Special Report: Micro Insurance - Spreading the word
Post-tsunami, micro insurance has become a whole new potential market area for the industry but is it a model that can be replicated throughout the developing world?
Living off the land is a tough business in India but Begum and her husband were just about managing it. Their small holding produced enough money to ensure that they were able to keep a roof over their family's heads, providing both remained fit and healthy enough to ensure that the day-to-day tasks were taken care of.
However, when Begum's husband died from injuries he had sustained in an accident, the family could have faced financial ruin - or at least they would have if they hadn't have had the foresight to have taken out a survivors' and invalidity insurance policy that cost them the equivalent of just EUR3.20 a year.
Welcome to the world of micro insurance where people such as Begum are typical customers. At present, as the South East Asian tsunami demonstrated all too well, those who are in possession of at least this minimal level of insurance are in a tiny minority. Furthermore, many people in rural areas of Asia, Latin America and Africa have previously not had the opportunity to take out insurance even if they could spare the small amount necessary to do so, as most insurers did not consider this a viable business. Fortunately, opinions are now changing.
REBUILDING WORK IN PROGRESS
German insurer Allianz says that it was already planning to implement micro insurance projects in locations in the South East Asian region before the tsunami struck. Although the disaster occurred too early for many of those who were affected to have actually been aware of the protection on offer and therefore benefit from the project, the fact that Allianz had already signed a co-operation agreement with two development aid organisations to develop micro insurance has meant that it will now have an important role to play. Namely, in ensuring the inhabitants of these regions will be better protected financially in the event of a similar event occurring in the future.
"We have committed resources and expertise to help build a social security network in Aceh that will eventually enable people to take care of their financial security," says Michael Anthony, a member of the Allianz sustainability strategy team. "We are not planning to sell policies but to develop and teach micro finance institutions on insurance matters."
Micro finance is far more developed in many of these rural areas than micro insurance and in many cases it provides the foundations on which micro insurance is built. Typically, micro insurance works like any other insurance business with a couple of significant differences. The first is that it covers more than 5,000 customers, but preferably more under one contract. The second is that it requires an intermediary to act between the customer and the providers. But rather than an Aon or a Marsh it is typically a non-governmental organisation (NGO) which then handles the whole distribution and administration process.
"The NGO members, or in our case, the social workers of ASA (Activists for Social Alternatives) take part in the local town meetings or visit people at their home to advise them on their financial planning," says Heinz Dollberg, responsible for Allianz's Asia Pacific region. "A well-rooted organisation will have a very high acceptance and will be a trusted organisation. This kind of trust often still has to be earned by the large insurance companies in these countries."
As our case study reveals Allianz's micro-insurance pilot project is already well established in India and although demands from the Indian regulatory authorities that carriers sell a certain percentage of insurances in rural areas has partly prompted this, Allianz says it is now comfortably surpassing these initial requirements.
"We currently hold over 42,000 life insurance policies (in the state of Tamil Nadu in southern India) and we are considering increasing this number," adds Mr Dollberg. "Currently, the only product that we offer is a micro life insurance policy, which costs 87 cents per year - the coverage in an event of natural or accidental death is EUR350."
In terms of generating revenue Allianz, and its joint venture partner Bajaj Allianz, receive 37 cents of every policy with the rest remaining with the NGO. Mr Dollberg admits that it is a profitable business but adds: "Keep in mind that for now we are talking about very few policies and this is not the kind of scale that makes a company rich. But we still do make a profit of 19% of premium."
POTENTIAL CHALLENGES
With its Indian project already a success it is understandable that Allianz is already showing an interest in other locations in the region: "We are looking at Laos and Indonesia and have found that particularly in Indonesia there is potential for micro insurance," says Mr Dollberg.
"Potentially, micro insurance could be an interesting market in some countries, if we find an interested NGO or other partner that could reach out to so many clients. We are reaching 42,000 people with just one insurance contract but we are still examining the scope of this market potential.
"In every country you operate in there is an official (and an unofficial license) to operate. If we successfully demonstrate to regulators and parliaments in those countries that we have a sustainable interest in the respective market, it will be helpful to prove that we are not only focusing on the profitable middle-class segment but also poorer groups in societies."
There are, however significant obstacles to overcome in order to replicate similar micro insurance models throughout the developing world as Dirk Reinhard, vice chairman of the Munich Re Foundation explains: "Clients are difficult to reach due to a lack of education, illiteracy, and bad or no infrastructure.
"Therefore innovative approaches to raising awareness and new channels of product distribution are necessary. For example, street theatres might be useful to explain the mechanisms of insurance. The respective community should organise the premium collection, as communities have better access to the local people. Another factor is that the premiums are often not paid regularly because of poor harvests, for example. Of course, those who are in most need do not necessarily understand the purpose and benefit of insurance, particularly why they don't get their money back when they have not made a claim."
It is vital that those entering the micro insurance market know the local conditions well. The administrative costs are very high and can only be reduced by close co-operation among all stakeholders. Often micro finance institutions don't have enough insurance knowledge. "We have heard of micro finance (micro credit) schemes that are now in financial turbulence due to the high number of casualties among their clients," says Mr Reinhard, so that is why partnerships between local organisations and insurance companies are ideal. With uncertain political and legal framework, reinsurance scarcely available and a lack of historical data on claims it is, however, essential that the insurance industry be integrated further into the process of developing micro insurance solutions.
"Financing the development of micro insurance is a significant challenge," agrees Mr Reinhard. "For the optimal functioning of micro insurance we need products that are easy to understand. In addition, low premiums are important (depending on the size of the solidarity community); only a small proportion of the income can be attributed to insurance premium.
"Frequent but low payments, for example, weekly contributions are necessary.
Insureds should be aggregated in order to attract professional insurers and reinsurers. Group insurances are most efficient. Above all, the key issue is who benefits from the insurance. Insureds or financial institutions?"
Next month the Munich Re Foundation will be holding a conference 'Making insurance work for the poor: Current practices and lessons learnt' in co-operation with the CGAP (Consultative Group to Assist the Poor) Working Group on micro insurance. Around 80 experts from international organisations, non-government organisations, development-aid organisations and the insurance industry will come together to discuss the findings from 24 case studies of micro insurance operations from around the globe. The tsunami may have acted as a catalyst for new micro insurance projects but this work has been ongoing for the past two years. Now it is finally time to look at the lessons learnt and reflect on what works and what doesn't work when it comes to dealing with the experiences and challenges of insuring people with low incomes.
Regadrs,
Priyanka....
