Microinsurance, insurance products designed for those on very low-incomes, is an effective and viable risk management solution. Although currently focusing on only a few risks, its scope is beginning to broaden and offers future potential.
Premiums and coverage are kept at a low level in order to make the products affordable and attractive to policyholders and yet remain commercially sustainable. Although currently credit life, a mortality cover bundled with microcredit, is the biggest selling microinsurance product there is a definite need in the market for a higher/broader level of protection that could be met with health, term life, agricultural microinsurance and affordable pensions and savings products.
By reaching individuals formerly excluded from the insurance market and reducing the vulnerability of the very poor while protecting their income streams, microinsurance helps to improve social stability and supports broad-based economic development.
“For insurers, microinsurance creates an opportunity to tap into new markets and build a strong brand value that can be used for selling conventional insurance products in the future,” said Amit Kalra, author of a Swiss Re report on microinsurance.
The market has the potential to offer cover to around four billion people and to generate premiums up to US$40 billion. Over the past 10 years insurers, NGOs, mutuals and community organisations have launched microinsurance programmes across product lines and in major emerging markets. The biggest and fastest growing market is the Asia-Pacific region while microinsurance has also grown considerably in Latin American and African countries.
The key drivers supporting the growth of microinsurance have been increasing microfinance penetration, particularly microcredit, active government involvement in particular markets and needs-based product offerings. As the industry expands however, organisations must increasingly cope with rising risk exposure and risk accumulation. This is set to bring additional needs for capital and reinsurance solutions, leveraging both traditional products and bespoke innovative solutions, such as weather derivatives for example.
The developing microinsurance industry therefore faces a number of challenges, namely the absence of specific regulatory provisions, poor infrastructure, and the lack of exposure and data risk. Insurers need also to find appropriate partners for distribution and claims management. Products must be adapted both to client requirements and the cultural background of prospective buyers.
Governments can foster the development of microinsurance in a number of ways by improving access to financial services for the very low income, developing sound regulatory frameworks, lowering barriers and developing efficient markets and increasing consumer awareness and protection.
Public-private partnerships (PPP) are another way. For very poor populations or markets not commercially viable, governments via PPP can effectively channel subsidies through microinsurance programmes by fully funding or subsidising premiums. “Policymakers can deploy multiple approaches to develop the sector, including adopting specific microinsurance regulations, providing financial support and sponsoring insurance schemes targeted to the extremely poor population,” adds Kalra.
International development organisations, NGOs and donors also play a key role in aiding the development of the microinsurance industry. The contribution of socially-minded entrepreneurs to microfinance and microinsurance has been influential in encouraging private players to participate in socially-driven businesses so creating new market opportunities for the very poor.