By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®
The "bottom of the pyramid," the billions of people on the low end of our global economic system, are starving for a lot of things--good governance, clean drinking water, basic but essential nutrients. But they are also starving for insurance.
It is not a tasteless joke. Insurance has only a 2 percent to 3 percent penetration rate on the planet's population as a whole. That means a lot of individuals and tiny businesses from Bangalore to Bogota--as many as 4 billion economically engaged individuals--are without the protection they need: for life, property, health. But regular-sized insurance won't do. Enter microinsurance.
"It is taking off in the sense that the commercial insurance is seeing what the commercial banking industry saw ... that there's a huge gap," said Monica Brand, principal director of the Gateway Microfinance Innovation Fund at ACCION International, a Boston-based private nonprofit dedicated to microfinance.
Big names like AIG and Zurich Financial Services have been involved in microinsurance since the 1990s, with AIG working on a cow insurance program in India and Zurich on healthcare in Bolivia. But they and others are poised to make micro big time.
MICROINSURANCE IN ACTION
For instance, in 2007, Zurich launched a global microinsurance initiative, and in 2008 transformed it into a business practices, comparable to its marine, financial lines and other global units. Last year, the practice grew revenue 100 percent, reported Brandon Mathews, its leader.
The Swiss-based carrier won't follow an incremental approach of working on a handful of local projects. Instead, in its global initiative, Zurich has "change-agent types" in the field to get individual programs going, on a trial-and-error basis, with Mathews and other centrally located experts overseeing the big picture.
Zurich will consider life and nonlife opportunities through distribution channels as diverse as local utilities, supermarkets, and even cell phones. One recent launch was a homeowners fire policy launched in Indonesia that costs a couple of dollars.
Catastrophe modeler Risk Management Solutions Inc. recently completed an analysis, in partnership with the Nanyang Technological University in Singapore, to see if earthquake microinsurance would be viable in rural China. The answer was yes.
By selling policies with an annual premium of about $1.50 to 55 million households, RMS calculated, insurers could generate enough cash to cover the $60 million in risk and administrative costs. In fact, RMS envisages an earthquake microinsurance system robust enough to support a $300 million primary layer, a reinsurance layer $300 million in excess of that, and then a top layer supported with government funds all the way to $1.8 billion.
RMS currently is in talks with the Chinese government and unnamed carriers to set up a pilot program.
"It is just a matter of time," said Pane Stojanovski, vice president of model development operations at RMS. "We'd like to do it as soon as possible."
He reported that the modeler is also in the early days of work on earthquake insurance in Gujarat, India. The idea is to come up with a parametric policy similar to the "CAT in a box" triggers that some securitized products have; in other words, a certain sized event must occur in a particular area for the microinsurance to apply.
Zurich, Switzerland-based insurer ACE Ltd. has also gotten involved in new microfinance initiatives--not as an insurer but more as a funds facilitator. Through its ACE Charitable Foundation, it has partnered with two Latin American nonprofits: Ban Igualdad, which provides microloans to villagers in Chile, and Freedom from Hunger, which does the same for cottage-industry businesses in Mexico, according to Eden Kratchman, executive director of the ACE INA Foundation.
ACE is looking for "transformational programs," she added. "You want to set this clientele up for success."
With its support of these microfinance products, what the insurer is providing is a means toward self-sufficiency, guidance in micro risk management, if you will.
ACE currently sells standard commercial and accident and health products in these Latin American markets and others.
The other insurance professional interviewed for this piece expressed the same humanitarian and social responsibility sentiments to explain why they got into microinsurance.
"We believe the work we do should benefit all societies and not just the top of the pyramid," said RMS' Stojanovski.
"Insurance is good, and it's bad that not enough people have good insurance," said Mathews of Zurich, who also explained another reason to get into microinsurance: You can make money at it.
Figure that the bottom 4 billion people in the world control $5 trillion in income, said Mathews, citing research from the International Finance Corporation, the private-sector arm of the World Bank.
"It's a responsibility to shareholders to try to make a business in this space," he said. "Getting it right is a big number."
There he touched upon a key facet--or challenge--of the microinsurance business. You have to get it right to make it work. Just repackaging products sold to individuals and businesses in developed countries won't cut it.
"We have a lot of gravestones to show that," said Brand.
From experience, ACCION's Brand points to microinsurance best practices such as minimizing the time it takes to get paymenton claims. For people and business living day to day, immediate payment is a must.
Mathews also suggests that part of this is reducing the effort on the part of the policyholder during claims.
"Do we really need three forms?" he asked, when a microclaim is for $100.
Also, simplicity and flexibility are key when accepting premiums from clients. In their work in Bolivia, for example, Zurich allowed premium payments anytime during a 30-day period.
When conceptualizing and selling micropolicies, insurers will do well to make payouts in "tangible terms," said Mathews, such as a bus ticket to visit a child in hospital or childcare payments for when the mother is sick.
Brand stressed that coverage initiatives for liability, property and health policies must also deliver benefits without morale hazards. A property insurer in Africa avoids this when providing "shanty insurance" by charging a copay and by selling through churches and other religious groups to instill a community sense. After all, setting fire to one's shanty to get an insurance payout could lead to a whole neighborhood burning down.
And there's one last thing insurers will want to do before diving into microinsurance. Such products won't be credible to the targeted customers unless the "tiny print and clauses"--the terms and conditions--are minimized, said Brand.
People in the developing world view insurers as "guilty until proven innocent."
Sounds like standard property/casualty companies can learn a thing or two from their microinsurance operations.
September 15, 2009
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