> Posted by Jeremy Leach, Director and Head, Insurance, Bankable Frontier Associates
The global financial inclusion agenda continues to place insurance at the back of the queue when it comes to funding and broader financial inclusion strategies, despite the fact that the International Association of Insurance Supervisors (IAIS) has become the leading financial inclusion focused standard setting body with its own financial inclusion implementation arm, A2ii and the significant growth of microinsurance from a low base of 78 million people in 2007 to 500 million people in 2012.
My hypothesis is that this is because of a lack of understanding of the role of insurance in the value chain and the way that it can manage risk and provide benefits for the low-income markets, which includes:
- A misplaced view that insurance is the lowest priority in a hierarchy of consumer financial needs – thus less important than payments, savings, or credit.
- The desire to directly target the very bottom of the pyramid. Whilst there has been a global recognition that microcredit is aimed at the near-poor, not the absolute-poor, donors have typically focused at the very bottom of the pyramid, often in hard to reach areas sometimes called the “supra-market zone,” and yet expect market-based solutions to work. Whilst this may also have been exaggerated through an irrational optimism by some of the private actors, the impact has been somewhat predictable.
- The time it takes to create a viable and dedicated insurance business. As exemplified by the recent business case undertaken on specialist microinsurance intermediaries, there was an unrealistic view of how quickly and easily it would be to create a profitable microinsurance business. A founder of a multinational $1 billion insurer once said that it takes 10 years to create a viable and profitable insurance business in the traditional sector – and yet we have been trying to get there far sooner.
- The focus on driving retail-based insurance products, paid for by the consumer. The idealistic view is that through the poor paying the premium from their own pockets they will learn to trust insurance and therefore value it, which will create a market. However, the nature of insurance, with payments due now and returns in a possible future, makes it notoriously hard for a customer to test. This has led to discussions around the need to drive tangibility and in-life benefits in order to assist take-up. The focus could equally be revised to address the portfolio risks of the institutions that serve the low-income market.
Whilst this is not a complete list, this does demonstrate that there is a disconnect between our growing focus on market-based solutions and the initiatives that have been supported.
Insurance Can Be an Enabler of Market Development
It is becoming increasingly apparent that insurance has been updated for the 21st century, with lessons from behavioral economics and “human-centered development” reshaping the product offerings. When observing this new range of products, we have found that insurance has been able to drive a range of behaviors that are beneficial for financial sector development and indeed market development:
- Driving growth in savings – with one bank claiming a 19 percent increase in savings as a result of a ‘free’ educational insurance policy that linked the level of insurance with the level of savings. An MNO found a similar experience with their mobile money account – clients valuing the ‘free’ insurance so much that they would change their behavior and save more through a formal savings instrument.
- Driving growth in mobile money. An MNO found that 40 percent of clients that bought an m-insurance product were new to mobile money. Thus insurance can help drive digital financial inclusion.
- Creating an insurance book. 55 percent of clients who opted in for a free product went on to purchase a voluntary paid product. Reportedly this figure is even higher now. A retailer who offered a similar model reported a 26 percent uptake. In insurance terms, this is phenomenal where response rates are typically in the region of 2 percent to 16 percent.
- Increasing spending on airtime (which is, arguably, not a social imperative). Another loyalty model which linked insurance to the level of airtime usage, drove an increase of prepaid ARPU (Average Revenue Per User, a widely used indicator by MNOs) by 33 percent with other models claiming an uplift of upwards of 15 percent.
- Reducing churn of mobile money and GSM clients. Two MNOs have claimed that their embedded insurance products were highly successful in reducing churn of their clients.
- Managing risk of lending to individuals, agricultural farmers, and SMMEs. Whilst credit life has admittedly been widely abused, portfolio insurance cover (index or otherwise) can be used to mitigate the risk of weather or life events and extend productive lending without adding the complexity of a voluntary insurance product.
- Improving spending on health and likely positive health outcomes. Research in India showed that introducing cash-less visits to community health workers led to more frequent visits which meant illnesses were picked up earlier and managed at less cost.
As the above examples show, insurance can been used to address the challenges of other financial and non-financial products. Whilst it is still early days for these models, the promise of using insurance to drive broader benefits is truly exciting.
This is not to say that direct retail purchase by low-income people is not possible. It is happening now in selected markets. The highly competitive South African market is a case in point and MicroEnsure and BIMA are seeing considerable success in uptake (admittedly financial returns may still need follow) through their freemium models.
Insurance can potentially have a widespread impact in terms of driving behavior, managing risks, and thus financial inclusion and market development. In order to achieve this we need to reorient our thinking toward aligning incentives and creating a market rather than seeking only the holy grail of poor people actively buying retail insurance products from the very beginning. We need to select our interventions carefully and challenge our current approach, by approaching insurance as part of making a market, both for insurance itself and for our other financial inclusion and market development objectives.
*With apologies to David Porteous, author of “Is Cinderella Finally Coming To The Ball? SA Micro Finance in Broad Perspective”
Jeremy Leach is Director and Head: Insurance at BFA (Bankable Frontier Associates), a specialist consulting firm focused on innovation in financial services for the emerging consumer. The insurance division is in partnership with the Centre for Financial Regulation and Inclusion (Cenfri).
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