# Microinsurance: From little acorns

Microinsurance is expanding but it needs to grow beyond just provision of life cover – what are insurers’ strategies in these vast and largely untapped markets?

Adding a million customers a week on a new product is a dizzying, almost unimaginable, rate of increase for any new insurance line.

However, these are the kind of headline numbers microinsurance has delivered to date although, looking at the sector’s rate of market penetration, the figures do not seem quite so healthy.

The most up-to-date numbers from the Microinsurance Network’s world map put Latin America and the Caribbean at 7.89%, Asia and Oceania at 4.33% while Africa’s at 4.44%. However, it is where the sector has come from, and where those in the industry hope it is going, that is fuelling investment.

President of the Microinsurance Centre and chairman of the Microinsurance Network, Michael McCord, has seen many groups move in and out of the sector over his 20-plus years in the industry but believes they are finally starting to crack the case.
“What’s happening is insurance is proving itself,” McCord says. “There was virtually nothing in 1994; in 2005, when we did the study then, we found seven million people who had microinsurance.”

Moving faster
In a global context, market penetration was essentially zero a decade ago. Now that worldwide average is 5% and McCord says just under 300 million people are covered by some form of microinsurance.

“We do have relatively low numbers still but you are going to see those moving faster as people become more comfortable with insurance,” he says. “There’s tremendous potential here; I’d say that there’s at least three billion people that could be covered with microinsurance.”

He says having to build the market from scratch takes time and there have been unique hurdles faced by operators in many of these countries. “People didn’t trust insurance and, in many places, they still don’t. But we’ve paid claims on time, quickly, properly and without a lot of hassle to the client,” he says.

“It took a while to get to that point where insurers actually were doing that. When you have a $500 (£350) policy you don’t have to do all of the same work that you need do on a$1m policy and insurers, it took them a little while to recognise that clearly. Now we’re starting to prove increasingly that microinsurance actually works.”

Richard Leftley, CEO at UK-based sector specialist Micro Ensure, has a venture with Indian telecommunications company Telenor, had seen a sign-up rate of 10m new customers in 10 weeks, says it is not low demand that has kept numbers down.

“Any product where that many people voluntarily open their phone, send a text message, do whatever is necessary to sign up for a product; that to me says there is huge demand,” Leftley says.

“The low income sector is acutely aware of the risks they face; they have risk for breakfast. If something bad happens to them, there isn’t a safety net. The biggest issue for microinsurance is distribution. This is about how we get those products out there that are relevant to people, easy to understand, easy to access.”

The company’s partnership with Telenor India and Shriram Life Insurance is one example of a distribution model that seems to be working.

The offer of two months of free life insurance is made to the 47.55m customers and after that period, the offers are calculated on a personal basis with each customer given target top-up rate per month. Recharging to this amount gives them 100 times that value in life cover.

Micro Ensure’s role is a back office one; here they will design the mass-market insurance products and provide operational support, but such embedded partnerships are not unusual.

Leftley says refining the process of moving from these products to upselling another policy or additional family member “becomes critical to the economics.”

In markets where no-one really knows the big insurance players, clearing the distribution hurdle has required partnering with firms that were known in these markets.

Leftley explains: “Back in 2010 most mobile phone companies were really struggling to get traction with their mobile money offering, so they wanted other services to put on the shelf so people would have a reason to open a mobile money account and then make transactions.”

He says they spent a lot of time simplifying an insurance product to fit and making sign up easy, but it wasn’t that straightforward. “We launched the product and it was a complete failure. What that showed us was that actually no-one wakes up in the morning wanting to buy insurance. Just because you make it easy to sign up, doesn’t fundamentally change the dynamic,” he says.

They went back to the African-based telco, saying: “We think the end game here is having people pay for insurance but we have to make a market. Our proposition was that no-one wakes up in the morning wanting to buy insurance, but they do wake up worried about the risks they face. If you give them free insurance, you’ll also give them a reason to spend more of their mobile top-up with one mobile network operator.”

That win-win situation gave the company access to a brand they could use, while proving to consumers that insurers would pay promptly and that there was value in the products.

Following this he says take-up rate of additional products was high, with up to 80% of customers retained.

“When we entered Zambia, 1% of the population had insurance, by the time we’d been in the market for three months, 17% of the population of Zambia had insurance,” he says.

Managing microinsurance risk

For a risk adverse industry, coming to terms with a distinct lack of data has been a core challenge in microinsurance. Head of emerging consumers at Allianz, Martin Hintz says while underwriting is far from the biggest problem, firms have to take a risk and start trying.

Richard Leftley, CEO at UK-based sector specialist Micro Ensure, says a lot of people ask how the company controls fraud in the claims process. “We have to take an approach where we pay claims quickly. As a result we know that there might be individual cases of fraud but what we’re looking for is systematic, organised crime.”

For example, he says in health, they would not sell a policy that covers the full cost of a hospitalisation, explaining: “If we do, we then have to actually go and check if the person is using the hospital as a hotel. If you know the cost is going to be $100 and the maximum you can recover from the insurance is$50, you’re going to be out of pocket.”

