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By Katie Kuehner-Hebert

Microinsurance schemes across the globe are gaining steam, as insurers find more ways to reach the very poor by partnering with governments, microfinance companies and even mobile phone carriers that already have a "payment backbone."

In its first year, MiCRO, a specialty reinsurance company formed in 2011, provided $1.64 million in microinsurance payouts to Haitian small-business owners impacted by the 2010 earthquake.

These entrepreneurs had taken out loans from Fonkoze, a Haitian microfinance institution that bundles MiCRO's microinsurance product with its small-loan programs.

MiCRO, a partnership of Swiss Re, Fonkoze, Mercy Corps and the UK's Department for International Development,also recently paid out more than $217,000 to Haitian entrepreneurs after Tropical Storm Isaac hit.

"There's definitely a positive effect because of the microinsurance policy," said Fonkoze's project manager Tyler Tappendorf. "The products allowed our clients to recover after the events happened and they didn't have to drop out of the institution because they couldn't pay their loans."

Fonkoze's dropout rate in the partnership's first year was about 10 percent, compared to the average annual dropout rate between 15 percent and 25 percent.

While Swiss Re is involved in a number of microinsurance schemes, the MiCRO partnership innovatively uses a combination of parametric and basic risk, said Nikhil da Victoria Lobo, a senior vice president in Swiss Re's global partnerships group.

The product combines parametric insurance, which has a payout that's quickly triggered by weather-related thresholds such as wind speed or rainfall, with apossiblesecond payoutif the initial parametric disbursementis not sufficient to cover the actual losses.

"Microinsurance is not about taking traditional insurance products and making them smaller," he said. "It's truly about understanding low-income people's needs ... and designing products that cater to that client segment."

The cost for Fonkoze clients is about five percent of their loans, but currently they pay three percent, while the microfinance institution subsidizes the remaining cost, Tappendorf said. MiCRO is considering changing the payout structure and is working to get a better deal from the Haitian government on premium taxes.

James Kurz, Mercy Corps' senior technical adviser, said MiCRO will expand in Latin America, Southeast Asia and the Caribbean, working either with microfinance institutions or other distributors, including mobile phone carriers.

"Allowing clients to buy microinsurance with a mobile phone would allow us to reach people in more rural places," Kurtz said.

The microinsurance market is on a "positive trajectory," said Marik Brockman, a partner at PwC's U.S. Insurance Advisory Services in Portland, Ore.

Indeed, 500 million people are now covered by microinsurance, compared to 78 million in 2007, according to research by the International Labour Organization and Munich Re. More than 30 of the global insurers are now involved, compared to just seven in 2005.

"Smaller, regional insurance companies are also getting more involved because they realize that microinsurance makes sense, particularly when governments and other entities such as mobile phone carriers can partner with them," Brockman said.

In September, Kenyan mobile service provider YuMobile began offering its prepaid subscribers life and disability microinsurance products through East African-based Jubilee Insurance and MicroEnsure.

YuMobile offered the products branded as YuCover. Subscribers can qualify for the insurance by topping up a certain amount of airtime each month, and they earn more cover if they increase their monthly top-up.

The use of mobile carriers makes sense in developing countries, Brockman said. "Cell phones are trusted everywhere, and the operators have got a payment backbone."

Governments are helping to drive the growth of microinsurance by providing subsidies or streamlining regulations or processes, he said.

In one scheme in India, Rashtriya Swasthya Bima Yojna, customers are able to swipe biometric smart cards containing their microinsurance information at government-run hospitals. The 2008 initiative was carried out by Financial Information Network and Operations Ltd., along with ICICI Lombard General Insurance Co.

The Indian government also subsidizes livestock insurance for people who buy milking cows to supplement their income, said Craig Churchill, ILO's chief of social finance program and head of its Microinsurance Facility in Geneva.

