You can make a difference and make the world a better place.
Many people in the insurance industry have some doubts whether this statement applies to their jobs. However, in the insurance industry we make a big difference. What could be more important than providing insurance to help someone rebuild their life after a catastrophe — in particular, if they are already low-income and vulnerable? Microinsurance does just that.
The need for microinsurance
One striking difference between developing and developed countries is the extent of insurance penetration. In the U.S., non-life insurance penetration (insurance premium compared to GDP) in 2017 was 4.28 percent, whereas penetration in Asia was 1.93 percent across 26 markets, and in Africa just 0.97 percent across nine of its larger markets.1 With almost half of the entire world population living under US $5.50 per day,2 this is not surprising. These people are the most vulnerable and are the most likely to be devastated by a natural disaster. Small shop owners and farmers are most at risk, as an event can deprive them of the limited assets they have and even basic necessities.
Imagine that you are a small shop owner in Haiti after a severe flood. Your business nets you about $6 a day of income, and you are in the process of paying back a $540 loan3 that you got from a microfinance institution to purchase your inventory. The flood resulted in a need to close the shop for repairs, and the inventory spoiled. Since you have no money coming in from the shop, you have to sell your cow (your other source of income from selling milk and calves) to pay the loan. You are starting from scratch and have just been knocked back below the poverty line.
But what if you had had an insurance product that specifically addressed your needs? Microinsurance is designed to do that.
Microinsurance specifically addresses the risks that low-income people face globally.
While there is no global, uniformly-accepted definition of microinsurance,4 almost all stakeholders agree that, at its core, microinsurance is insurance for low-income populations.
What could be more important than providing insurance to help someone rebuild their life after a catastrophe — in particular, if they are already low-income and vulnerable? Microinsurance does just that.
Microinsurance products, therefore, need to be designed differently than traditional insurance products. Katie Biese of the MicroInsurance Centre promotes the need for “SUAVE” (simple, understood, accessible, valuable and efficient) design.
- Simple: The products need to be simple in benefit structure and have few to no exclusions. Benefits are often a fixed amount.
- Understood: If people don’t understand the product, they won’t buy it. Most of the microinsurance target market are first-time insurance buyers.
- Accessible: Sales need to happen through channels that reach low-income people where they are, such as cooperatives, input suppliers, microfinance banks, or simple mobile phones.
- Valuable: Products need to provide clear value both for clients and for insurers.
- Efficient: A low-income target client has a lower ability to pay premiums. In order for products to be affordable, it’s critical that processes be efficient and low-cost. This often results in low policy limits. It is important that claims are paid quickly.
Examples of microinsurance property-casualty products
There is a growing number of microinsurance property-casualty products globally, protecting a variety of assets against a number of perils. Some of the most common are:
- Property Insurance. After Typhoon Haiyan in the Philippines in 2013, more than 110,000 low-income Filipinos received non-life microinsurance claims payouts totaling more than $12 million to help them rebuild after the disaster.5 A variety of flood, fire and other calamity coverages protects homes and small businesses in markets such as Haiti, the Philippines, Colombia and Ghana. (See “Microinsurance in Ghana.”6)
- Crop Insurance. Due to the linkage with larger development goals such as food security, a significant amount of funding and resources is being directed to developing, piloting and scaling up both index-based and indemnity-based crop insurance for smallholder farmers. Allianz protects small farms in Burkina Faso and Mali, covering outstanding corn or cotton loans if rainfall is insufficient for proper growth of crops, with payouts triggered automatically based on an index.7
- Livestock Insurance. Like crops, livestock represents a key source of food and income in many developing markets. Local insurance companies in Kenya provide index insurance to pastoralists, based on assessments of grazing conditions made by satellites measuring the color of the ground. The product is designed to pay in time to keep livestock from dying, and it is supported by the Kenyan Government, World Bank, International Livestock Research Institute and Swiss Re.8
- Regional disaster insurance programs. In addition to products targeting individual clients, there is a number of macro-level programs that cover developing markets. The African Risk Capacity (ARC) “helps member states to improve their capacities to better plan, prepare and respond to extreme weather events and natural disasters, therefore protecting the food security of their vulnerable populations.”9 The ARC provides parametric weather insurance coverage through a risk pool, capitalizing on the natural diversification of weather risk across Africa. Other similar programs include the Caribbean Catastrophe Risk Insurance Facility (a segregated portfolio company) and the Pacific Catastrophe Risk Assessment and Financing Initiative.