Inbuilt fraud mechanisms help – the company knows expected claims rates and sends in mystery shoppers if they are exceeded. President of the Microinsurance Centre and chairman of the Microinsurance Network, Michael McCord says insurance companies are essentially conducting population underwriting, so everybody gets a similar price.

“Moving forward there are going to be more groupings, some segmentation in terms of employment and risk history of the different entities. There’s a universal problem with data in terms of underwriting; I think actuaries are becoming more comfortable with the lack of data in this area.”

Partnership model
This partnership model is widely used by microinsurers. Leftley says many first joined forces with microfinance groups before moving on to telcos and other retailers in order to achieve volume.

However, Micro Ensure will launch direct products this year, although he cautions it is a continuous learning process.

“We’ve got our first products coming out on a B2C basis in the first quarter and those will be wrong, they will be fundamentally wrong in how we first launch them, but we will learn. Up until now, distribution has been entirely B2B through embedding insurance into a loan or a savings account, or a mobile phone top-up. As these consumers get their hands on very low-cost smartphones, and they get access to the internet for the first time in their lives, the ability to go directly to the consumer is starting to emerge.”

Head of emerging consumers at Allianz, Martin Hintz, agrees while telecoms have been fundamental to expand access, the sale of the second, even third, policy is the current challenge. “Over the long term I’m not sure if this ‘free’ insurance model will stick around for many years, maybe it’s just a fad of the day. Telecom companies tend to do this for two years and then they come up with something new, so I’m not so sure how sustainable that is.”

But he says mobile technology still has a vital role to play, as companies could start collecting premiums through e-money, rather than through credit or the ‘free’ programs that equate cover with airtime purchased.

“Much of the challenge and why we didn’t do a lot of upselling before was because we didn’t know how to collect the premium. Most of what we do today is tied to credit and savings but once the credit is over the insurance is over and what do you do then? Most people don’t have a credit card and you can’t use a bank draft,” he says.

“E-money allows regular collection and that enables you to have a better renewal process and that allows you to structure products more over the long term.”

He says currently they have pilot programmess in Indonesia and India to see how to best upsell their offering. “Generally we are switching from mandatory products, which establish the foothold in the market, to offer voluntary top up offers. There’s still a lot of innovation that needs to go into this to really sell the second policy; that’s for me the biggest, toughest nut to crack. The company that best cracks this ‘how to sell a second policy’ piece will take away the largest prize, and for this you need innovation.”

Growth markets
That is something Alex Frost, head of country intelligence at insurance information service Axco, agrees is vital. He says demand is far from the problem here, with south-east Asian countries such as Cambodia, Vietnam and Myanmar providing the strongest growth; markets where health and income protection policies are being sold from supermarkets and local shops, with prices in 2015 from around \$6.50.

“Demand for these products have proved so popular in the Thai market that demand is growing for the policies to be extended across the border into Cambodia, presenting a problem for local regulators,” he says.

He adds overall, regulation could be another stumbling block for the sector. “The major problems in helping facilitate this demand will come from a lack of clear legal and regulatory frameworks, although there are some encouraging examples to provide benchmarking, such as Kenya’s 2012 Insurance (Amendment) Regulations, which introduced microinsurance as a new class of general insurance and has been followed more recently by proposals for its regulation and supervision.

“Many of these countries suffer from severe infrastructure deficits, which not only makes the provision of coverage difficult, but also presents a challenge in communicating the benefits. Innovation in distribution is therefore vital.”

McCord says while the penetration rate will never be 100%, or even close to that figure, the sector was on track for growth in the next decade. “I would expect that in five more years we’d easily be at 10 to 12% (penetration) and then five years after that I expect we’d be at 20 to 25%. That’s probably where we’re going to end up, we’re never going to a point where everybody’s buying insurance but within 10 years we’ll be at 25%.”

However, he says it is volume that is pushing the continued commercialisation of the sector, away from the not-for-profit model used in its infancy. “It used to be that insurers would hook up with microfinance institutions and pick up 5000, 10,000, 15,000 maybe, and that was something but wasn’t enough for them to be in this business,” he says.

“Hitting that volume is what’s critically important for insurers, it’s the distribution channel that in many ways is driving what happens in terms of the growth of microinsurance. They want to get to volume and how do you get to volume? You don’t get to volume by sending your own traditional agents out.”

Hintz says they are not concentrating on volume but how to take the next step and sell the second policy to the company’s existing insureds. “It’s unchartered commercial territory and once somebody finds something that works, I’m sure that the commercial players will follow suit,” he says.

While life has been the easiest entry point for insurers, he adds: “If you have saturated life cover, which will eventually come in the more advanced emerging consumer markets, you need to look for new things that can be bundled, you may have life with a small health component first. Accident insurance is also in there, but anything like property, health, agriculture are difficult both from product complexity, profitability and convincing customers; it’s the higher hanging fruit.”