Some thoughts on micro-insurance

Four billion people spending an average of ten dollars per year on micro-insurance: According to Cocker, that’s a 40 billion dollar market. The ‘emerging customer’, as the global base of the economic pyramid is called these days, shall be the next battleground of the insurance industry. That was the indication given by a Swiss Re Sigma study which came up with the figure about five years ago. And it sounds just fantastic: Insurers compete with ever lower prices for hearts and wallets in the Global South, thereby establishing insurance as a widely recognized and utilized mechanism in the fight against poverty and economic stagnation. Doing good and earning money – a potent combination. But indeed, that people conceive of insurance as a natural thing to buy still seems like a fantasy. With Asia being in the lead on this by far, particularly Africa is not the micro-insurance success story (yet) that the official euphoria in the development sector would like it to be. Globally, micro-insurance still has to be sold, it’s not bought. And a lot of times it’s actually given away for free with the hope that people get used to it. However, micro-insurance is not per se a ‘good to have’. There are even reported cases where it has done harm.

But let’s take a step back and look at the micro-insurance industry. Particularly over the last few years, commercial and philanthropic initiatives with the aim to increase the insurance penetration of societies in Latin America, Asia and Africa have been able to attract considerable amounts of funds and investments. A recent example is the private equity-backed micro-insurance service provider BIMA which managed to gather 38 million dollars during a financing round in July this year. This event has just been a small note in some of the financial news outlets, but it lines up with a trend that has been going on for a while: The “old” insurance industry and in particular many of the giants in Europe and Northern America are losing out on micro. When XL Catlin, Hamilton, AIG and a few others launched a micro-insurance venture incubator (labelled ‘Blue Marble Microinsurance’) during the World Economic Forum in January, you could only marvel. Most of the participating companies hardly have any significant track record in micro-insurance and up to now nobody knows or wants to tell, where the innovative drive that Blue Marble claims for itself is going to come from. That the retail business in emerging economies will eventually save insurance companies from their lethargy in matured markets seems like wishful thinking at the moment. The only strategy that those players have come up with is to acquire regional and local insurers that are more familiar with the targeted customer base and have more experience with micro propositions. This looks anything but visionary.

So, if the big ones struggle, who doesn’t? Blue Marble shows that financial commitment and political support are not a problem. The thing is that micro-insurance is not working like any other insurance proposition. Although the product logic is exactly the same as a standard insurance policy the cost structure is turned upside down. In order to make products with daily premiums around 3-5 cents economically viable, expenses for administration and distribution have to decrease drastically. One way to achieve this is to distribute via mobile phones. Mobile-based micro propositions, however, are something insurers tend to struggle with and which, in turn, has paved the way for companies like BIMA. The state-of-the-art arrangement these days, thus, leaves many insurers with the role of an extra. Service providers either distribute micro-insurance themselves or partner with microfinance institutions and, becoming ever more frequent, with mobile network operators. With even the claims process being owned by the service providers (and in some cases also the reinsurance policy), the insurers are left with the actual underwriting profit. Depending on the product, that profit can be quite disappointing.

I admit that in many ways this is only one side of the story since some insurance companies hold financial stakes in entities like BIMA and hence also gain from their success. And there are indeed a few underwriters that do comparably well and seem to have a plan of what they want to achieve. Profit may also not be the first motive for engaging in the business. Some count on the long term effects insurance can have on customer loyalty (although that calculation is often not in favour of the insurer) and on overall economic progress. However, the fact is that other than the blurb around Blue Marble may suggest, the business drive in micro-insurance lies with those service providers – or ‘third parties’ as insurers still like to dwarf them – and the mobile network operators which have been responsible for most of the recent scale.

What’s then the demand perspective here? First of all, this all looks like it can’t get much cheaper for the ‘emerging customer’ with widely affordable insurance policies distributed through mobile phones and claims processes becoming much more straightforward. And you could say that the roughly 500 million people around the globe who have micro-insurance cover sound like a decent achievement so far. But one has to be wary of the impression this number creates. What kind of insurance value has been created here? Moreover, one could also ask why the numbers are not higher. And that question causes quite a headache to many in the business because the standard answers are hard to come by in the short term: lack of trust, culturally-linked attitudes, no or little financial education, religions prohibiting insurance, state protectionism in the insurance sector, insurance penetration just takes time etc. There is some validity to all of those points. But sometimes the rhetoric in the debates feels paternalistic: These Africans just don’t want to swallow the medicine we know is good for them. If you put that notion in the context of the huge amounts of money and efforts that go into ‘customer education’ the whole picture becomes even weirder.

Now, I don’t doubt the huge enabling potential that insurance has for emerging economies. I just have the impression that the focus in business has been far too much on how products work for the suppliers – be it an insurer, a service provider or any other entity involved. Many micro-insurance propositions only cover risks partially and therefore compete even harder with other coping strategies that people have had in place long before the advent of formal insurance. It’s totally misleading to imply that the societies at hand have not developed ways to deal with the uncertainties in life. The question is whether formal insurance has any added value here – also beyond the financial aspect.

The strategy of partial coverage has been particularly applied by mobile network operators which often see insurance primarily as a conduit for increased customer loyalty and, thus, average revenue per user. With many people using several SIM cards in parallel that is an only understandable concern. But then the actual product is not really in the centre of interest and that doesn’t bode well for the customer. Moreover, many insurance policies are the result of a copy-paste exercise from other markets. That keeps the cost low but also produces poor value. Propositions that, for example, tap into local and regional money flows, thus taking into account widespread labour migration movements within and across continents, and that consider informal ways to cope with risk a business potential rather than a problem would be interesting. Micro-insurance needs to be far more connected to what is going on in the financial world in general, particularly with regards to the evolving revolution in international money transfer. Although transferring money is still relatively expensive, fees have been lowered and other ways to remit have opened up. These days you can find business models that offer diasporas to buy goods for relatives in their country of origin rather than send them money. This ‘indirect’ remittance is cheaper and gives the sender control over the allocation of funds – an aspect that is often underestimated. The same could be done for micro-insurance. The product would be moved to where liquidity and a better understanding of insurance resides. Micro could potentially, then, be less micro than it currently is which, in turn, would make life easier for all business stakeholders. But that is only one idea of many more to be considered. Eventually, it is also this wider area where I see some potential for further collaboration between the private and the development sector. Promoting ‘financial inclusion’ with millions of development funds is not an end in itself.

So, in a way, getting micro-insurance right is “just” about connecting the dots that already exist. I don’t say that’s a straightforward exercise but it has also never really been tried at scale. And probably that indeed takes time. However, the intention to provide a sound financial service needs to be at the heart of any progress in this field. Otherwise micro-insurance will struggle to fulfil the commercial and developmental hopes attached to it.