Financial Services

Micro-insurance: here to stay

August 26, 2014

Global

August 26, 2014

Global
Stefano Scuratti
Contributor, The Economist Intelligence Unit

Stefano is a Director at Asia Group Advisors (AGA), a strategic advisory firm specializing in market entry, government affairs, and public policy in Southeast Asia, with offices in Bangkok, Hanoi, Jakarta, Kuala Lumpur, Manila, Singapore, Washington D.C. and Yangon. Prior to joining AGA, he was a Director at AlphaBeta, a Singapore-based economic consultancy, and spent eight years at The Economist Intelligence Unit, most recently as the APAC Director of Public Policy Consulting.

From business opportunity to open innovation lab

In 2010 Embu County, a fertile land in the northeast corner of Kenya, made the news as the first example of a large-scale insurance pay-out through mobile technology, with over 100 farmers receiving compensation for below-average rainfall. Embu, like most parts of Africa, is subject to erratic weather patterns and droughts. 

Unlike those in developed economies, African farmers have traditionally been overlooked by the insurance industry. They have limited financial means and live in remote areas, which makes it difficult to reach them. So, in the event of a drought, crops are ruined and farmers do not have the income to repay their loans for seeds and fertiliser, forcing them into poverty. What happened in Embu is a clear signal that this series of events can be avoided. 

Innovation in insurance products, including challenges to traditional pricing models and distribution channels, are proving capable of providing a much-needed product to at-risk populations while generating economic returns to investors. Mobile micro-insurance,  an insurance product that uses mobile technology, has emerged as one of the most effective business solutions in this space. 

Originally driven by corporate social responsibility initiatives, mobile micro-insurance is becoming a growth area for large insurance companies as well as smaller operators across the globe. The ILO estimates that there are over 500m low-income people who are covered by micro-insurance, with a market of 4bn people. With most of these people living in remote areas, mobile technology is offering the platform required to address the last mile problem. The ILO estimates that, in Africa alone, just 44m lives and properties are covered by insurance. With 600m mobile phone subscribers, the market potential is clear.

While the opportunity is enticing, implementation and uptake have proven much less straightforward. The bottom of the pyramid is a unique consumer segment and effective business models are rarely successful when blindly replicated. Innovation in this space has flourished and a decade of experimentation has taught us a few lessons. The first one is that offering low-cost premiums is not sufficient: pricing models need to account for both income levels and patterns. Although Mi-Life, a life insurance product offered by a Ghanaian operator, achieved significant uptake by starting at US$0.36 per month when it was launched, other operators launched services at equally competitive rates and failed because they overlooked the fact that, in the target market, income patterns were erratic, meaning that target customers often had insufficient funds at the time of enrolment. Flexible payment models have proven to be able to address this issue. For example, a livestock insurance scheme in China introduced credit vouchers, which allowed farmers to take up insurance while delaying the premium payment until the end of the insured period (when cattle were sold). 

A second lesson is that more traditional channels can help crack the accessibility conundrum. Microfinance institutions have enjoyed the lion’s share of the microinsurance market, often bundling microinsurance with other financial services via mobile-based marketing programmes. However, older delivery models still have a lot to offer. A recent study funded by the Inter-American Development Bank focusing on Latin America notes that retailers, utility companies, and bill payment providers are quickly gaining market share, increasing the channels for market access. 

The final lesson is that engaging and educating potential customers is critical. YuMobile, a Kenyan operator, found that 81% of its customers failed in the registration process either due to poor understanding or technical difficulties. Tigo, a Senegalese mobile operator, partnered with Bima, a mobile insurance service provider, to develop a sales force of agents, who are responsible for educating and registering subscribers into Tigo Kiiray insurance products. These efforts introduce a human component into the sales process, establishing trust and a foundation for lasting commercial relationships.

Whilst success stories are not rare, trial and error seems to be a constant feature of setting up successful business models in the world of micro-insurance. Entrepreneurs have been grappling with the idiosyncrasies of engaging with the bottom of the pyramid for a decade but micro-insurance is emerging as a thriving growth sector in spite of the challenges it presents. The promising news is that micro-insurance is increasingly becoming an open innovation lab, at the intersection of business, research and the public sector. Knowledge is constantly developed, shared and applied through global collaboration networks. As long as this collaboration continues to grow, the industry’s future prospects look bright. 

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.

Receive forward-looking perspectives from our editors - Subscribe now for our Weekly Digest