Swiss Re’s latest sigma study Microinsurance – risk protection for 4 billion people emphasises the relevance of microinsurance as an effective and viable risk management solution for low-income individuals.
Microinsurance, which has the potential to cover up to 4 billion people, concentrates on few risks today, but its scope is broadening. The interest of insurers in microinsurance lies very much in its future potential.
Microinsurance refers to insurance products especially designed for low-income individuals. The premiums and coverage are kept at a low level in order to make the products affordable and attractive to those policy holders, yet remain commercially sustainable. Currently, the risks covered by microinsurance are heavily tilted towards credit life insurance, but the market could expand to cover areas such as health, agricultural insurance, term life insurance, affordable pension products and other savings products.
By reaching many individuals who were formerly excluded from insurance, and thereby reducing the vulnerability of low-income individuals and 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. It is a win-win situation: insurers help those who urgently need access to insurance. This, in turn, supports the long-term economic goals of insurers.
The microinsurance market could generate premiums of up to USD 40 billion. Over the last decade, insurers, NGOs, mutuals and community organisations have launched microinsurance programmes across product lines and major markets. The key drivers supporting this activity’s growth have been increasing microfinance penetration (in particular microcredit), the active involvement of government in certain markets and need-based product offerings.
The Asia-Pacific region is the fastest growing and largest microinsurance market. Microinsurance has also grown considerably in African and Latin American countries despite these being relatively smaller microinsurance markets at present. As the microinsurance industry expands, organisations must increasingly cope with rising risk exposure and risk accumulation. This will lead to additional needs for capital and reinsurance solutions that leverage both traditional products and tailor-made innovative solutions. The latter includes, for example, weather derivatives and parametric nat cat solutions.
While credit life, a mortality cover bundled with microcredit, is the largest selling microinsurance product, there is a strong need for a higher and broader level of protection that can be met with savings/term life, health and agriculture microinsurance. Some of the challenges that microinsurance faces are: insufficient
infrastructure, the absence of specific regulatory provisions for microinsurance, and the lack of exposure and risk data. Insurers must also find suitable partners for distribution and claims management. Products must be adapted to client needs as well as the cultural background of the prospective microinsurance buyers.
The key objectives for governments and policymakers in this regard should be:
· improving access to financial services for the low-income population;
· the development of a sound regulatory framework;
· lowering of barriers and developing efficient markets; and
· increasing awareness and ensuring consumer protection.
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.
For the extremely poor population or markets, which otherwise are not commercially viable, governments, through public private partnerships (PPP), can effectively channel subsidies through microinsurance programmes by fully funding or subsidising premiums. The governments contribute to developing comprehensive natural disaster solutions and formulate collaborative approaches – such as PPPs – to deal effectively with the financial consequences of largescale natural disasters on the low-income population.
NGOs, international developmental organisations and donors have played an instrumental role in aiding the development of the microinsurance sector. The contribution of social-minded entrepreneurs in the field of microfinance and microinsurance has also been influential in encouraging private players to participate in the
socially-driven businesses and thereby create new market opportunities for the bottom of the pyramid population.