The last decade has witnessed strong growth in micro-insurance, especially in Asia, Africa and, increasingly, Latin America. India and China have been at the forefront: India alone is currently estimated to account for 60 percent of all the individuals covered by micro-insurance worldwide.
Overall, however, market penetration remains relatively small. As a result, there remains enormous growth potential. Industry estimates put the total number of possible customers at between US$2.5 and US$4 billion and value total potential revenue at about US$40 billion a year. Quite apart from the direct revenues, many of these potential customers are in emerging economies and can become increasingly valuable to insurance firms as they lift themselves out of poverty, acquire assets and have surplus income to save. We believe insurers are poised to make a big difference in the lives and well being of these people, developing innovative routes to market to tap into a viable revenue stream.
Strategically, there is a clear commercial incentive for firms to seek first-mover advantage by building positive relationships with low income groups. In addition, many governments and insurers feel a socio-economic and moral imperative to offer relevant products that help protect poorer people from events such as drought, the loss of a cow, or the theft of a plough, which can spell disaster. But for people living below the poverty line, who are often averse to buying an intangible service and suspicious of an insurer's willingness to honor a claim, the question is: why spend my precious dollars on an insurance policy?
As part of national socio-economic strategies, governments and regulators are responding to this question by raising the awareness and benefits of insurance amongst poorer demographics and providing the framework within which micro-insurance can operate commercially. As a result, in a number of countries micro-insurance regulations are being introduced that lower capital requirements for micro-insurers compared to traditional regulatory frameworks. They also simplify compliance, relax constraints on distribution channels and minimize licensing and examination requirements for intermediaries.
The need for a new approach
There is considerable socio-economic and regulatory momentum building behind micro-insurance and this is opening up new opportunities for profitable growth.
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. This diversity means that a 'one size fits all' model for product design does not work. Insurers need to look beyond the traditional segmentation strategies around income, wealth, geography and age. Instead, they need to focus more closely on insurance needs and behavior and adapt their customer value propositions appropriately.
In Latin America, for example, and especially in Brazil, the micro-insurance market is focused on goods, particularly extended warranties for such items as cellphones and refrigerators. In India and Africa, on the other hand, where 60 percent or more of the population is involved in agriculture, on low incomes and living mainly in rural areas, the main need is to insure those assets that are vital to survival – cattle and other livestock and crops – together with life cover to protect the micro-finance loans with which these assets are often bought. Nor is it the case that there is consistency even within a region – an extended warranty product that is a success in Brazil cannot simply be offered on the same platform and customer value proposition in Mexico, where the appetite for extended warranties is completely different. Equally, in some African countries funerals are major events and there is a strong market for relevant insurance distributed by burial societies and funeral parlors to community clubs. In other countries, death is not a suitable topic even to be raised in discussion.
Apart from this market fragmentation, the low income segment has other inherent features that require a new approach. In India particularly, more extensive collaborative industry models may be required, with fastmoving consumer goods companies (FMCG), telecom, cellphone shops, local post offices, grocery stores and sellers of seeds, fertilizers and farming equipment bundling insurance cover with their products or services and sharing customer information. The distribution structures of regional rural banks, cooperatives and business correspondent models may need to be leveraged. And microfinance institutions may need to be even more engaged in selling life policies along with providing a loan. In Africa, bancassurance could play an increasing role as banks initially based in South Africa expand their operations across the continent.
Despite their poverty, brands can have a powerful attraction for those on low incomes. As insurers build confidence in their own brands, many policies are being sold as add-ons to products and brands that people already know and trust. For example, UK-based MicroEnsure is now conducting most of its business in Africa through partnerships with mobile phone companies; while high profile retail chains that have built their businesses in
South Africa are now appearing in other African countries and offer enormous potential for the distribution of financial products. Nevertheless, the dispersed, remote nature of this customer segment means that it is difficult to reach by intermediary and few low income people have PCs or internet connections. However, mobile penetration in the countries of Latin America, India and Africa is already high, with aggressive marketing of the benefits of the cellphone as both a communications and a payment tool. Mobile telephony therefore offers a huge potential; and those insurers who are serious about the micro-insurance market will have to tap into it.