Inclusive insurance – the great enabler

Microinsurance is getting insurers to low-income markets and transforming lives in the process.

The worst effects of global warming are likely to hit those living in poverty harder than anyone else, a point re-emphasized in the 2018 Intergovernmental Panel on Climate Change (IPCC) special report. That amounts to three billion low-income individuals struggling to make ends meet without any sort of safety net to protect them in the event of failing crops, flooding or rising tides. Yet action can be taken now to mitigate the loss and damage associated with climate-related events through microinsurance, which provides low-income people with focused protection against risk.

Not that it will be easy. As Michael J. McCord, head of the MicroInsurance Centre at Milliman, puts it: “The medium- and long-term answer to climate change is not insurance. It’s adaptation. But we cannot have sustainable development without good insurance products for low-income people. It just will not happen. Insurance helps low-income people adapt. With insurance as a protector, we can give them the confidence to raise new breeds of cattle or grow new varieties of maize.”

We cannot have sustainable finance without good insurance products for low-income people. It just will not happen.

The benefits of microinsurance can be seen through the example of disease- and insect-resistant seeds, which can increase crop yield by large margins. Yet when farmers in rural Africa are advised to switch to the new seeds, with just a one in 20 chance of crop failure, more often than not they will decline the offer and stick with their traditional – though considerably less productive – methods.

Why is this? Because for those living on the margin, crop failure can mean starvation. Making any change to the tried-and-tested traditional methods, which have allowed them to subsist for generations, represents an unacceptable risk. How many of us would accept a 5 per cent chance of their family becoming destitute? Insurance against crop failure gives farmers the peace of mind to make the change.

Microinsurance has risen in prevalence over the past quarter of a century. The two main providers, MicroEnsure and BIMA, now claim to insure 80 million low-income people around the globe. Yet this remains a small portion of the three billion who could benefit.

Partly, the low penetration rate is the result of a perceived lack of value of more traditional insurance. Studies have shown that in the mass insurance market there are examples of claims ratios of less than 10 per cent. This, in McCord’s assessment, is nothing less than “thievery”: “What’s the value of insurance if people aren’t claiming because their families don’t even know they are entitled to it?” he asks.

Mobile companies are in a great position to sell microinsurance because they reach so many people.

As familiarity in microinsurance solutions grows, this will become less of an issue. Craig Churchill, who heads up the Social Finance Programme for the International Labour Organization, says: ‘‘People are naturally sceptical. Insurance is something they haven’t experienced before, it’s intangible and they don’t know how it works. So, they have to see the benefits. Once they see their peers being paid at a time of great need then the word gets out.”

Another microinsurance success story has been funeral insurance in South Africa, a hugely popular venture boosted by policies being paid out within 48 hours. In microinsurance, a fast turnaround is essential. “If somebody dies and you’re expecting to have the insurance money pay for the burial, you can’t just have the body lying out in the yard for a month while you wait for the insurance settlement,” says McCord.

“So, the paradigm shift insurers have to go through is to figure out how they are going to pay these claims in a couple of days if not hours.”

Innovation is also seen in the policy document, which in many cases is reduced to the size of a business card. Simplifying the process benefits both customer and provider by reducing costs to a minimum.

The paradigm shift insurers have to go through is to figure out how they are going to pay these claims in a couple of days if not hours.

“We have to focus not on cutting down the claims paid out but on cutting down the admin costs,” concludes McCord. “If you can’t do this efficiently then don’t bother trying because you’re not going to succeed.”

Just as crucial is the development of products tailored for the low-income market. So, while comprehensive health insurance is financially out of reach, there is increasing demand for so-called ‘hospital cash’ policies. These pay out a fixed per diem cost to support low-income workers when they, or a family member, are hospitalised. “In order for these policies to be affordable they can’t provide ‘Cadillac’ benefits,” adds Churchill. “These are partial solutions, but they are better than no solutions at all.”

The greatest challenge of all, however, is generating greater access to microinsurance. Good news can be found in the transformative impact of technology and innovation on the microinsurance market. Today, microinsurance is being sold or distributed through mobile telephones, for example. Mobile companies are in a great position to sell microinsurance because they reach so many people.

Additional innovative delivery methods include insurance that is now being sold through retailers, banks, churches, credit unions, co-operatives and utility companies – any aggregator which is in regular contact with and trusted by low-income people. Often the insurance is embedded in other transactions – which is perfect for increasing transaction efficiency.

Microinsurance is a dynamic and rapidly evolving sector, empowering people to manage risk and break the cycle of poverty. Says McCord: “It is absolutely crucial in helping the low-income people in the world make positive strides towards a future out of poverty.”