> Posted by Aparna Dalal and Craig Churchill, International Consultant and Team Leader, Microinsurance Innovation Facility, International Labour Organization

New impact evidence shows that microinsurance products can provide financial protection, reduce vulnerability, and improve access to critical services for low-income households. And with innovations in product and delivery, more people now have access to microinsurance. The sector grew from an estimated 78 million clients in 2007 to 135 million in 2009, to 500 million in 2012. Does this mean that microinsurance has finally arrived?

The answer depends on where you look. While we have seen breakthroughs in certain countries (such as India, the Philippines, South Africa, and Colombia), glaring geographic disparities in coverage persist, with vast deserts without coverage amid oases of success. Common challenges facing countries with low coverage include inappropriate regulation, lack of capacity within the insurance industry, lack of infrastructure for distribution, limited data, and insufficient knowledge of insurance among low-income households.

These challenges vary with market maturity. For instance, insurers in a country in the nascent stage of development might have limited capacity to offer mass products beyond credit-life and they often have to develop marketing strategies and distribution infrastructure from the ground-up. They must find ways to reach persons who are unfamiliar with insurance. In contrast, insurers in growing markets are looking for new distribution partners and developing more customized products to address specific client needs.

Stages of Market Development

Stages of Market Development

A systematic approach is needed for countries to address these challenges and accelerate the development of insurance markets. This approach includes two core elements: 1) catalyzing stakeholders and 2) evolving products.

Catalyzing stakeholders

The experience of Zambia highlights the importance of bringing stakeholders together to catalyze the development process. In 2009, the International Labour Organization (ILO), United Nations Capital Development Fund, and FinMark Trust brought together industry representatives, potential distribution channels, consumer advocates, and donors to discuss the findings of a diagnostic study and create a roadmap of interventions to promote microinsurance in Zambia. The taskforce oversaw the implementation of the interventions, including seed grants and trainings for insurers and distribution channels. These efforts led to the launch of five new microinsurance products that now protect 220,000 people.

As markets develop, insurers need to explore new partnerships and business models. In countries with higher microinsurance penetration, much of the expansion has come through partnerships with governments (e.g. RSBY scheme in India) or alternative distribution partners, such as pawnshops and mobile network operators (MNOs).

New partnerships do, of course, create their own challenges. Governments often have their own agenda and schemes that might be interrupted with each electoral cycle. For example, elections disrupted a Facility partner’s plans to pilot in a preferred location. Other partners have had consumer education campaigns discontinued during election campaigns. Government priorities can fluctuate, resulting in cut-backs and inability to deliver on promises. In Kenya, the Cooperative Insurance Company (CIC) partnered with the National Hospital Insurance Fund (NHIF) to offer a composite product. The product was unilaterally redesigned by NHIF after the launch, and ultimately discontinued, as the revised package was no longer considered viable by CIC.

When working with new distribution channels, financial incentives might not be enough. For distribution channels to take insurance seriously, insurance should contribute to the channel provider’s core business, for instance, increasing airtime usage or improving retention of mobile phone clients for MNOs. Also, some channels are more suited to sales than service. But it’s important to factor servicing requirements, including claims and policy administration, when forming partnerships. Distribution channels should get excited about claims, as this is when value materializes for clients.

Evolving products

The development of insurance markets takes time. One of the primary reasons for the delay is on the demand side. The objective is to create a culture of insurance among the working poor, so they see insurance as part of their risk management toolkit. To realize that goal, they need to understand how it works and have opportunities to witness the benefits that insurance brings.

Potential Product Evolution Path

Potential Product Evolution Path

Another problem facing markets has been the introduction of complex products before their time. Old Mutual (OM) faced slack sales when it first introduced a retail funeral product called “Pay While You Can” distributed through ShopRite, one of the biggest food retailers in South Africa. PWYC was originally designed to be flexible, with clients having the option to top-up coverage on an ongoing basis. The product was not successful mainly because it was too complex and clients had difficulty in comprehending the waiting periods associated with the top-ups. OM has since conducted a client value analysis using the ILO’s PACE  (Product, Access, Cost and Experience) assessment tool, and used the results to simplify the product, while still meeting the needs of clients.

Regulators and providers should factor the current stage of market maturity when deciding on the type of regulation and products to introduce. Missteps can result in consumer distrust, provider fatigue, or overprotective regulation causing significant delays in market progression.

Starting with simple, embedded or mandatory products that provide partial cover is a sensible first step in many markets. Such products should be offered at highly affordable prices, especially in new markets that are price sensitive and budget constrained. These products help overcome initial demand challenges, allow providers to reach scale quickly, and enable the low-income market to have increased and often initial exposure.

Even partial cover products can be a better option than many informal or formal alternatives. The Kore W, the catastrophic property insurance cover offered by Fonkoze, an MFI in Haiti, offered loan forgiveness and up to $125 cash payout in the event of a disaster. While this level of coverage was not always sufficient to cover all losses faced by clients, client value analysis showed that the product performed better than informal risk management mechanisms across all dimensions of client value.

In India, IFFCO-Tokio General Insurance Ltd (ITGI) partnered with cooperative banks to offer a credit-linked livestock insurance product. Because of rampant fraud, many insurers avoid offering livestock insurance despite the fact that there is a huge market for it in India. But ITGI innovated, using RFID technology (which includes a chip inserted in the cattle that can be scanned with a reader) to identify cattle instead of traditional ear tags, and was able to significantly reduce fraudulent claims so that the business became profitable. The product also performed well on client value analysis metrics, primarily because ITGI improved its enrollment and claims processes. Improving access (enrollment) and experience (claims) value is critical at the initial stages of market development to build the trust and knowledge of insurance among low-income households.

Finally, as markets develop, there is an opportunity for providers in identifying additional client needs and taking an added-value product development approach to ensure that products fulfill a need in the complex financial lives of the poor. Products should add value compared to informal risk-sharing practices and social security systems. As is the case with all financial products, exploratory market research is a must for developing microinsurance products that better address customer needs.

The authors work for the International Labour Organization’s Microinsurance Innovation Facility, funded primarily by the Bill & Melinda Gates Foundation. The Facility has provided more than 60 innovation grants to insurance companies, brokers and associations, NGOs and 30 research grants to academics, and involved researchers.

Have you read?

How Financial Literacy Can Help Build the Market for Microinsurance

Microinsurance: Can the Cinderella of Financial Inclusion Join the Global Ball?

New Insights From the Field on the Value of Life Microinsurance