Can insurance help to combat poverty?
The microinsurance industry, which offers cover to the world's
poorest people, is growing fast and is predicted to double in size
over the next few years. Policymakers and aid experts see its
development as playing an important role in offering millions of
people around the world greater financial peace of mind and a
stepping-stone out of poverty.
Microinsurance provides some protection to those people who are
often the most exposed to risk but have the least resources to
protect themselves from a fate that could prevent them from feeding
themselves or earning money.
It also may offer them a hand in escaping from their current
circumstances. Farmers living in areas exposed to floods, typhoons
or drought may find it hard to borrow the money to buy fertiliser
or seeds. But weather microinsurance policies linked to such loans
can give farmers access to the credit they need to grow, and
therefore earn, more.
Protection for families
Insurers are increasingly springing up in developing countries
that lack a social welfare system to provide protection against a
family's main breadwinner falling ill or dying or offering cover
for their home, crop or animals.
For the microinsurance industry to take the next leap in its
development it needs to be able to offer good value products at
prices that make sense for the insurers in areas such as health and
property.
But with a growing number of insurance industry giants,
including AIG, Allianz, Zurich and Lloyd's, taking an interest in
microinsurance, the answer to that conundrum may be just around the
corner.
"It will only be a matter of time before this becomes a viable
and sustainable commercial market," says Alex Bernhardt, who runs
Guy Carpenter's microreinsurance initiative.
"The global poor population has collective spending power of
about $5 trillion and the existing financial system doesn't reach
them at all. The poor have proven to be viable economic citizens,
so long as you can tailor products to suit their needs."
Microinsurance potential is massive
For big insurers, facing intense competition in their
established markets, developing countries have become an
increasingly attractive proposition. By establishing a foothold in
these markets now they hope to be rewarded as the country becomes
wealthier and people's spending power increases.
The potential market for microinsurance is massive: up to 4
billion people live on less than $2 a day, but at the moment less
than 3% of those have any form of cover.
Growing interest from major industry players has helped
kickstart a rapid growth in microinsurance that could see it catch
up with, and even overtake, the longer-established microfinance
sector.
"Microcredit has taken a long time to get up to speed, because
they had to prove the model worked. But, having proved that, they
still have to fight to get their hands on capital to lend to poor
people. There's no big-brand bank willing to set up a microfinance
branch," says Richard Leftley, President and CEO of MicroEnsure, a
specialist microinsurance intermediary.
"Microinsurance, on the other hand, has been able get off the
ground much more quickly, because there has been a desire on the
part of big insurance companies to offer their products to poor
people," Leftley adds.
Market set to grow 100% in 5 years
Around 78 million people have microinsurance, a 2007 report by
the Microinsurance Centre found. But a survey of microinsurers in
the report predicted the market would grow by 100% over 5 years.
That isn't hard considering the very low numbers of people who have
cover right now.
But small sums insured mean tiny premiums and low profit margins
for the insurers that could easily be consumed by their operating
costs.
In several developing countries, markets have grown up for
simple term-life policies - the original microinsurance product -
that have proven to be both sustainable and profitable for
insurers.
But other markets remain some way from being sustainable for
private insurers.
"The big challenge that microinsurance is grappling with at the
moment is health insurance. Generally it isn't thought it can be
commercially viable. But it's the thing that the people want most,"
says Craig Churchill, of the International Labour Organization, a
UN agency.
Thriving markets for simple hospitalization policies exist in
several developing countries, but finding ways of extending
policies to include outpatient care - thus reducing or even
alleviating the need for hospital treatment - without making the
premiums prohibitive remain elusive.
Simple policies for large numbers
Products to cover against damage to property, crops and
livestock are also being developed. To make any money, insurers
have to offer simple policies to large numbers of people that are
cheap to administer. But how insurers sell such small-sized
policies to enough people without swallowing up all their profits
remains a conundrum.
Technology is likely to play a crucial role, both in
distributing products to the masses but also in keeping a tight lid
on cost.
With more than half the world's population estimated to have
access to a mobile phone there is huge potential to sell financial
services at a low cost via the telephone network.
"There may be another technological leap in the next few years
that will bring costs even lower and allow us to go out into the
market and sell to individuals," says Leftley.
"Microinsurance is the furthest frontier of insurance. People
are still working out how to get distribution right and how to keep
costs low," says Leftley
Microinsurance can provide a laboratory, says Churchill, for
international insurers to find ways to bolster their profits
margins in their saturated core markets in which price is the main
differentiator.
"If you can figure out how to get your costs down through
technology to allow you to do business at the bottom of the pyramid
then that may offer valuable lessons for your mainstream business,"
concludes Churchill.