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 MI came from microfinance institutions looking to manage their risk in case their borrowers passed away. "Standard micro-life-insurance covers the outstanding loan if the borrower dies, and gives a lump sum to the relatives," says Biggar.
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 offer life and permanent disability insurance, a retirement savings fund and a loan redemption fund to our members," says Alex Dimaculangan, the association's director. Premiums for the whole package are 10 pesos (less than $0.20) per month. Benefits grow with length of membership. After three years, the life insurance benefits stand at 16,600 pesos (around $300) for the member plus 6,000 pesos(around $110) for up to three legal dependents.
"We cater for the poorest of the poor and have a very affordable product," says Dimaculangan. The organization learned its professionalism the hard way, after an initial pension scheme nearly led to bankruptcy. "We outsource the price calculations to a consulting actuary," says Dimaculangan. CARD MBA is licensed under governmental regulation and complies with all the necessary actuarial analysis. Funds are invested in government retail treasury bonds, fixed treasury notes and time deposits.
Later this year, the association will begin offering 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.
"The biggest problem is how to reach the poorer population," says Svenja Paulino, project manager for financial systems development at the German Association for Technical Development (GTZ). Last December GTZ entered into a public-private partnership with Allianz, Europe's largest insurance company, to produce three pilot projects in India, Laos and Cambodia. The aim is to develop, offer and market a range of private microinsurance products to poor population groups and later extend the experience to other countries.
Private eye
"Private companies are sensing a business opportunity in the way that micro-credit also developed into a profitable industry," says Paulino. "Our contribution is creating access to the potential clients." Allianz has already gained some experience with MI through its Indian subsidy Bajaj Allianz, which launched its life insurance package InvestGain in 2003 and has partnered with the GTZ on other projects.
"Whenever I present MI 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 MI 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 MI products will cover at least 60-70 million, the same number now involved in other microfinance areas.
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 spokesperson. "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," states the press office. "While we are of course looking at this topic as part of our ongoing 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 MI. 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 Briggas, "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.
Whatever the model – and many are already being tested – MI is set to take off in a big way. "It's a really new field," says Paulino, "and this is reflected in the small number of existing projects." But the experience with other microfinance tools should help to get MI off the ground quickly. "We can really benefit from our past experience with financial systems development," she adds.
For commercial insurers that decide to take the step and design products accessible to the poor, a great future may await. "One hundred years ago Metropolitan Life offered insurance to very poor people in the US and went on to become one of the largest insurance companies in the world," points out McCord.
Indian file
India is a unique case when it comes to insuring its public. After all, this is the only country in the world where regulated insurers are obliged to offer services in rural areas. But the government is taking it one step further by drafting regulations to help the microinsurance industry take off, to ensure that the rural poor have access to cover.
On the back of government legislation, large insurers are facing increasing pressure to get involved in microinsurance. Since most are obliged to sell a fixed percentage of their products to the social sector and rural areas, the incentive for diversifying into the micro sector is growing.
"There has been a giant step in innovation for microinsurance," says Michael McCord, director of the US-based MicroInsurance Centre, who cites crop insurance in case of drought as one key area where the product is being tested.
The quota insurers must divert to rural areas rises annually and reaches a maximum of 16% of all life insurance policies after five years, and 5% of premium income for other types of insurance. The Insurance Regulatory and Development Authority of India (IRDA), the main driving force in these developments, has been strict in implementing the law, which applies to all insurers that have set up in the country since 1999. To date, several insurers have been fined for not meeting their targets.
Now, however, a new regulation, which was published by the IRDA last year but has yet to be enacted, creates a structure for NGOs and microfinance institutions to sell insurance products. The approach is to strengthen the cooperation between large insurers and development organizations.
"We need a framework that allows smaller institutions to offer services, but is careful to secure funds and to ensure that policies are paid out," says Svenja Paulino, project manager at the German Association for Technical Development (GTZ).
Problems still exist. For example there is a danger that the new regulations could result in a wave of badly designed products, sold at a loss in rural areas by companies keen only to meet the quotas. "To some insurers the fines are just a cost of business," says McCord.
Also, capital requirements to offer microinsurance remain extremely high. An insurer who only wants to offer microinsurance has to have the same capital as a regular insurance company. At $21.7 million (2003 figures), this requirement is prohibitive for smaller organizations.
But as the microinsurance business grows, regulators elsewhere are likely to look to the Indian example of proactive regulation for ideas. Creating the conditions for this market to take off and develop represents a bold step towards profitable insurance for all.