Sept., 2010 – Amidst the recent turmoil and uncertainty in the global markets as a result of the ongoing financial crisis, microfinance has continued to generate positive returns, both social and financial for microentrepreneurs and investors (albeit at a slower pace versus pre-crisis levels). For those not familiar with this emerging asset class, microfinance is broadly defined as the provision of financial services (e.g. microsavings, microcredit, and microinsurance) to poor people excluded from traditional or social financial systems, particularly microenterprises with no access to meaningful forms of expansion capital. The industry has seen tenfold growth in the last decade or so and microcredit products now reach well over 150 million customers worldwide. As demand for microcredit continues to increase, Deutsche Bank estimates investment into the microfinance industry at large will increase from USD $5 billion in 2005 to USD $25 billion by 2015.
Building on microcredit’s growing success, an array of utilitarian microfinancial services are being developed and deployed, including microinsurance. Much like microcredit, microinsurance can be defined by its scope and scale: risk transfer products and services with low premiums and coverage limits, designed to service low-income people and businesses not served by typical social or commercial insurance schemes. The most common types of microinsurance are life, health, disability, property, and crop. Microinsurance policies are generally very simple with few exclusions and utilize minimal claims/accounting processes. The market for microinsurance is tremendous. Over 4 billion people worldwide live on less than $8/day and control over $5 trillion of income1. These poorest individuals live predominantly in emerging markets where they are particularly vulnerable to financial losses as a result of perils such as death, illness or crop failure. Because the global poor have fewer resources, appropriately designed microinsurance products can have tremendous utility. With a demand-driven product and targeted marketing and education, significant latent demand for such assurances can be tapped. However the market for microinsurance products remains largely unpenetrated with only 3.4% of the poorest 4 billion able to access any type of insurance (as of 2009). To give a better sense of the market potential, a recent 100 country landscape study demonstrated a total demand exceeding one billion people2 and another study has placed the total value of microinsurance products and services at over USD $90 billion3. International insurers, reinsurers, and others in the insurance industry are beginning to respond to this demand by designing high volume, low priced microinsurance policies and by leveraging technology as necessary to facilitate their distribution and administration and make each product viable and self-sustaining.
Mobile technologies such as mobile money transfer solutions are seen by most in the industry as being key to the distribution of microinsurance products. Because of the small premiums and rural locations of insureds, cell phones have the capacity to greatly increase the efficiencies of microinsurance, bringing down operating costs and making products with low premiums , high claims frequency and delivered in remote areas viable. “Many consider 2009 ‘The Year of Mobile Ubiquity’, that is, the year in which it became safe to assume that virtually everyone has or has access to a mobile phone. In fact, mobile penetration has increased so quickly in emerging markets that of the 5 billion mobile subscribers globally, over 300 million are in Africa. With mobile money services growing at comparable speeds, the financial landscape in emerging markets is set to undergo a radical transformation. Indeed, it already has.” says Ben Lyon, the VP of Business Development for Kopo Kopo, Inc., which provides a platform for connecting mobile money and enterprise management systems.
GSM World predicts that by 2012 there will be 1.7 billion cellphone users without a bank account. Most of these users have few assets and are vulnerable to shocks like natural disasters, loss of property, illness or death, and could greatly benefit from microinsurance.
International insurers are exploring the microinsurance space in greater numbers with companies like Zurich and Allianz already selling microinsurance products. By establishing relationships and increasing their brand value now amongst low-income policyholders, many of these insurers are looking to position themselves for growth in the future when microinsureds move up the socioeconomic ladder and begin to purchase more traditional insurance products. Other insurance companies are keeping a close eye on the innovative technology developments in microinsurance product distribution, particularly with respect to the use of cell phones. Many of these technologies which facilitate premium payments via SMS and claims processing through the mobile web can be applied to insurance products at home. Increasingly, banks, insurers and other financial services companies are looking to the developing world for the most innovative and cost effective applications which could be integrated into their own business processes. The introduction of low cost smart phones and tablets like the iPad will further accelerate this east to west technology transfer.
In addition to primary insurers, reinsurers are very active in microinsurance, not only supplying support in the form of financial capacity, but often taking a lead position in the formation of innovative microinsurance programs. For example, in 2009 Munich Re teamed up with Indonesian insurer Asuransi Wahana Tata to provide an index-based flood insurance product providing coverage to low income families in Jakarta. Swiss Re teamed up with Nyala Insurance Company and Oxfam in Ethiopia to develop a satellite index-based program for local farmers. Reinsurance intermediary Guy Carpenter is engaged in the development of innovative microreinsurance solutions and most recently arranged reinsurance coverage for a large state-sponsored health microinsurance program in India. Increasingly reinsurance is playing an integral role in microinsurance schemes, providing the extra support needed when local supply is limited.
” The global reinsurance community is flush with capital and invaluable underwriting expertise and is thus uniquely positioned to support the advancement of microinsurance in a big way. With the strategic assistance of development partners this financial and technical capacity building can be unlocked and put to excellent use for �non-commercial’, though highly socially beneficial projects,” said
Alex Bernhardt, Vice President at Guy Carpenter and head of the firm’s GC Micro Risk Solutions unit. “It is the (re)insurance industry’s social and commercial obligation to explore the micro market in more detail.”
Although it is still a relatively new concept, it is a safe bet that micro(re)insurance will be discussed and written about with much greater frequency over the next couple of years given its relevance to both social economic development and commercial (re)insurance actors. The interconnected global nature of today’s markets will ensure the growth of microinsurance and it will have an impact on the commercial industry as a whole. Indeed the future fortunes of many (re)insurers lies at the base of the global socioeconomic pyramid.
About Kevin Day and Riskebiz
Kevin Day is CEO of Riskebiz, a microfinance investment firm and a technology services company. The Riskebiz Microfinance Fund provides venture capital and technical assistance to small and medium sized microfinance institutions (MFIs) in emerging economies. Riskebiz leverages mobile applications, including mobile money transfer solutions, to implement microinsurance schemes at MFIs where microcredit loans are provided to entrepreneurs. Kevin worked as an insurance broker in the 90’s and remains an active committee member of the Canadian Captive Insurance Association. More about Riskebiz at www.riskebiz.com.