By MARIK BROCKMAN and ANAND RAO, partners with Diamond Management & Technology Consultants; and JAMIE YODER, managing partner with the firm
Four billion people, or about two thirds of the world's population, live on less than $3,000 per year, according to the World Resources Institute and International Finance Organization.
These people consist mostly of the planet's working poor, and are susceptible to devastating losses as a result of natural disasters and disease.
Microinsurance, an insurance trend emerging across the globe, provides risk protection for microbusinesses and individuals at very low premiums. This kind of insurance is appropriate for the working poor and helps to mitigate catastrophe risk.
The investment world is definitely taking note. LeapFrog Investments, the world's largest microinsurance investment fund, is already a $135 million business. This organization reports that more than 1.5 billion people are eligible for microinsurance, yet less than nine percent of this 1.5 billion population is actually able to access the market.
"The insurance industry has a historic opportunity to develop profitable businesses that serve this immense customer base. We can generate strong returns for investors while helping millions of people with their daily struggle to get out and stay out of poverty," said Andrew Kuper, founder and president of LeapFrog.
Microinsurance is also being used by insurance underwriters not only for financial growth, but to fulfill social goals and technology is facilitating this trend.
Technology is playing a role in all aspects of microinsurance, specifically around four areas:
-- Customization to tailor to the unique needs of the micro-segments.
-- Distribution technology to reach hidden markets.
-- Fraud and loss control technologies.
-- Using technology to drive down costs.
Microinsurance products need to be tailored to the unique needs of each customer segment. The products must be simple, easy to understand and not constrained by a "one-size-fits-all" mindset.
The individual ticket size may be small, but risk determination is easier at a group level, and large volume compensates for low individual premiums. Pricing microinsurance at a group level rather than at an individual level makes it affordable for the customer while still being profitable for the insurer.
In the past decade, the use of mobile technologies has made it possible to reach a large number of the working poor people across the globe, and it has opened the door for insurers to this untapped market.
Hand-held devices, which are being used in many of the poorest nations, capture customer information at policy issuance, during premium collection and while servicing claims. Mobile applications transmit critical data to insurers' systems quickly and from remote areas to ensure accurate claim eligibility.
In the Philippines, for example, insurers are allowing people to pay premiums via their cell phones, while ICICI Prudential sells life insurance through kiosks in remote areas in India.
Technology-driven distribution and service models reach customers in remote places through handheld devices, enabling the immediate capture of customer details and transfer data via mobile networks to back-end systems.
The government of India has been promoting cattle insurance for more than three decades, but costly premiums due to a high level of fraud have kept livestock owners on the sidelines. In fact, less than 10 percent of the cattle in India are insured.
"For insurers, it has been a loss-making business to insure cows because too often farmers have claimed insurance losses that were not theirs," said Ashok Patil, head of rural business at Bajaj Allianz. "Market experts assumed that a quarter of all claims were fraudulent. Furthermore, it was a costly affair to send an insurance assessor a long way to a farm to see if a cow really died, let alone to find out if that particular cow was insured."
Today, insurers in India are starting to use new technology to reduce fraudulent activity in cattle insurance.
Many insurers are using radio frequency identification or RFID to keep track of cattle. In one district in India, veterinarians walk around with laptops and RFID readers, and the processing of cattle insurance is being done almost immediately.
This process, which used to take about a month, now takes just one day. In another district, the use of RFID technology has resulted in a seven percent lower premium for a three-year policy, versus typical market rates of 12 percent for cattle owners.
RFID technology is also being used for animal-disease management, including artificial insemination data, vaccinations and calving.
Iffco-Tokio, a private general insurer, is using RFID as a means of identification and loss mitigation in cattle insurance. According to Iffco-Tokio, the insurance will be about two percent to four percent of the value of the animal, which is affordable given the high claims ratio associated with cattle insurance.
A natural extension of RFID technology are smart sensors and a sensor network. Smart sensors are devices that observe physical phenomenon, measure the physical property and quantity of the observation and convert the measurement into a signal. A network of such spatially distributed sensors can interact with each other and with other applications to acquire, process, transfer and provide information extracted from the physical world. Sensory networks can monitor physical or environmental conditions, temperature, sound, vibration, humidity, motion, pollutants.
These technologies can be used to inform farmers on when to sow their crops, how much to water, and provide advance warning of forest fires to ensure better yields of crops and protection of livestock and property having a significant impact on loss control. The costs of these technologies are continually dropping and can be purchased for a few hundred dollars to a few cents.
Other technologies are assisting with fraud control as well. Personal digital assistants are being used to issue receipts when insureds make payments, while subscriber identity cards are being used to transfer transition details immediately to insurers' servers--even the possibility of fraud decreases when time and date are recorded in transactions.
In order for insurers to succeed in the microinsurance arena, operational costs must be minimized. From product design to pricing, distribution, billing, and claims, simplicity and efficiency is critical.
Product design and pricing must be simple to understand for those new to insurance and also for the claims implications about what is covered and what is not. Pricing schemes should be initially group profile-based to ease the complexity of the rating scheme.
Distribution should leverage third parties with low-cost infrastructure already established. Given the geographic reach of many rural microinsurance opportunities, or the need to utilize people versus established Internet infrastructure to market insurance coverage even in urban areas, leveraging nongovernmental organizations or high-efficiency commercial distributors such as banks helps keep costs down.
New business must include straight-through processing. Simple forms or tools for collecting information and initial premium must result in quick recognition of the insureds without quality checking and manual entry. Billing must be automated.
Data visualization techniques can aid claims decision-making such as satellite imagery related to land-based claims where lines in the land from fire, flood, or other catastrophes can help decide the fate of claims en masse.
Microinsurance opens a new revenue stream for forward-thinking insurance companies. By reaching out to typically uninsured customer segments in emerging markets, and by being innovative in all aspects of the insurance value chain, insurance companies are serving the working poor of the world, making a positive social impact and growing their bottom lines at the same time.
November 1, 2010
Copyright 2010© LRP Publications