Technology is Key to Huge Microinsurance Growth Opportunity

Microinsurance, the business of selling low-premium products to traditionally underserved economic strata, currently comprises a market of about $4 billion in premium. Analysts and advocates of microinsurance predict that the market could expand to ten times its current size, given the right products, regulation and the right technology applications and communications infrastructure.

Interest in the microinsurance opportunity remains a widespread, yet relatively low-key activity for the time being, suggests Marik Brockman, a principal with PwC's Diamond Advisory Services (Chicago), but that is starting to change. "Every one of the top insurance companies globally has something going on in microinsurance, both on the life and P&C sides," he says.

The main opportunity microinsurance presents to the North American insurance industry is to global companies headquartered in the U.S. with operations in emerging markets, according to PwC's Brockman. "These insurers are looking for ways to be inventive and achieve growth that the U.S. market can't support," he elaborates. "The U.S. economy is likely to grow 2 to 3 percent a year and the U.S. is a saturated market, as far as insurance goes. Companies seeking higher growth, and even double-digit growth need to look to emerging economies."

Brockman estimates that total annual premiums are somewhere between $3.5 and $4 billion, representing roughly 200 million policies. A recent Swiss Re study concluded that the microinsurance market has the potential to extend to 4 billion policyholders, with annual premium volume of up to $40 billion.

In terms of the target consumer and related distribution concerns, microinsurance is closely tied to microfinance, according to Pranav Prashad, grant officer with the Microinsurance Innovation Facility (MIF), International Labor Organization (Geneva). Prashad notes that the target customers of microinsurance are people above the lowest levels, where government "safety net" measures or subsidies may be the most appropriate services.

"Potential microinsurance customers include what you might call microentrepreneurs or people in informal sector economies who have some resources but are especially vulnerable because of their proximity to poverty," explains Prashad. "Traditionally insurance policies have not been available to these people, but they are at least as vulnerable as those who have had access to protection products -- about 35 percent of people who have risen from poverty have fallen back."

Brandon Mathews, head of the Emerging Consumer organization at Zurich Financial Services (Zurich), further defines microinsurance customers as those households who don’t yet need traditional entry-level insurance products such as auto and homeowners. "While the individual premiums are lower, the enormous population - literally the majority of the world's population - makes this an interesting business," he comments.

The microinsurance represents special distribution challenges, according to Mathews. "What insurers call ‘alternative distribution' actually represents the primary places where people shop -- grocers, pharmacies, etc. -- but insurance is not as simple to understand as a tomato," he says. Mathews relates that in 2010, Zurich piloted a mobile phone-based presentation and binding application designed to help retail sales people not trained in insurance to sell products confidently and correctly.

Microfinance institutions also have a strong role to play in the marketing and distribution of microinsurance, according to the MIF's Prashad. He gives the example of a street vendor who needs a loan for a bigger cart. The microlender would be especially well positioned to offer such customers protection products. "There are extremely strong linkages between microcredit and microinsurance customers, and we feel those institutions can play a very strong role in microinsurance, not as risk carriers but as distribution partners," Prashad says.

Information technology will play a critical role in the success of microinsurance, according to Kurt Karl chief economist for Swiss Re's Americas division. The most obvious role of technology is to provide automation in order to efficiently manage the large policy volume, low value transactions involved. From an underwriting perspective it is vital that all policyholder information be recorded in order to prevent risky individuals from surreptitiously taking on new products without transparency about the risk they present, he says.

Also, the collection of accurate information about rainfall and temperature would drive sound underwriting information agricultural insurance products, Karl suggests. "Detailed information of this kind can enable the creation of highly tailored microinsurance products that could be the least expensive for consumers while being a lucrative business line if underwritten accurately," he comments. On the distribution front, mobile hardware, applications and infrastructure are key, according to Zurich's Mathews. "With 5.8 billion cell phones on the planet, mobile is clearly an important element of what we do," he says.

However, Mathews stresses that the greater challenge is in making policy administration and service more efficient that it is within traditional markets. "The most important work is the least glamorous," he insists. "Imagine what's required to cut policy and claims processing costs not just by 10 percent but also to 10 percent!"

"This isn't only about cost cutting, it's about transforming access to and performance of our products," Mathews adds. "While good, smart steps are underway, this remains a story with many chapters to go."

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio