By Sophia Hoffmann
Microinsurance promises to revolutionize the way big insurers approach business. But so far, few have signed up
Global players in the insurance market are sounding out the options for providing cover for the world’s poor. Big insurers are keen to combine a philanthropic image with commercial success, especially given the triumph over the last decade of socially conscious initiatives such as micro-credit. The advent of microinsurance – schemes aimed exclusively at low-income families – might allow them to do just that.
The devastation caused by the Asian tsunami last December brought home the fact that most victims lacked insurance cover for their destroyed belongings. Many also did not have access even to basic financial services.
Microinsurance involves setting up insurance schemes for households, like many of those affected by the tsunami, that traditionally are not covered by commercial insurance companies, because of the small size of their business or their inability to pay commercial premiums.
“Big finance institutions are located in the city, and many poor people live in rural areas,” says Nigel Biggar, senior programme officer at Grameen Foundation USA. Also, information is lacking. “Poor clients recognize their needs, but they are not necessarily familiar with solutions,” adds Biggar. Large corporations, on the other hand, “don’t know the microfinance market, don’t know who to speak to and don’t know the clients.”
As a tool for poverty alleviation, the idea behind microinsurance came from microfinance institutions looking to manage their risk in case their borrowers passed away.
Smart moves
But now institutions are developing much more sophisticated products, which are receiving growing attention from commercial insurers. One such case is CARD MBA, a Filipino mutual benefit association that insures over 100,000 members, each with a monthly income of no more than 1,500 Philippine pesos (around $27).
“We cater for the poorest of the poor and have a very affordable product,” says Alex Dimaculangan, the Association’s director. The organization, which charges premiums as low as 10 pesos (20¢) a month, learned its professionalism the hard way, after an initial pension scheme nearly led to bankruptcy.
Later this year, the association will begin to offer the health insurance programme of Philhealth, the Philippine government’s semi-autonomous health insurance organization, to its members. Philhealth had difficulties in accessing all sectors of the population and CARD’s outreach to the informally employed is what makes the partnership attractive.
Private eye
“Private companies are sensing a business opportunity [in microinsurance],” says Svenja Paulino, project manager for financial systems development at the German Association for Technical Development (GTZ). “Our contribution is creating access to the potential clients.” The Association partnered last year with Allianz, Europe’s biggest insurer, to set up three pilot microfinance projects in India, Laos and Cambodia.
“Whenever I present microinsurance to big insurers it’s like one of these ‘Aha!’ moments,” says Michael McCord, director of the US-based MicroInsurance Centre. “The companies realize that they haven’t even considered this market.” McCord works as a microinsurance consultant across the developing world and is hugely enthusiastic about the prospects of commercial involvement in the business.
“American Insurance Group (AIG) in Uganda insures loans of 1.6 million people at an average one-off fee of $2.50,” he says. “Others, such as Allianz and Munich Re are poking around to see how big the market is.” Over the next decade McCord is confident that good microinsurance products will cover at least 60-70 million, the same number now involved in other microfinance areas.
Treading Carefully
But the big companies maintain a cautious approach to publicizing their involvement. “We are still missing the basis for concrete future projects,” says an Allianz spokesman. “But there is an interest to develop a position on microfinance.” The insurer wants to evaluate the market potential first and is awaiting the result of the three GTZ pilot projects.
Zurich Financial Services has a similar stance. “Zurich has one or two small projects that could be considered as falling within the category of microinsurance,” says a spokesman. “While we are of course looking at this topic as part of our strategic analysis, we do not have specific development projects in this area at this time.”
There are still significant barriers facing a more widespread delivery of microinsurance. Although the potential market is huge, many microfinance organizations, which can provide the necessary access, only service a small number of people. “Big insurers are only interested in scale,” says Biggar, “but some institutions only have 800 clients.”
Village voice
The largest impediment is the absence of research and development, which provides the necessary information to develop the products that clients are interested in. “Demand research is key,” says McCord, who goes into villages, speaks to focus groups and conducts participatory workshops to find out which risks the community faces and wants covered. “People are starting to realize that their indigenous risk-management measures are not sufficient and that they need better management tools.”
Not all experts agree that private-sector involvement is the best way forward. Maintaining local control over clients’ premiums means that there is strong commitment to provide the community with the services it needs, rather than maximize profit. “The primary involvement of commercial insurance companies that I perceive as of now, is as re-insurers and assisting new microinsurance providers in actuarial analysis,” says Dimaculangan. He sees mutual benefit associations as the better option and is involved in exporting this structure across the Philippines and in Laos and Indonesia.