Low income households have long been considered too impractical to underwrite, but that may be changing. RGA South Africa explores the trends reshaping the emerging market for microinsurance.
Microinsurance is a fast-emerging financial service taking advantage of current low insurance penetration rates and the increasing need to protect consumers from financial shocks.
If appropriately designed and administered, microinsurance could not only play a significant role in reducing the vulnerability of low-income households to economic stressors, but it could also be a profitable market segment for commercial insurance providers.
The microinsurance market is significant and growing. The rapid expansion of the market can be attributed to the culmination of several factors, including rising disposable incomes, innovations in mobile and insurance technology, and an enabling regulatory environment. The Microinsurance Landscape Studies report that more than 500 million microinsurance policies have been sold in the past decade. While this growth is encouraging, it still leaves a large portion of the estimated 4 billion consumers globally that make up the potential market unserved.
The following trends are currently shaping the microinsurance market:
The use of relatively low-cost mobile channels plays a huge role in addressing the high acquisition costs associated with microinsurance, and offers the potential to reach poorer and more remote clients. In the last five years, mobile microinsurance intermediaries have been able to scale and reach tens of millions of consumers within a relatively short period. Microinsurance intermediaries typically partner with mobile network operators (MNOs) to offers (free or paid) products to the MNO subscriber base. Beyond marketing and sales, these intermediaries facilitate various processes ranging from product development and premium collection, to claims administration, payments and client servicing. In some jurisdictions, these intermediaries may be licensed risk carriers offering their own products to consumers.
Furthermore, recent advancements in insurance technology are transforming the insurance industry and giving rise to a new wave of insurance models – such as peer-to peer and on-demand offerings – that provide consumers access to flexible products and an end-to-end digital experience. As more products become available digitally, buying microinsurance policies might become more popular, even for individuals in higher income segments. Indeed, these newer insurtech innovations could pave the way for more targeted product development, further enable scale and mass outreach, improve cost efficiencies and claims turnaround times, and enhance the overall viability of microinsurance.
Entering new markets and increasing revenue streams have become new motivating factors for insurers and other players to enter the microinsurance industry. The Institute of International Finance (IIF) reports that the number of insurers actively involved in microinsurance has significantly increased, from just seven insurers in 2005 to around 60 multinational insurers that currently have microinsurance projects in operation. Interestingly, we see a number of multinational insurers and reinsurers investing in microinsurance intermediaries. For example, Allianz X recently invested around $97 million in BIMA. Similar investments were made by AXA and Sanlam in MicroEnsure. Innovations in mobile technology are allowing insurers to offer and administer microinsurance policies in a cost-effective manner, thereby making the market more financially viable than it was in the past. In addition, industry analysts at Cenfri highlight inclusive insurance as one of the top three most profitable opportunities that insurers can invest in, with even greater future profitability and benefits for first movers.
In recent years, the focus of microinsurance has gradually expanded beyond targeting low-income consumers to include the wider mass market, with regulators recognizing the need for a broader, more inclusive insurance strategy. The Access to Insurance Initiative (A2ii) reports that 18 countries across Africa, Asia and Latin America have adopted a microinsurance regulatory framework, while 23 countries are in the process of developing some form of microinsurance-specific regulation.
Although the scope and objectives for the development of microinsurance regulations differ among jurisdictions, impressive strides have been made by insurance supervisors to create a framework that provides both flexibility for microinsurance providers to operate in a sustainable manner and adequate consumer protection. Several jurisdictions have introduced a wide range of regulatory solutions such as less stringent licensing and prudential requirements; allowing electronic enrolments and administration of policies; removing tax burdens; and permitting distribution through non-traditional channels such as mobile, retail stores, call centres, post offices, etc. These regulatory flexibilities have helped to stimulate market development and the overall reach of microinsurance to previously uninsured or underserved individuals.
The microinsurance market is vast, largely untapped and potentially viable. Driven strongly by mobile and insurance technology, the microinsurance market has gained significant traction over the last decade. Multinational insurers, reinsurers and regulators are increasingly recognizing the value of microinsurance for unlocking the potential of emerging and underserved insurance consumers in markets around the world.