One provider is IFFCO-Tokio General Insurance, a joint venture between the Indian Farmers Fertiliser Cooperative Ltd. and Japan insurers Tokio Marine and Nichido Fire Group. In the scheme, microinsurance is bundled with the sale of fertilizer; the more fertilizer a customer buys, the more livestock coverage they get, Churchill said.

The joint venture has decreased fraud by embedding radio-frequency ID tags on livestock, he said, so that loan officers intent on fraud cannot stockpile tags in their drawers to place on any dead cow to get false claims paid.

While the microinsurance market globally still has a long way to go -- for every one successful project there are five failed projects -- many schemes are taking lessons from those failures and are devising better organizational structures, said Richard Phillips, associate dean for academic initiatives and innovations at Georgia State University in Atlanta.

Schemes such as CARD MBA in the Philippines enlist people who buy their microinsurance products to serve as advisers, to help develop more trust of insurance within their communities, Phillips said.

"Very poor people already have some mechanisms to help them manage the death of a cow or a family member -- they usually borrow within the family or within the community," Phillips said. "So the argument for a microinsurer isn't that they don't have something already in place, it's that what they are doing is really inefficient relative to what the microinsurer can offer them. Advisers can help build that trust."

Advisers are also necessary because mass media advertising is cost-prohibitive -- and many poor people may not even have TVs or radios, said Robert Hartwig, president of the Insurance Information Institute in New York. As such, schemes must have scale to be sustainable.

More investors are viewing microinsurance as a growing opportunity, said Thomas Brunner, a partner at LeapFrog Investments -- the world's first microinsurance fund.

Launched in 2011 with former President Bill Clinton, LeapFrog raised $137 million from investors including JPMorgan Chase & Co., TIAA-CREF, Flagstone Re, SCOR, the ACE Group, development banks IFC, KfW and EIB, Proparco, the Waterloo Foundation, the Soros Economic Development Fund and the Omidyar Network, created by eBay founder Pierre Omidyar.

The fund recently announced a $15 million investment in Mahindra Insurance Brokers Ltd., a subsidiary of Mahindra Finance.

There has to be a "realistic prospect" for profitability before LeapFrog invests in microinsurance schemes, Brunner said. "We are not interested in an inadvertent form of charity -- this has to be a commercially sustainable operation."

To do that, microinsurers must be able to achieve scale, and LeapFrog looks for companies that can potentially serve more than just a few hundred people, he said. LeapFrog also looks for companies that do not "cross-subsidize" their microinsurance products.

"There are a lot of carriers who are taking the profits they are making on their business writing for higher-income people, to pay for the losses of their microinsurance product," Brunner said. "They can get some numbers in terms of microfinance, but it's a PR game. A microinsurance product has to stand on its own."

Sabbir Patel, a senior vice president for the International Cooperative and Mutual Insurance Federation in Cheshire, UK, said the microinsurance industry is now reassessing its direction to ensure that the work that has been done so far has achieved its intended impact.

"Evidence is suggesting the industry has moved too fast [and was] too anxious to achieve scale, without due consideration to what really is needed for long-term sustainability," Patel said. "The recent race for numbers covered by microinsurance has not proved to have the suggested impact on people's livelihoods. In fact, in some cases, [it has been] almost the opposite, with renewal rates down and little or no effort being made to ensure the community understands the product and it is appropriate to their needs."

Now, microinsurers are recognizing that, not only should they better design products and claims processes, but they should also provide financial education so clients can better understand the overall concept of insurance.

Churchill said he believes microinsurance schemes will significantly grow once customers see that their claims will actually get paid.

"They need to see that insurers are trustworthy and they are fulfilling their promises, and not putting a lot of exclusions in fine print," he said. "If we don't get it right now, then it could take a whole other generation to have another chance to do that."

KATIE KUEHNER-HEBERT, a freelance writer based in California, has more than two decades of journalism experience and expertise in financial writing. She can be reached at riskletters@lrp.com.

November 1, 2012

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