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Micro insurance - Managing risk  

Commercially, the low margins achievable on each policy mean that it can only be profitable if a greaat many standardized products are sold and managed through highly automated business models that are focused on a large volume of transactions and a low cost of operations.

However, the high degree of automation combined with the simpler operating environment being put in place for micro-insurance will create challenges for insurers´ risk management frameworks. Especially since some micro-insurance regulation has allowed the use of specific channels – such as micro-insurance brokers, electronic direct sale channels – that involve less formal requirements and consequently will demand special attention in areas such as fraud prevention and money laundering.

Another factor to be considered is risk assessment and product pricing. Given the small premium size and the lack of both actuarial data and any history of pricing, it is difficult to quantify the sales volumes required to cover the risk. Reinsuring also becomes a problem. As a result, insurers will need to conduct greater research and analysis to achieve a better understanding of individual markets and people’s needs. The right financial models will also be required to set the best pricing margins and help ensure customers are sold suitable products at appropriate prices. Cross-industry collaboration to share costs and risks may also be needed, such as having central company that specializes in handling claims or distribution, or creating common industry databases for micro-insurance. In India, for example, one option might be a pool of all the micro-insurance revenues accrued through initiatives run by insurance companies, the Government, postal services and through top-up or bundled schemes. Payment of claims could be managed by the pool based on information stored in smart cards or mobile phones.

Tailor products, lean systems

Above all, product design is crucial. The concept of simply transferring existing products to these new markets may be superficially attractive, but the reality is it will not work. The opportunity is more difficult: to develop and introduce new, tailored products.

The key to success for insurers lies in recognizing the diversity of cultural, regulatory and economic environments across the individual countries of Latin America, Asia and Africa.

Success can only come if insurers talk to people, assess their needs and design their products to fit. In many ways, these are simple markets requiring simple products. For example, modularity may be an important principle. So instead of offering fullblown contents packages, micro-insurers might offer products that enable cover for single specific items, such as a TV. As the customer becomes wealthier and accumulates further assets, cover can be extended asset by asset.

In another example, many of the rural poor live in communities that essentially act as cooperatives to pool and sell produce grown by individual families. Insurers need to recognize how this social model can make life easier in terms of distribution, marketing and pricing – and offer these co-operatives relevant products like weather or crop insurance. The need to keep operations lean means that, while products will have to be tailored, streamlined business systems and processes will have to be replicated as much as possible as micro-insurance is rolled out from market to market. All this requires insurers to think strategically about the global micro-insurance market in all its cultural, socio-economic and regulatory diversity, decide where they can compete successfully, develop innovative products, prices, processes, systems and business models and execute them faultlessly. Recognizing the lack of consumer confidence, insurers will have to build a reputation for fair treatment, honoring honest claims and processing payments quickly.

The challenge is considerable. But in these fast growing economies the potential rewards – in terms of both short-term profit and longer-term relationships as people grow wealthier and accumulate assets – could be great.

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