Microinsurance has gained an increasingly high profile in recent years across East Africa. But how big is the microinsurance market? What role do commercial insurers play? And how can they make a profit in difficult and remote environments, often with little culture or experience of insurance, where premiums are necessarily very low?
Despite the substantial involvement of non-commercial providers in the microinsurance market, including community-based, informal and mutual schemes (particularly in the areas of health and life cover) and international organizations, donors, NGOs and governments (particularly in the areas of education and capacity building), the main suppliers of microinsurance in all areas except health are commercial providers. Most international insurers and reinsurers are already involved in the microinsurance market and several have established specialist microinsurance units at their head offices.
A report produced by Lloyd's 360 Risk Insight and the Microinsurance Centre estimated the potential size of the microinsurance market (which can be defined for this purpose simply as insurance aimed at the low income market) to be between 1.5 and 3 billion policies globally, with products including health, life, agricultural and property insurance and catastrophe cover. However, back in 2009, the same report put coverage at only around 135 million people globally, only 5% penetration of the estimated market.
Within Africa, the market is at an even earlier stage, and a study by the Microinsurance Innovation Facility put market penetration at only 2.6% of the population living under US$2 per day. Nevertheless, the number of people in Africa covered by a microinsurance policy increased more than 80% between 2005 and 2010, with annual growth rates at over 10% in some countries.
Coverage is by no means uniform; the current African market is concentrated in certain geographical areas and dominated by certain products. In particular, credit life cover currently accounts for around 30% of all policies both globally and within Africa (followed closely by term life cover and then health, with agricultural and property insurance currently making up only a fraction of the market). This can be explained in part by the fact that credit life is typically a compulsory accompaniment to a microfinance loan, and that both credit life and term life cover are significantly simpler to provide and administer, with lower fraud risk and assessment costs compared to other products. However, this uneven distribution does indicate that there is potential for significant penetration if relevant limiting factors are addressed, and that there is plenty of scope for expansion into underprovided areas.
There are a number of limiting factors, the impact of which can be highlighted by the M-PESA programme (originally developed in Kenya and now operational across East Africa), under which relatively small-scale farmers can be protected against rain damage to crops by a weather-index insurance.
- Microinsurance is naturally characterized by small transaction sizes, great price sensitivity and markets with limited or no historical or individualised risk data. This means that, by necessity, schemes are driven to stringently minimise transactions costs, and thus to become very efficient, both in terms of the design of the policies and the distribution and delivery mechanisms. This means that microinsurance is often at the forefront of the development of innovative techniques
- For example, in terms of payment delivery methods, the more traditional microinsurance model revolves around partnerships between the insurers and microfinance institutions (MFIs) or healthcare providers. Technology is also now allowing significant breakthroughs in this area. Under the M-PESA scheme for instance, payouts are delivered to policy holders directly to their mobile phones by way of a credit without the need for any physical payment distribution partner or for the policy holders even to lodge a claim
- In terms of product distribution too, the M-PESA policy is characteristic of the trend in microinsurance to seek alternative distribution mechanisms in order to access customers unaccustomed to and perhaps distrustful of,
- the concept of insurance. The policy is purchased not from brokers or insurance providers but directly from local agro-dealers simultaneously with the purchase of the insured crop or product. The vendor scans a bar code with a camera phone at time of purchase, which automatically registers the policy via Safaricom and sends an SMS confirmation to the farmer's phone
Even in terms of the product itself, the M-PESA policy reflects the emerging trend of using index insurance particularly weather-indices in the agriculture sector, as opposed to individual property or crop and livestock insurance. Index insurance is well suited to the microinsurance sector in that it has the potential to greatly minimize claims handling and verification costs and eliminate fraud and moral hazard, while, if the index is well calibrated, still correlating payouts well to actual losses (the M-PESA scheme used thirty different weather stations in order to detect rainfall over relatively small areas in order to achieve this). Nevertheless, index policies are still very much in the pilot stages at present and there remains a debate around both their developmental value and their commercial viability as uptake has been limited to date.
Index schemes are also a key area in which reinsurers are becoming involved in the microinsurance market; although their role has been relatively limited to date due to the scale and basic nature of the market. However, there has been significant support already from reinsurers in product development. It is likely that reinsurers will become more involved as the sector becomes more mature, in the same way that we have seen securitisations start to take off in the microfinance market.
In other product areas, microinsurance remains closer to traditional insurance models, but significantly more simplified in terms of pricing (generally not risk adjusted for individuals), policy wording and exclusions. For example Madison Insurance in Zambia, which after two years removed the HIV/AIDS exclusion to its health insurance policy and found the policy to maintain its profitability (due to significantly lower claims confirmation costs) but with increased take up. Other techniques used by microinsurance schemes to minimise transaction costs include using group policies and waiting periods to mitigate adverse selection and moral hazard.
The impact of national regulations cannot be underestimated, and which are often drafted with the emphasis on consumer protection as opposed to promoting access to the market. They often impose restrictions which are unduly burdensome to the microinsurance sector, including as regards control mechanisms, price setting, claims handling, capitalisation and in particular nationality restrictions on insurers operating in the local market.
- The Lloyd's report referenced above concludes that the potential benefits to commercial insurers of entering the microinsurance market are immense; not just exposure to huge, largely untapped markets, but a larger and diversified risk pool, market knowledge and 'first mover' advantage in underdeveloped markets. The report perhaps plays down the 'first mover' disadvantage - i.e., sunk development costs which can then be exploited by competitors, however it should be borne in mind that for microinsurance a lot of this work is already being done by the donor sector in their efforts to stimulate private sector involvement. It is also clear that the difficulties of the microinsurance sector can drive innovation which can in turn be applied to traditional products and/or clients with more purchasing power. Finally, the reputational benefit for commercial providers of participation in microinsurance should not be underestimated. This is a business line, and yet the underlying rationale should not be forgotten; microinsurance clients are usually more vulnerable, less able to absorb shocks and more in need of cover than most 'traditional' clients and therefore the potential developmental impact of microinsurance is significant.
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