Making microinsurance work

An increasing number of organisations have begun to provide protection against specific risks to low-income, vulnerable customers in emerging markets using so-called "microinsurance".

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These products provide the opportunity to overcome what insurers have found to be long-standing barriers to increased insurance penetration in developing economies, including cost, accessibility, customer understanding of the products, and even lack of the documentation required to make a claim.

The "protection gap" in developing countries is increasingly recognised as a cause for concern, with international organisations like the Insurance Development Forum (which Clyde & Co is pleased to cooperate with) highlighting that countries with greater penetration of insurance coverage have faster economic recoveries from disasters and rebuild with greater resilience to future disasters. At the same time, the limited diffusion of insurance products in these markets offers insurers opportunities for expansion, including through microinsurance.

Numerous microinsurance products are already available or are in development. In 2016, XL Innovate invested USD4m in Swiss microinsurance firm Stonestep, which aims to change how insurance is delivered in emerging markets by offering consumer risk products and services at affordable prices. Elsewhere, AXA Group is a key partner in leading microinsurance specialist MicroEnsure, while Allianz Emerging Customers offers a range of products specifically tailored to the needs of low-income families, with key markets in developing countries in Asia, Africa and Latin America.

New markets, new challenges

Making microinsurance products successful involves addressing a number of challenges:

• Creating useful products with very low premiums that are commercially viable. Economies of scale can help, but that might require marketing microinsurance to potential customers who have very little, if any, experience with financial products and often lack basic documentation usually required by insurers.

• "Casting the net" wider, to cover risks that were previously thought to be uninsurable, creating products with fewer exclusions.

• As well as focusing on inclusion, insurers may also need to find cost-effective ways to minimise insurance fraud and false claims. AI can play an important part in forming a solution to this, as can technologies such as the use of automated weather stations and the use of drones to monitor remote locations.

• When entering these markets, insurers may also face new requirements for risk assessment and risk management, fewer underwriting controls, a lack of data for developing pricing bases and new distribution methods.

Whilst navigating this new market, insurers will have to think about how to meet any capital requirements, as well as focusing on their risk-based assets. Last year’s failure of insurtech P2P company Guevara due to its inability to establish a fully capitalised underwriting vehicle underlines this challenge.

The opportunities and challenges associated with microinsurance for insurers are clear. A number of insurers have recognised that if they can move into these new markets and address these challenges effectively, there is enormous opportunity for growth. Furthermore, because of the ability of microinsurance to help insure the previously uninsurable, it could genuinely help to close the stubbornly high protection gap in developing markets. However, the challenges involved should not be underestimated and it remains to be seen how quickly technology will help insurers make inroads into new markets.

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