Launching the 2020 Landscape of Microinsurance, MiN Executive Director Katharine Pulvermacher noted, “Despite positive developments in microinsurance markets in all regions, there are important concerns around the value provided to customers. Claims ratios across the three regions are relatively low. A third of products in all regions…have claims ratios in single digits.” This matters, she said, because unjustified low claims ratios may undermine trust and hinder uptake.
The past year has highlighted the increasing need for affordable inclusive insurance products to help low-income customers through crises such as the COVID-19 pandemic, yet according to Indira Gopalakrishna of the MicroInsurance Centre at Milliman, “Low claims ratios continue to challenge the sector, primarily due to lack of awareness among customers.”
The received wisdom among microinsurance professionals has long been that low claims ratios are often due to low customer awareness – put simply, customers lack sufficient knowledge about the product they have purchased. They may even be unaware they have a policy – this is especially true of ‘bundled’ or compulsory products.
“The majority of microinsurance policies are sold by intermediaries who speak to the customer for 10-15 minutes and that is it,” says Consulting Senior Actuary and MiN member Shamim Ashraf. “Thus later on, many customers do not understand what they are covered for, how to make an insurance claim or if they are a named beneficiary. In Pakistan, for example, it is common for a husband to name his wife as beneficiary, but the wife doesn’t know the policy even exists.”
But other factors, such as poor product design, over-complicated and lengthy claims processes, high intermediary costs, and weak regulation are also potentially at play. Customer-centric product design is key – for example, a health product may offer hospitalisation cover, but that’s little use if the clients live so far from the hospital they are unable to get there. Exclusions, obstacles, and delays to payouts will similarly undermine trust and exacerbate low claims ratios.
Premiums are based on expected payouts plus the cost of doing business, but if brokers are demanding an excessive cut – up to 60 percent in some markets – the cost of delivering insurance becomes too high. Speaking last year, Gabriel Bernardino, Chairman of the European Insurance and Occupational Pensions Authority (EIOPA), noted: “Business models based on high commissions and structural low claims ratios have created consumer detriment in the past and need appropriate monitoring by supervisors.”
Examples from the 2020 Landscape study serve to underline the scale of the challenge. In Africa – where hospital cash products are increasingly important – health policies have an average claims ratio of around 14 percent. “It is important that these particularly low claims ratios are addressed in order not to undermine the gradual creation of an insurance culture in the region,” notes the report. There’s a particular low claim problem with mobile-enabled hospital cash products, although companies such as aYo – which has paid out more than US$1 million in claims in Zambia since it launched there last year – are doing their best to buck the trend.
The picture is even more gloomy in Asia, where more than a third of products analysed had claims ratios in single digits. This is particularly concerning for the millions of low-income, vulnerable garment workers who are in urgent need of affordable health and unemployment cover during the pandemic. Meanwhile in Latin America and the Caribbean (LAC), which has a concerning claims ratio in single digits for more than half of all products, the study is clear that high commissions paid to distribution channels are a major factor. “The broker channel is the main distribution channel used in LAC,” observes Nigel Bowman, an expert actuary, inclusive insurance consultant and long-time member of the Network. “Perhaps brokers are driving up commission leading to lower claims ratios.”
However, the accepted mantra “low claims ratios are bad, high claims ratios are good” needs to be analysed in context. For brand new products, claims ratios are often low – sometimes because of waiting periods – and in many of these cases, customer value is not a concern. Other products are deliberately designed to have expensive distribution channels which will reduce the claims ratio. The way claims ratios are calculated and presented can also be an issue. “To start with, the reporting of claim ratios may not be consistent between insurance companies,” says Shamim Ashraf. “Some quote gross claims ratios and others quote them on a net basis, after deductions for acquisition costs to brokers, technical service providers, fronting costs, etc. As a result, a ‘low’ claims ratio may in fact be even lower than it appears to be.”
“It’s difficult to set a minimum acceptable claims ratio, but a good rough guide is 30 to 40 percent,” says Nigel Bowman. “Any lower than 30 percent and customers are better off not having insurance. We need more research to understand what is driving low claims ratios and where the balance of premiums is going. The potential solutions will be very different depending on whether high costs or excessive profit taking are driving low claims. High costs could be tackled through efficiencies, whilst excessive profits could be restricted through regulation.”
Whilst weak data for accurate pricing is often cited as a factor in low claims ratios, Shamin believes that lack of data is not the issue, nor affordability, but the absence of a vision to build a data system and to then collect as much relevant information as possible. “It then becomes a case of iterating the product design and pricing process to ensure the product remains aligned to the customer needs, especially as the customer becomes more insurance-aware and asks for supplementary coverage.”
Cost of sales is, of course, only one factor in hindering distribution. In Nigeria, for example – where just two percent of adults have insurance cover – financial inclusion is highly regionalised. 56 percent of households in the southwest are banked, as opposed to just 16 percent in the northwest. As the recent Nigerian Microfinance Platform annual symposium heard, “For most insurers, expense ratios are high and claims ratios are either too low to provide product value or too high to maintain profitability.”
Given the multiple and complex factors behind low claims ratios, it is an urgent priority for the MiN and its members. The issues will be under the spotlight at the forthcoming JMM, where a session specifically dedicated to low claims ratios will ask 'What are they, why are they low, and what can be done?' Based on the findings of the 2020 Landscape study, participants will be invited to discuss approaches to determining the ‘right’ target claims ratio as well as potential steps towards achieving that target.
One way to reduce costs – and therefore premiums – is through increased digitalisation. Automated payments and end-to-end digitalisation can significantly reduce both distribution and claims processing costs, as well as making the claims process easier for customers, all of which could potentially lead to higher claims ratios – but could also risk exacerbating the digital divide.
Low claims ratios and distribution costs are inextricably linked. Much has been made of the potential for low value ‘sachet’ products – also known as ‘bite-sized’ or ‘small ticket’ – to reach previously underserved populations. According to one report, “the nominal premium that such products typically charge is actually its major draw” – but as ever there is a catch. Distributing and administering sachet policies can prove to be disproportionately expensive, and some distribution partners expect high commissions. In addition, “sachet covers…can be a good starting point for new policy buyers. But those very buyers must also understand that these are not complete substitutes for a full long-term health or life insurance with adequate coverage.” In this context, the JMM will also devote a session to the 'Economics of Distribution', exploring the pros and cons of group vs. individual policies and how digitalisation and economies of scale can improve uptake.
Increasing claims ratios requires customer education and awareness. “Ultimately, if an insurance product is not used, people will forget it and not value it,” says Shamim Ashraf. “They will focus on their immediate challenges instead of the longer-term hardships resulting from having no insurance.” In the short to medium term, premium subsidy will also help. “Where insurance penetration is very low – less than one percent – the only real way to make progress is some form of mandatory insurance with government support that is then removed over a three- to five-year period,” he adds. “Ideally that would start with healthcare, which has the highest frequency of usage and the widest demographic reach.”