For the final Expert Forum of 2019, our panel of experienced professionals revisited the 2014 Microinsurance Learning and Knowledge (MILK) Project which concluded: “Microinsurance is a business of doing good, and if done well, it is also good for the company’s bottom line.”
Michael J. McCord, Managing Director of the MicroInsurance Centre at Milliman, Laura Elena Rosado, Strategy and Finance Manager - Emerging Customers at AXA, and Raimund Snyders from Leapfrog Investments, joined Bert Opdebeeck, Founder of Microinsurance Master to ask: is there still a business case for microinsurance?
What has changed since the MILK study?
Michael: The initial focus was on straight profitability, but now there’s a growing realisation that profit can be both direct and indirect. Major players are getting into microinsurance to build future markets, distribution channels are evolving and there’s a lot more discussion about client value linked to profitability - getting beyond the false dichotomy of either helping clients or maximising profit. The discussion is broadening to address customers’ actual needs, helping them to manage risk, not just pay premiums.
However, there are major differences between regions. Latin America is very business-driven - most insurers there don’t even call it microinsurance any more, it’s ‘mass insurance’ with a big focus on profitability. Africa still struggles, partly because regulations are not great - in Nigeria, for example, the regulations make it virtually impossible to be profitable. Some Asian countries are showing really good profitability, especially the Philippines - and India, although that’s primarily because of government subsidies.
Laura: In Latin America, distribution partners expect very high commissions, and that leads us to question the value for customers. Where do you draw the line between what the distributor gets, what the customer gets and what the insurance company gets? The biggest differences are with distribution channels. We see three main trends: digital and mobile, not just to increase penetration but to serve customers better; partnerships with MFIs and banks which bring an existing customer base; and linking crop insurance to government schemes. These three areas have very different levels of profitability.
Raimund: Sustainability is the key challenge for an investor. From an emerging market perspective, insurance penetrations are low and awareness and trust are still massive barriers to overcome. Leapfrog looks for a business case that is both direct and indirect: microinsurance can be the catalyst to create an insurance market, which then grows as the economy grows. The two feed off each other.
We don’t see microinsurance as an investment opportunity on its own, but as a segment of an insurance business it becomes interesting. The ideal is to have a package of conventional insurance plus microinsurance as one line of the business. That makes it a more exciting opportunity for strategic investors.
Is microinsurance viable for standalone businesses and intermediaries?
Laura: Microinsurance should always be a profit-driven business for AXA, but that doesn’t conflict with generating social value as well. The beauty of what we do is that we are changing people’s lives and at the same time generating profit. Around 15% of our global customer base are emerging customers, and that makes us really proud.
Our programmes must be self-sustainable and profitable, but at the same time we have a long term vision to create the market of the future. This business is a gigantic opportunity if you look at the untapped potential value. There are countries where insurance penetration hasn’t moved for decades - that calls for a fundamental change in the way we do insurance.
The big challenges for stand-alone microinsurance are the capital requirements which push the entry level too high, and additional overhead costs which you wouldn’t have if it was a division within an existing company. Trying to create a microinsurance market from scratch faces a lot of hurdles which can really harm profitability in the short and mid-term - you really need to be patient to make money out of a stand-alone.
Michael: Intermediaries can help get insurers over the big first step of creating a market and the expenses that come with it, but in some cases that might be short lived - we’ve already seen some cases of disintermediation, we’ve seen some insurers using these platforms as a proof of concept and then taking that role for themselves. The role of intermediaries will continue to be important, though - the market is huge, and there’s a huge potential in the near- and mid-term for profitability.
What are the challenges and pitfalls when setting up or scaling up microinsurance?
Raimund: The key challenge that we all agree on is distribution - the ability to form partnerships that do not debilitate the proposition to the customer. Clearly the regulatory challenge is another huge hurdle - exciting markets are where the regulator puts in a sandbox, you see appreciation by the regulator and government for the significant role that insurance can play.
When it comes to opportunities, we have to look at customer-centricity: do you actually get what it means to put the customer at the centre, do you have an agile approach to bringing new initiatives to market, what is your tech coefficient, do you have insight and appreciation and track record of developing tech-driven answers for getting solutions to the customer? If you get those things then you are half way there.
Michael: We used to see mainly multinational players setting up in emerging markets - they had bigger vision, they could take a chance and frankly they had deeper pockets. Local insurers held back, watched and waited until they saw some success. I think that’s changed, we’re seeing local players come in - there’s a lot more information about the business case, about how to do it properly, and that has helped to make it easier.
Can agriculture insurance work without government or donor funding?
Michael: It’s hard to see how it can work effectively without subsidies. It’s a problem of timing - nobody’s going to buy a product to cover events that happen once every 10 or 15 years, and in an age of climate change it’s becoming more and more difficult to both sell and make profits from a product that’s not subsidised. But we have to be careful about subsidies - there are cases where they are driving out the commercial sector.
Laura: The big agriculture and climate change schemes we have in emerging markets do involve government sponsorship - for example, our biggest scheme in India is about 80% government sponsored. When you look at average premiums you start to understand why - agriculture has premiums of more than €100, compared to other policies which are below €50 - sometimes €10 or even €5. For the customers needing this type of cover - mainly smallholder farmers - the affordability gets really complicated.
Also, the reputational risks are gigantic - if customers think they are covered and then find they didn’t reach the threshold for payout, you get a massive negative view which affects the rest of the industry, not only for agriculture insurance but for insurance overall.
Raimund: Microinsurance can yield significant benefits - I would encourage everyone in the insurance industry and their partners to continue seeking more and more ways to solve this. It’s a great thing to do.
Laura: The emerging customer segment is a huge untapped opportunity for many insurance companies. There is a business case, but as always the devil is in the detail and you need to think about diversifying the way you engage emerging customers. Pay attention to distribution and product design, and watch out for customer value to ensure your product will be sustainable.
Michael: Insurance is a tough business these days, and it’s important that insurers realise there is a broader market to be had. There are plenty of cases which show it can be profitable, but insurers must think about both direct and indirect profitability, about risk management and not just insurance, minimising admin costs and making operations more efficient.
Bert: There is a market, it has been proven to work and there is a business case - but you need to look at it from a broader, long-term, holistic perspective.