Microinsurance: what is it and what are the innovative corporate and social benefits it represents?

• United Kingdom

• ESG
• Insurance and reinsurance

01-09-2022

Introduction

With a unique opportunity to address some of the most prominent ESG challenges in the insurance industry, not least, the issue of underinsurance in the developing world, as well as many of the deficiencies of the traditional insurance market, microinsurance is set to become an increasingly important part of the insurance landscape.

What is microinsurance?

While there is no single definition for microinsurance, microinsurance policies are typically affordable, event-driven policies with a low policy value. Microinsurance is often utilised by people of modest means in the developing world in relation to specified perils such as flooding or crop failure, in order to help mitigate the financial impact of losses.  

Claims paid out under microinsurance policies, while often of low value, can provide an immediate lifeline to policyholders. An illustrative example is offered by the disaster caused by Typhoon Haiyan in the Philippines in 2013, after which more than 110,000 low-income Filipinos received non-life microinsurance claims pay-outs totalling more than $12 million to help them rebuild.

The extension of microinsurance policies to those previously uninsured can also help to address the significant disparity between the take-up of insurance in the developed and developing worlds, despite many developing countries facing the most serious perils.

How is microinsurance different to traditional insurance?

Microinsurance products do vary in type and structure, but are generally distinguished by high volumes, low cost and efficient administration.

Microinsurance is also often more event-driven, providing coverage for events such as a journey, a harvest or a purchase, rather than a single, comprehensive policy providing cover for a longer period. Arguably, such policies represent more sophisticated insurance products than traditional policies, being simpler, transaction-based and more closely aligned with the risk.

The delivery of micro insurance policies necessitates the use of technology to deal with high volumes of customer contact for sales, queries, claims and complaints, which would not be feasible with traditional policies, and certainly not at low cost. Typically, micro insurance policies are delivered via a mobile app, or some other tech platform, which gives the insurer control over the whole product lifecycle. This is in contrast to the delivery of traditional policies, where the sales process and administration is usually contracted out to brokers or other third parties.

Many microinsurance policies also incorporate other innovations, for instance the use of parametric triggers rather than a reliance on loss-based mechanisms, which are typically slower to pay out.

Who pays for microinsurance policies?

Microinsurance is often provided in cooperation with microfinance organisations, rural banks, savings and credit cooperatives, and humanitarian organisations, as a means to help protect vulnerable communities.

Microinsurance policies are sold by global insurers and have been for some time. For instance, AIG began selling microinsurance policies in Uganda in 1997.

Some businesses which operate in developing countries partner with insurance companies in the provision of microinsurance products, whether for ESG considerations, or as a practical means of improving the resilience of their supply chains. For example, in October 2018 Blue Marble partnered with Nespresso to create a weather-index microinsurance solution for coffee farmers in Colombia.

What is the potential for microinsurance?

Developing countries are, on the whole, chronically underinsured when compared to developed countries, despite often facing the most perilous risks. Microinsurance is able to help bridge that divide, and that is reflected in its traditional use for ‘property-casualty products’, including property insurance, crop insurance and livestock insurance.

While emerging markets account for around one-fifth of total global premium, they represent 80 percent of the world population, pointing toward enormous potential for growth. The microinsurance network reports that 290m people worldwide are covered by a microinsurance policy. Moreover, the provision of microinsurance often serves as a gateway for insurers to develop brand awareness as well as expand commercially in new markets. For instance, in the key Asia-Pacific region, 90% of the time mobile microinsurance is a person’s first experience with insurance.

The potential for microinsurance also extends to developed countries. As outlined above, microinsurance policies need not solely be focused on low-income consumers but simply offer a new, more tailored approach to insurance. There is also the potential for microinsurance to be embedded in other products, rather than being seen as a standalone product. For instance, the provision of coverage for use of a bicycle or car alongside a GPS device, or insurance embedded in Internet of Things (IoT) devices.

Microinsurance certainly has the potential to make a significant impact on the insurance landscape in future, in both developing and developed countries.