MICROFINANCE PAPER WRAP-UP: Emerging Markets in Microinsurance, by Arthur D. Little

Published August 2009 as #135 of reports released by Arthur D. Little, 4 pages, available for registered ADL website users at: http://www.adl.com/reports.html?&no_cache=1&view=421

Arthur D. Little (ADL), a global management consulting firm specializing in strategy and operations management, recently released a report titled “Emerging Markets in Microinsurance.” Microinsurance is meant to provide coverage for individuals living in high-risk environments characteristic of developing countries. Natural disasters, chronic illness, and drought are amongst the many prevalent issues that can jeopardize a working environment and an individual’s ability to work. As such, ADL declares the bottom of the pyramid (BOP) as an attractive and growing market for insurance companies to market their services. As stated in the release, “microinsurance aims to help those at the bottom of the pyramid (BOP) to stay above the poverty line even when they are hit by an adverse event. It does this by providing risk protection at very low premiums.”

The release indicates three determinants in the success of a microinsurance scheme: volume, simple quality at the best price, and tailored distribution techniques [1]. The Datamonitor Group, a business information tool, reports that approximately four billion people live on fewer than USD 2 per day, making up a market for insurance services of up to USD 90 billion per annum [2]. This volume, according to ADL, is the basis for ROI, particularly in low-margin business models. That is to say, even if profits are low per customer, when multiplied by several sales, such profits can create a significant return for shareholders. While this may seem like an attractive opportunity for insurance companies, there are several obstacles which companies should be aware of.

First, consultants at ADL emphasize that traditional insurance plans cannot be marketed to BOP consumers successfully. This is due to the lack of knowledge amongst low income consumers (LICs) regarding the nature of insurance plans. ADL suggests that LICs require a more regular and tangible return on their commitment to microinsurance. “It is difficult to persuade LICs that they are getting value for their money, especially if they do not claim.” The release suggests cash-back benefits, like premium-features with interest, as the key to success. Furthermore, insurance companies need to be aware of the market of LICs, comprising very limited infrastructure, unreliable electricity supply, poor water quality, etc. Awareness of this is important so that suppliers of microinsurance can account for and invest in loss-prevention measures by working with local organizations and NGOs to improve these issues and thus “reduce claims for health and life insurance.”

Additionally, ADL explicitly states that distribution is not the forté of most insurance companies. According to the release, insurance companies intending to provide microinsurance services should collaborate with local MFIs and leverage their existing infrastructure to gain sustainable access to the target market. As another MicroCapital story states, microinsurance schemes are likely to see success when insurance companies work in collaboration with community-based organizations that already have the trust of LICs [3]. Furthermore, to build trust in the product, insurers need to provide training and educational sessions on the concept and benefits of insurance within a local context. One example is the financial literacy workshops offered by the South African Insurance Association (SAIA). The release also suggests that insurers become familiar with and utilize the types of technologies MFIs are currently using with their consumers, such as ATMs with biometrics, smartcards, point-of-sale devices, etc.

Insurance companies that have marketed their services to LICs include Zurich Financial Services AG, Allianz SE and Munich Re, among others [4]. A previous MicroCapital story discussed the findings of two researchers, Giné and Yang, who tested the attraction of microinsurance amongst farmers in Malawi [5]. Their research found that farmers were more inclined to take up credit without insurance than were those offered a package of credit and rainfall insurance. They attributed this discrepancy to the farmers’ uncertainty about the insurance product. ADL, along with other companies currently offering microinsurance, suggest a simple insurance scheme with fewer thresholds and payment schedules [6]. The assumption is that simplicity in an insurance plan and a farmer’s tendency to purchase the plan are positively correlated.

Arthur D. Little was established in 1886 and currently employs 1, 000 employees serving clients worldwide. The privately held consulting firm is headquartered in Paris, France. As of 2006, revenue was USD 2 million [7]. For more information, please visit www.adl.com.

By: Diya Chopra, Research Associate

Bibliography:

[1] Arthur D. Little

http://www.adlittle.com/reports.html?view=421

[2] Arthur D. Little

http://www.adlittle.com/reports.html?view=421

[3] MicroCapital

https://www.microcapital.org/microcapital-story-tensions-in-the-microinsurance-sector-observations-from-munich-res-experience-in-indonesia/

[4] Business Day

http://www.businessday.co.za/articles/Content.aspx?id=79658

[5] World Bank

http://siteresources.worldbank.org/INTFR/Resources/GineYang-InsuranceMalawi.pdf