Micro insurance and global efforts to close protection gap

Nigeria’s insurance industry, like many other countries of the world are looking to take advantage of micro insurance to deepen penetration and protection gap among consumers, who do not buy into conventional products, either for reason of cost or cultural believe. This led to the recent release of micro insurance guideline by the insurance regulator. Here, the Center for Financial Inclusion at Accion (CFI) and the Institute of International Finance (IIF) in this research shines a spotlight on the market opportunities and challenges associated with expanding coverage to new customer segments and the efforts insurers and other financial institutions around the world are making to achieve this. MODESTUS ANAESORONYE presents the report:

Insurers are expanding into new markets and reaching  underserved customers through new technologies,  business models, product designs, a deeper  understanding of customers, and partnerships. This wave of efforts by insurers and entrepreneurs  recognizes the market opportunity and needs  of approximately 3.8 billion people globally who need better risk management solutions, and companies are pursuing it as a mainstream business.

Even for people with very little disposable income, insurance can be a useful and vital tool to manage financial risks, such as stresses related to  illness, crop failures, natural disasters, or income loss due to the death of a  wage earner. For this population, insurance can help avoid drastic coping strategies when they experience a shock, such as selling precious productive assets or having to take children out of school and putting them to work.

We use the term “inclusive insurance” to encompass many different approaches to reaching the unserved, underserved, vulnerable, or low-income populations in emerging markets with appropriate and affordable insurance products. These range from microinsurance for people with very little disposable income to new products and services for an emerging middle class around the globe who have not been served by traditional insurance.

Insurers spoken to said they are pursuing inclusive insurance as a business.

They see profit margins that are proportionate, not any lower than those of conventional products. With large distribution partners, they are able to multiply those margins by large volumes while meeting the needs of customers.

The market for inclusive insurance is vast, largely untapped, and potentially profitable. An estimated 3.8 billion low- and middle-income people in emerging markets compose the addressable market for insurance and have unique needs.

Digital innovations and the historical demographic shift from low to middle incomes have made it commercially viable and sustainable. This change is recent,

so old assumptions should be revisited to recognize that this is now a profitable segment.

Industry analysts at Cenfri believe that inclusive insurance is one of the top three most profitable opportunities that insurers can invest in emerging markets given limited capital and human resources. Further, they see it promises even greater profitability in the future with follow-on benefits for first movers.

In 2005, only seven of the major insurance companies were involved in microinsurance. In 2011, there were 33. By 2016, 60 major insurers, including

AIG, Allianz, AXA, Metlife, and Zurich, among others, were active in microinsurance.

In the broadest terms, the challenges of providing insurance to lower-income population segments are similar to those of providing mainstream insurance: identifying, understanding, and connecting with customers; providing relevant products; and carrying out the administrative work of collecting premiums and paying claims.

For customers at the base of the economic pyramid, the small incomes from which premiums must come require insurers to solve these challenges in highly cost-efficient ways. Adding to the intensive cost pressure, several factors amplify the challenge of connecting with these customers: their remote locations, lower education levels, and lack of experience with formal institutions.

Simplifying and streamlining products is a recurring success factor for inclusive insurance. Insurance products that are easy to understand, easy to enroll in, and easy to claim against are a key to driving adoption as simplicity is transparent and “friendly,” helping to create trust. Streamlined products are also easy to manage, cutting administrative costs.