Microinsurance is all about scale, but as long as big insurance companies focus on risk rate instead of distribution, selling and services, it’s unlikely microinsurance will grow significantly.
The debate around the viability and business case of microinsurance is not a new one, but as moderator Bert Opdebeeck reminded participants in the latest Micorinsurance Network Expert Forum, it is still a hot topic. Opdebeeck - the Founder of Microinsurance Master - was joined by two veterans of inclusive insurance: Richard Leftley, CEO of MicroEnsure and Denis Garand, President of Denis Garand & Associates.
The Microinsurance Learning and Knowledge (MILK) Project looked at the business case and client value for microinsurance as far back as 2013, but many unanswered questions remain. Some big insurance players still haven’t grasped that inclusive insurance premiums are very low - in some cases just a few cents a month - so in order to be viable you have to reach a lot of low-income people, which is why low-cost, efficient distribution is key.
For Richard Leftley, mobile is the real driver of growth - before MicroEnsure started working with Mobile Network Operators (MNOs) growth was fairly slow, but now they’re signing up 100,000 new clients every day in India alone through mobile. Even though the premiums are tiny - a maximum of a dollar a month - when you scale that up to millions of clients, the business case becomes compelling. But insurance companies default to the challenge of risk rate and how to price risk, when what they should be looking at is selling, servicing and paying claims quickly, effectively and at low cost. If they don’t, the best product in the world will fail. Companies should focus on providing a really excellent digital customer experience at very low cost - that way they can scale up and make a profit.
Distribution, capacity and understanding are more important than risk rate, according to Denis Garand. Risks are predictable - far more important is understanding the context of the risk. If you are a company that doesn’t understand the context of what you’re doing, the risk rate will be much higher. According to Leftley, there are three vital ingredients for scaling up successfully: the need to be trusted, the need for accessibility and the need for low-cost, efficient payment mechanisms. The reason why MNOs have been so successful as distributors of inclusive insurance products is because their customers have a high level of trust in them, which comes from frequent interaction. Ironically, it is the very lack of interaction between client and insurance company which reinforces lack of trust. Telcos combine trust, accessibility and payment mechanism. Microinsurance takes a different approach to conventional insurance because it is based on serving the clients, said Garand. Traditional insurance companies need to understand they won’t be trusted until they put the clients’ interests first.
Moving on to the question of profitability, the experts reminded participants of the KPIs which were developed in the early days of microinsurance which suggest reasonable levels of profitability are attainable. In the Philippines, for example, profitability went down as inclusive insurance grew, but at the same time the absolute dollar profits went up - that’s why scaling up is so important, as percentages can be misleading: you have to look at the actual cost and the value of the product.
Discussion turned to the role of regulators in helping to scale up inclusive insurance. Garand was very clear - regulation blocks innovation, and many companies are running into rigid regulation because regulators don’t really understand microinsurance. We need a different regulatory approach which allows genuine competition in order to reach more people. Competition is the best way to ensure value, and regulators need to understand they are actually harming the population by putting barriers in the way of growth. In addition, said Leftley, much greater transparency is needed around risk data - sharing data will not in itself create a bigger insurance market for the poor, but it will help.
Summing up, both experts agreed that distribution, value and service are key elements which the big insurance companies need to take on board if they are going to scale up. Leftley pointed out that insurance companies are not the drivers of innovation - the exciting developments are coming from a new wave of organisations focused on distribution. With more brains and more money we will start to see some breakthroughs - watch this space!