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With Proper Regulation, Microinsurance Presents a $40 Billion Opportunity Says Swiss Re

The troubled Indian microcredit industry exposes some of the hazards of microfinance, but regulatory safeguards and responsible business practices can open up lucrative lines of business.

The advent of microfinance was troubled by concerns about the ethics of profiting from the poor. A November 2010 New York Times story seemed to justify those concerns, reporting that “almost all borrowers in one of India’s largest states have stopped repaying their loans, egged on by politicians who accuse the industry of earning outsized profits on the backs of the poor.” However, a more recent study by Swiss Re identifies a huge opportunity — potentially $40 billion in premium — for the insurance industry in providing products to low-income people.

We recently talked to Swiss Re’s Kurt Karl, the company’s chief economist for the America’s region, to talk about what may have gone wrong in Indian microfinance and what the implications of those failures might have for microinsurance.

The success of any microfinance endeavor requires having the right policies in place to prevent problems such as underwriting that fails to take adequate account of a borrower’s ability to repay the loan. “One clear requirement is that lending can’t be for consumption,” Karl comments. “There must be a business plan, and there should be follow up from loan officers.”

In the case of microinsurance, as opposed to microcredit, Karl says similar regulatory guidance should be implemented, including risk-based capital requirements and training for both producers and customers. Mandatory credit insurance would be another useful safeguard, as it introduces double underwriting to a given risk, Karl adds.

With an adequate regulatory framework and consumer protection, microinsurance products, Karl says, “can help to raise communities and individuals to a higher economic level.” Traditional community risk management solutions might involve eight individuals or families pooling resources to manage costs such as those associated with a funeral and burial. Such syndicates are useful but can run into trouble if, say, five of the contributors were to die in a single year. However, insurance is able to spread that risk over a vastly larger pool, Karl notes.

“With insurance, you could have not eight but rather 800,000 or 8 million,” Karl notes. “So not only does the pot not run dry, but costs are reduced as well — you don’t have to pay extra into the pool because it becomes not a one in five but a one in five million chance that that number dies in a given year.”

Information technology plays a critical role in the success of microfinance of any kind, according to Karl. It is vital that all borrowers or policyholders’ information be recorded in order to prevent risky individuals from surreptitiously taking on new products without transparency about the risk they present.

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.

Mobile technology could be a vital feature of insurance marketing and sales, claims management and customer service, he adds. “A great deal could be done in the field with smart phones or tablets that could calculate risk issues, provided users have access to adequate information databases,” he says.

Technology is also vital in providing the economy of scale to defray the costs associated with high numbers of policies with low economic value, according to Karl.

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

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