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22 May 2013
People in developing countries may not have much material wealth to insure, but providing them with basic cover does give insurers an entrée to rapidly growing economies.
Microinsurance is expanding quickly, not only in the number of policies but also in the sophistication of the products available.
As insurers gain expertise in the segment, their data collection is growing, enabling better risk management and pricing.
The New York-based Insurance Information Institute (III) says the rise of microinsurance reflects global insurers’ increasing interest in emerging markets.
“With limited growth prospects in the insurance markets of developed countries, which are largely saturated, insurers see emerging economies as presenting significant potential for growth and profitability,” it says.
According to research by the International Labour Organisation (ILO) and Munich Re earlier this year, 500 million people are now covered by microinsurance, up from 78 million in 2007.
Many of the products relate to life insurance for those in countries where there is no welfare safety net if the breadwinner dies.
Although large global insurers are involved in the segment, many product backers are government aid agencies or community organisations.
For example, Australia’s international aid agency, AusAID, is involved in a funeral insurance scheme in Fiji. Local insurer Life Insurance Corporation of India offers funeral coverage of $FJ1000 ($533) for a $FJ14 ($7.50) annual premium.
It’s not industrial special risk, but commercial covers are being offered – albeit on a smaller scale than in developed countries. Much of the growth is coming from China and India, which have many family farmers and small businesses.
The ILO report finds at least 33 of the 50 largest commercial insurance companies in the world offer microinsurance, up from seven in 2005. These include AIG, Allianz and Zurich. Swiss Re and Munich Re are also in the segment and Chinese insurers are developing life and health products in a country where a serious illness can bankrupt a family.
Allianz estimates the microinsurance market could contain 1-3 billion people. It has a microinsurance customer base of 2.6 million and expects a significant increase in coming years.
It says challenges associated with the product include tiny margins per policy, which mean a large number of standardised products must be sold through uniform processes.
“To achieve an adequate financial return, Allianz only offers microinsurance in markets where a subsidiary operates and efficient distribution partners such as non-government organisations, microfinance institutions or mobile operators can be found,” it says.
Illiteracy is an issue in countries with the most potential, so new ways are needed to educate people about insurance.
“Risk assessment remains difficult and needs to be improved through a better understanding of the markets and people’s needs, which is achieved by increased market research,” says Allianz, which operates programs through organisations such as World Vision and the German development agency GIZ.
The III says microinsurance is characterised by high volume, low cost and ease of administration, and notes there are various types of program. An insurer may use parametric triggers, which enable rapid payouts based on measurable factors or parameters.
For example, a farmer might be paid if wind speed or rainfall reaches a certain level. Insurers’ costs are kept low because they do not have to send out a loss adjuster and the farmer gets a rapid payout to keep them solvent.
Since microinsurance is relatively new, there is extensive innovation in the segment. The ILO says the distribution network is spreading, with banks, retailers and mobile phone companies offering products.
It notes the insurance is not only another source of revenue for commercial organisations such as utility companies but can also generate more sales for their core businesses.
About 30% of microfinance is sold by banks or relates to mandatory credit insurance, brokers provide access to about 10% of cover sold and a range of community agencies are involved.
The ILO says when products were first offered, the premiums were often relatively high because insurers lacked data on which to calculate prices. This has changed as insurers have become more familiar with the markets. Consumers have also become more sophisticated and started demanding different products.
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