21 January 2024
This article was published in The European Financial Review and is shared with the kind permission of the publication.
By Lorenzo Chan
The insurance industry has historically thrived on risk pooling, from Lloyd’s inception well over 330 years ago to contemporary catastrophe risk pools addressing natural calamities and exposures. Such a means of risk sharing is instrumental for committed entities to drive meaningful change sustainably. While micro or inclusive insurance has made breakthroughs, limited appreciation and understanding of the market and its potential, along with continuing concerns about its viability stand in the way of speedier development.
While the considerable and apparent potential of microinsurance to address the global protection gap and contribute significantly to public policy goals is evident, only a small fraction of emerging customers and small-scale producers worldwide currently have any form of insurance. This gap presents a continuing challenge but also a distinct opportunity for the insurance sector.
The last decade has witnessed industries and countries across the globe increasingly aligning, albeit at different paces, with environmental, social, and governance (ESG) principles in line with the UN’s Sustainable Development Goals (SDGs). An increasing number of businesses and industries have committed and forged partnerships to enhance product sustainability and support local industries while upholding ESG standards.
The question is how do we ensure these all come together for the greater good?
One can draw insights from the adjacent microfinance sector. Its target market clearly understands the role it plays and the purpose it serves. Time and again, this sector has demonstrated its ability to improve livelihoods, better lives and lift people out of dire poverty. But the realisation is that each time an unforeseen event occurs, whether it is illness, accident, calamity, or the effects of climate change – setbacks occur, and without insurance in place, people go back to ground zero all over again. Microinsurance addresses this by ensuring people and MSMEs need not restart from the very beginning. Its role in helping fill the protection gap does not imply it will address all the losses suffered but rather enable people to rebuild and resume their lives and livelihoods after what will now be temporary setbacks. Very often, it is this ability to bounce back without having to start from scratch that makes the difference.
We are encouraged by COP28, where inclusive insurance emerged as a focal point in the drive to adapt to the impacts of climate change. This serves as another reminder for governments and industry, regulators and insurers, and other stakeholders in the ecosystem to continue the pursuit of financial inclusion and economic resilience.
While insurance plays a role in building resilience, it cannot do so without appropriate regulation and public policy that enable accessible, affordable, and relevant insurance propositions. Public and private roles complement one another. A framework to measure the progress of inclusive insurance is needed to create awareness and accountability. The Microinsurance Network’s 2023 Landscape of Microinsurance Study is set to be fully unveiled in the first quarter of 2024. Entering its second decade, this flagship research continues to provide invaluable insights, thanks to the support and participation of members, brokers, insurers, reinsurers, experts, and collaborators supported by industry and government partners.
The Landscape of Microinsurance provides a unique benchmark to track lives covered in 36 countries, along with selected social performance indicators. Most countries in the Global South have low insurance penetration and lack adequate formal protection mechanisms. These are hindrances to the financial well-being of households, small business, and smallholder farmers. The continuous development of functional, responsive inclusive insurance markets is key to delivering several of the United Nations Sustainable Development Goals. These include focus on no poverty, zero hunger, good health and well-being, gender equality, decent work and economic growth, and climate action.
The 2023 Study, encompassing data from 294 insurance providers across 36 countries, shows progress. 330 million people in the surveyed countries, representing up to 11.5% of the target population, were covered by microinsurance products. This number is a substantial increase from 2019, during which the estimated share stood at 7%.
Does one see the glass as half full or half empty? On the one hand, up to 11.5% of the microinsurance target population is covered. On the other hand, close to 90% do not currently have microinsurance, highlighting the need for continuing and unrelenting efforts. While there has been progress, when taken against the continuing growth in the global population, it also suggests there is catching up to do. To move the needle further, more players must seize the available opportunity by taking the plunge to serve the needs of this huge market of unserved and underserved. To build volume requires the ability to scale, which in turn requires more innovative and cost-effective distribution.
Over the years, the Study has reflected the addition of alternative distribution channels alongside the traditional avenues of agents and brokers. These include microfinance institutions, rural banks, aggregators, NGOs, cooperatives as well as outlets and chains engaged in retail business frequented and trusted by the low-income sector. A significant number of products being offered have adopted digital solutions as a component of their distribution strategy. Payment methods include direct debit, mobile wallets, and other platforms.
The International Conference on Inclusive Insurance 2024, scheduled for 21-25 October in Nepal, is expected to bring together experts from over 50 countries to once again share best practices, lessons learned, explore ways of accelerating growth and economic viability as well as provide a venue for collaboration in inclusive insurance. It will be hosted by the Nepal Insurance Association and the Nepal Insurance Authority in cooperation with Munich Re Foundation and the Microinsurance Network.
The landscape of microinsurance continues to witness the utilisation of technology platforms and the entry of insurtech pioneers as carriers of inclusive products – providing ease of enrolment, contact with the end client, and often simplified processes for claims filing. Such avenues are intended to provide simple access and rationalise costs and efficiency in reaching out to a broad base of clients and last-mile customers.
Driven by the challenges posed by the pandemic, technology as a tool and enabler has come of age but has yet to fully replace that face-to-face and personal interaction that remains vital in scaling microinsurance. Remote satellite sensing and other forms of parametric platforms continue to shape the development of index insurance, allowing us to enjoy the benefits of technology in claims assessment.
There has likewise been an increasing number of Network members forging partnerships. Such efforts integrate simple to comprehend insurance offerings with tangible products and services offered by entities patronised by the low-income market. The chances of higher take-up often rely upon the degree of customer centricity exercised in the product design – be it affordable price, ease of process (both enrolment and claims), or relevance in addressing the many needs of the different markets. Such needs include the effects of climate change, which have an increasing impact on health, gender well-being, income continuity, and food security.
When one comes down to it, all the necessary factors are present today – the market of billions is there, the exposure to risks is there, which means the need for protection is present. The market of billions must gain a greater awareness of the benefits of insurance. In essence, there is no scarcity of insurers. There is rather a shortage of those willing to look beyond the traditional business case by learning more about the micro market – what it needs and what it can afford.
The time is ripe. Regulators must continue the path of enabling the industry to do more – whether it is creating awareness, innovating products and approaches, digitalising and simplifying processes for ease of doing business, or creating value propositions that benefit the client. The ultimate goal is to enable the industry to do more for the market it serves, hence the importance of paying claims as quickly as one can. The low-income sector has little resource. They cannot afford to wait. Many live hand to mouth and hence need claim payouts soonest so they can restart. Speedy claims settlement and turnaround time should be part of the equation if one is to win more converts and believers.
By playing to their strengths and investing in inclusive insurance, insurers contribute to the long- term development and stability of emerging markets by building resiliency, supporting economic stability, and closing the people protection gap. This is in line with its origins of helping widows and orphans, assuring continuity of lives and livelihoods, and the ability to recover and rebuild. For as long as one can remember, its target market has often been limited to those who can afford it rather than those who need it most.
Isn’t it about time we serve both?