Insurers are increasingly recognizing the tremendous potential in the lower-income market. As the microinsurance industry develops and more attention is focused on lower-income consumers, good market data and information is critical to support positive growth. The World Map of Microinsurance, launched this week, and its regional landscape studies provide insurers with these vital insights into the global landscape of microinsurance:
The most recent regional landscape studies identified a combined USD 2.2 billion in gross written premiums (GWP) for microinsurance products. In Latin America and the Caribbean (LAC), the USD 828 million GWP in 2013 represented about 0.5% of total industry GWP but in individual countries microinsurance represented as much as 4.7% of total GWP. In Africa and Asia, coverage rates are 4.4% and 4.5% of the total populations, respectively.
Distribution and growth
To achieve the efficiency and scale needed to offset the low premiums in microinsurance, insurers are seeking a broadening array of distribution channels. In the 2014 LAC study, retailers, utilities, and other mass channels accounted for almost a third of the market, and in Africa and Asia mobile-based distribution has become massive growth engines, as evidenced by intermediaries such as MicroEnsure, with 1 million new clients per month in 2014 through this channel. MNO channels will continue to push growth there, and likely in LAC in the near future. Although MNO channels bring in large numbers of policyholders, the related revenue per policy is quite small. For example, in Ghana in 2014, MNOs accounted for 57% of individuals covered by microinsurance, but only 8% of premiums and 4% of claims when considering all products including insurance-linked savings components, or 58%, 39%, and 44% if insurance-linked savings are excluded1.
In LAC, microinsurance is quickly morphing into “mass” insurance that is not specifically designed for the low-income market, but can provide value to any economic level. While these mass products might cover a broader range of clients, they do seem to be including low-income people as shown by the Bima e-insurance programmes. High commissions have become a reality; in LAC, commissions as high as 61% were reported, with a regional weighted average of 21%. Whilst distribution channels can reduce costs and provide access to new volumes of people, key mass insurance markets Mexico, Colombia and Brasil have noted additional commissions in the form of “exclusivity” or “access” fees which are said to occasionally amount to over a million USD. Although unusual in Africa and Asia, it is likely to become more evident as microinsurance aims for greater distribution and insurers move more into the “mass” market.
The 2013 LAC landscape offers the first significant set of data on combined ratios –a big step closer to offering proof of profitability. The evidence is clear: only a handful of insurers experienced combined ratios over 100%, and most had ample room for profits, with a weighted average of 64%. Profits are strongest in life and accident products, but many health and property products also showing clear business viability.
The microinsurance business case is predominantly driven by administrative costs. In LAC, administrative expenses (excluding commissions) account for about 25% of premiums on a weighted average basis. Technology is increasingly necessary to increase cost efficiencies both in terms of distribution, as mentioned earlier, but especially back office technology to eliminate the need for costly manual activities. In LAC, one-third of insurers report using specialised software for managing their back office operation in microinsurance.
The market as a whole is expanding to cover more of the uninsured. In LAC, mass market products are rapidly covering middle and some lower-income markets. Microinsurance products, particularly life and accident, are also substantially expanding through the low income markets of LAC. The mass market spread is likely to now be seen strongly in Africa through mobile insurance, and later in Asia.
Products remain centered on the easier, and often more profitable, life and accident covers, though expansion beyond these is slowly evolving. Distributors are increasingly dominating the sector, with the large ones presenting challenges with very large commissions.
Overall, the state of microinsurance is healthy. Some growth, some contraction. Lessons are being learned and apparently applied. Premiums are growing and distributors are expanding. The market – middle and low income – is gaining improved access to insurance, and continuation is likely with more of a merging of micro and mass insurance.
Summarised by Julia Graham, Knowledge and Advocacy Coordinator at the Microinsurance Network, based on an article by Michael J. McCord and Katie Biese from the MicroInsurance Centre, published in the State of Microinsurance magazine 2015.