case studies and tapping into ongoing initiatives to help answer some of the questions raised in the landscape review. In particular, the ILO’s Microinsurance Innovation Facility conducts research on various topics related to business case and will be a close partner of the MILK project. MILK’s business case work will be complemented by our client value effort.
This post is the second of a two-part series by Michael J. McCord, Project Director of MILK and the President of the MicroInsurance Centre, and Emily Zimmerman, a Research Associate at MILK.