Developed insurance markets are not exactly a hotbed of growth right now. That is why insurance and reinsurance executives may have started salivating when reading a new report from Swiss Re on microinsurance.
The Swiss reinsurer believes this market could expand to make $40bn in annual premiums, by covering health, agricultural insurance, term life insurance, affordable pension products and other savings products across emerging markets. Certainly a mouth-watering prospect.
Swiss Re’s sigma study Microinsurance – risk protection for 4 billion people, released in December, says microinsurance “supports socio-economic development and insurance growth in emerging markets”.
“By reaching many individuals who were formerly excluded from insurance, and thereby reducing the vulnerability of low-income individuals and protecting their income streams, microinsurance helps to improve social stability and supports broad-based economic development,” says Swiss Re.
The reinsurer says the microinsurance market could rise rapidly from its limited rollout within the past decade by some insurers, non-governmental organisations, mutuals and community organisations.
The Asia-Pacific region is the largest and fastest growing microinsurance market. It contains about 70% of the world’s low-income population. Microinsurance has grown particularly fast in India and Bangladash.
The market has also grown considerably in African and Latin American countries despite these being relatively smaller microinsurance markets.
This is all great stuff, and certainly a positive story for the industry. But one important issue the report does not discuss in any great detail is how profitable microinsurance could be. Swiss Re says the target consumers for “commercially viable microinsurance” are those living on between $1.25 a day and $4 a day. The reinsurer estimates that the 2.6 billion people in this group could represent a $33bn market.
It adds that solutions could be found for those below $1.25 a day – the international poverty line – with the aid of government measures, and this group could add up to a $7bn market of 1.4 billion people.
The penetration of microinsurance now is 2% to 3% of the potential market, providing about $800m to $1.2bn of direct premiums.
To me, that already sounds like impressive progress, given the low insurance penetration overall in developing markets. But it is a long, long way from the figures bandied about in the Swiss Re report. Getting there will be an enormous challenge. Getting there profitably will be even harder.
In microinsurance, keeping distribution costs to a minimum is vital. Already, mobile phone technology, for example, is making buying and administering policies a lot more efficient than could have been dreamed of 10 years ago. But the market has precious little room for the cost ratio to rise.
Another big challenge will be creating awareness. The target consumers will not be keen to spend their scarce money on something if they cannot see the need. There are surely dangers involved for carriers. The concept carries shades of the subprime mortgages in the US, where lower income groups with bad credit had loans extended to them so they could buy houses. We all know this did not end too well. Also the market still needs a lot of innovation to really take off.
Credit life is the dominant microinsurance product. It is simple and has received strong backing from microfinance institutions to bundle life with microcredit. But the product only gives limited protection to low-income families. Swiss Re reports that carriers are increasingly designing products that offer more comprehensive life and property protection and help mobilise savings. Health and agriculture microinsurance products are also potentially important for low income buyers but they are more complicated to design, price and administer.
However, the report does spell out the benefits of pursuing micoinsurance for insurers. The products are not just a philanthropic exercise for insurance firms, says Swiss Re.
“For insurers, microinsurance creates an opportunity to tap into new markets and build a strong brand value that can be used for selling conventional insurance products in the future,” said Amit Kalra, the report’s author. “It is a win-win situation. Insurers help those who urgently need access to insurance. This in turn supports the long-term economic goals of insurers.”
Continued growth of microinsurance lines would greatly benefit Swiss Re, of course. The reinsurer acknowledges that rising risk exposure of insurers to microinsurance would put pressure on them to purchase reinsurance and boost capital holdings.
Reinsurance of microinsurance lines would use traditional and bespoke products, says Swiss Re. Tailor-made products will include weather derivatives and parametric natural catastrophe solutions.
The report says insufficient infrastructure, a lack of specific microinsurance regulatory provisions, and the deficiency of risk data, are all problems facing the segment. Distribution and claims management risks mean that insurance players will also be forced to find suitable local partners for microinsurance offerings, says Swiss Re.