You may be thinking that some of these products might be “interesting” to price … or reserve or reinsure.
The above are just a few examples of numerous individual projects globally. In addition, there are many recent larger-scale initiatives underway that should increase the availability of microinsurance products. One is the G7 Climate Risk Insurance Initiative. This was adopted by the G7 in 2015 to increase access to insurance coverage against climate change for an additional 400 million of the most vulnerable people in developing countries by 2020.10 There has also been significant activity by the private sector, with demonstrated interest from major multinational insurers. For example, Blue Marble Microinsurance is a “consortium of nine companies collaborating to extend socially impactful, commercially viable insurance protection to the underserved,” with crop insurance ventures piloted in Zimbabwe and Colombia.11
Implications for actuaries
By now you may be thinking that some of these products might be “interesting” to price … or reserve or reinsure. Indeed, many of the characteristics of microinsurance that make the products appropriate for low-income people may make actuaries a bit uncomfortable. François-Xavier Hay, CERA, chief risk officer of the French insurance company Groupe Macif, sees microinsurance as an opportunity for reimagining: “Microinsurance invites actuaries to rethink the answer to risks starting from a blank page … to revisit insurance products and processes in an inclusive way where clients are considered as active stakeholders.”12
If you are up for the challenge, we as actuaries can be involved in microinsurance in many ways.
- Actuaries are needed to price the products. This is often complicated as data on low-income populations and their risks is hard to find and significant judgment is necessary.
- For index products, actuaries can do research and publish this information to help the growth of insurance products in developing countries.
- We can publish educational material that will help local companies to price products.
- Actuaries can be the champions who get their organizations more involved in microinsurance. Actuaries with the appropriate knowledge and background can help design products that are profitable for their companies and benefit society.
The CAS is currently researching additional ways that our members can become involved in microinsurance. I would appreciate your input. Thank you.
1 World insurance in 2017: Solid, but mature life markets weigh on growth. Swiss Re Institute, Sigma No3/2018. Table IX, p. 46
2 http://iresearch.worldbank.org/PovcalNet/povOnDemand.aspx Accessed July 26, 2018.
3 Average loan outstanding in Haiti, 2008. http://www.haitianmicrofinance.com/HaitianMicrofinanceIndustryOverview.pdf Sourced 26 July 2018
4 One example from the International Association of Insurance Supervisors is as follows: While the term “inclusive insurance” is aimed at excluded or underserved markets the term “microinsurance” has been defined as insurance that is accessed by low-income populations, provided by a variety of different entities, but run in accordance with generally accepted practices (which include the Insurance Core Principles). Source: IAIS. Issues paper on conduct of business in Inclusive Insurance, Nov 2015 p. 5.
5 “Aiding the disaster recovery process: the effectiveness of microinsurance service providers’ response to Typhoon Haiyan.” Luxembourg: Microinsurance Network, 2015. pp. 6, 21.
6 Magnoni, B., T. Chandani and E. Zimmerman. “Milk Brief 10 – Doing the Math with Property Insurance in Ghana.” Appleton: MicroInsurance Centre, 2012.
7 “Emerging Consumers Product Pool: Overview and assessment of Allianz products for low-income populations in developing countries.” Allianz, October 2017. p. 59.
12 Blacker J., (Ed.), Actuaries in Microinsurance: Managing Risk for the Underserved, Connecticut: ACTEX Publications, Inc., 2015, p. 16.
Microinsurance in Ghana
In October 2011 a flood hit the bustling market near Accra, Ghana’s most populous city. Many low-income people faced severe damage to their businesses. MicroEnsure, a specialized microinsurance intermediary, in partnership with a local insurer and microfinance bank, offered insurance coverage aimed at addressing some of the business risks faced by informal sector business owners, including damage from flood, fire and earthquakes.
The Obra Pa (“Good life in the future”) product is a mandatory coverage sold with microfinance clients’ loans in Ghana. Benefits include payment of the business’s outstanding loan as well as a fixed cash benefit (approximately USD 114 at the time of the flood).
After the flood, the insurance coverage, while not covering the entire losses faced, allowed insureds to recover more quickly and use fewer burdensome coping mechanisms like selling assets, depleting savings and taking out additional loans. A long claim processing time — averaging 45 days — eroded the value of the insurance somewhat, but 92 percent of clients said it was a good idea to purchase the coverage and would recommend it to others.