Microinsurance

Microinsurance is a low premium, low coverage version of the typical insurance services targeted towards the low-income population that cannot get the benefits of conventional insurance services due to high cost. The key idea of microinsurance is to provide some, albeit small compared to macroinsurance, type of insurance against risk to those who cannot provide the existing insurance services. Much of these schemes are focused on developing nations, because many developed nations already have a social means of providing support to their low-income population.

The concept of microinsurance has been around for at least a decade, and as of 2007 there exists some form of microinsurance in at least 77 of the 100 poorest countries, and 78 millions are covered by these services.^[1] Some optimists see a market as large as 4 billion people, which could be achieved if the coverage ratio of the developing world starts to catch up with the developed nations. Recently, with the widening spread of mobile phones in these countries, the technology associated with mobile phones is becoming a very useful tool for the scaling of these microinsurance services.

A Brief History

Some of the first forms of microinsurance grew out of micro finance institutions, in the form of cash life insurance. Simply put, cash life insurance is the insurance against the risk of death of a person before he pays of his loans. These were understandably offered as mandatory services, since the micro finance institutions needed some form of defence against such deaths. By using the already established distribution chains of the micro finance institutions, cash life insurance quickly gained some market share.^[2]

At the same time, many donors started to fund microinsurance. Donors include government funded initiatives such as GTZ (Deutsche Gesellschaft fur Internationale Zusammenarbeit), UKID (UK Department for International Development), and the World Bank. There also exists corporate social responsibility programs of large insurance companies. The one of the most notable is the Gates Foundation, which provided 70 million U.S. dollars for microinsurances in 2007.^[3]

Current Issues

One of the greatest issues with microfinance schemes is reaching a suitable scale. For any type of insurance services, scale is critical for profitability, since the cost of payouts must be distributed among a large number of policy holders for the scheme to survice. Microinsurance is no exception, and it needs some degree of scale for profit and survival. Moreover, one of the core goals of microfinance is providing a social safety net for the low-income population that cannot afford already existing conventional insurance services. If microinsurance schemes cannot grow to cover a large percentage of the entire population, the goal of providing a social safety net cannot be met.^[4]

The problem with the cash life insurance schemes is that it is hard to get a scale larger than the micro finance institutions that provide the service. Another problem with mandatory services is that people do not realize that they are covered by this service. The problem with donor initiated services is that profitability is not their main concern, since there is a rich beneficial donor that provides the fund regardless of the profit created by the service. As a result, the scale that is critical to achieving profitability is often overlooked.

Recognizing microinsurance as a variant of micro finance, people at first tried to try the approaches that worked for micro finance institutions. It turns out that the scale required for a profitable microinsurance service is larger than that of a micro finance service. Then people tried to look at microinsurance as a downsized version of conventional insurance services, which also did not fare well. There are reports that microinsurance is something altogether different, and a different approach is required to meet the scale requirements of microinsurance services.

Mobile Phones as Solutions

The number of mobile phone subscribers are greatly increasing worldwide, notably in the developing nations. Even without the liberating applications of smart phones, many services can be provided through telephony and text messages. Moreover, as more and more people use mobile phones, mobile banking is getting widespread coverage as well. Therefore, it is only natural that mobile phones have been proposed as a possible solution for the issue of achieving suitable scale in microinsurance services.

Mobile phones can play several roles in microinsurance services:^[5]

• Marketing: advertisement and possibly education (for people oblivious to the idea of insurance) can be conveyed through mobile phones.
• Sign-up: people could sign up for policies via mobile phones, or receive key information through a mobile phone and sign up using a computer.
• Payment: the premium payment can be collected along with the monthly phone bill. Or small payments could be made over time, as long as the policy holder pays a given amount.
• ms: claims could be accepted by call centers or text message, the latter being more cost efficient.

All four roles, if put to use, can greatly cut down the management cost by removing the middleman, allowing microinsurance services to achieve lower premiums by more efficient management. Moreover, by actively advertising and educating people about the service using mobile devices and making it easier to sign up for the service, the number of policy holder could greatly increase, leading to a scale suitable for profitability. These are not mere vague ideas. Microinsurance through mobile devices have already been put to use in some countries.

Examples

• Kenya: UAP Insurance of Kenya, Safaricom, Kenya's biggest mobile-network operator, and the Syngenta Foundation for Sustainable Agriculture, part of a big Swiss agribusiness group set up a microinsurance service for agriculture products. Policies are set up per purchase of seeds via cameras on the mobile phones, and confirmation arrives immediately by text message. When weather becomes inhospitable, payouts are immediately and directly made through Safaricom's M-PESA mobile-money service.^[6]
• Ghana: Hollard Insurance Group and the MTN group, a South Africa-based mobile giant jointly established mobile insurance where Ghanaians pay as low as one cedi ($0.65) through MTN's mobile banking system for life insurance. People can sign up using their mobile phones. 2 million of 9 million mobile phone subscribers have signed up for the program since the launch in July 2009.^[7]

References