The emergence of microinsurance

1. The emergence of microinsurance Craig Churchill Microinsurance Innovation Facility International Labour Organization

2. Overview of Presentation • Microinsurance characteristics and trends • Examples of innovation • Concluding thoughts

3. Would you insure these houses?

4. Would you insure these farmers?

5. Would you insure these assets?

6. Or these?

7. Would you insure these lives?

8. Microinsurance trends Some insurance companies are interested in reaching new markets, including low-income households Microinsurance is emerging out of the shadow of microfinance Greater variety of distribution channels are being used Experimentation with consumer education tools and methodologies is beginning Policymakers, regulators are showing a greater interest Product innovations are taking place to provide better coverage to more low-income people

9. Survey results

10. Formal insurance industry WEALTH Informal insurance Insurable, without access Uninsurable through market mechanisms POPULATION Who is insured by whom?

11. Characteristics of the insurable poor • Often work in the informal economy • Irregular cash flows • Often “un-banked” • Manage risks through myriad of informal means, including social networks • Possibly illiterate • Limited familiarity with formal insurance • May not trust insurance companies • Vulnerable to risks

12. Key characteristics of microinsurance • Accessible: physically, intellectually, financially • Simple, easy to understand policy document • Make the intangible tangible • Broadly inclusive, with few if any exclusions • Premiums accommodate irregular cash flows • Small sums insured, often for short terms • Pre-underwritten, community or group pricing

13. Key characteristics of microinsurance (cont.) • Distributed through alternative channels: aggregators • “Agent” aggregators may manage the entire customer relationship, premium collection, claims payment • Often integrated with another financial transaction • Designed to minimize claims rejections • Bottom of the pyramid business model: small margins, large volumes

14. Main Message: Microinsurance is not just a scaled down version of regular insurance…the product and processes need to be completely reengineered to meet the characteristics and preferences of the low-income market.

15. Overview of Presentation • Microinsurance trends and characteristics • Examples of innovation • Concluding thoughts

16. The Microinsurance Innovation Facility Large number of lowincome people making informed choices to manage risk RESEARCH DISSEMINATION TECHNICAL ASSISTANCE INNOVATION GRANTS MICROINSURANCE INNOVATION FACILITY

17. Innovation Grants • Grants:ranging from $25,000 to $600,000 for projects between 1 to 3 years • Purpose:Action research on product design, institutional models, and consumer education • Eligible organizations:Insurance companies, semi-formal insurers, labour unions, cooperatives, NGOs & other distribution channels, insurance associations • Results after 3 rounds: > 400 applications from over 40 countries; 35 grantees have been selected

18. Overview of the Facility’s Grantees (11/09) see Grantee Community on www.ilo.org/microinsurance for details

19. Distribution Channels • Launching a property insurance product sold through retailers and suppliers of cell phone airtime • Collaborating with national consumers’ association for rural water rights to develop life, health, personal accident and funeral insurance products for farming families, with premium payments collected with water bills • Distributing life insurance and savings through “mom and pop” retail stores with handheld terminals • Distributing life insurance and savings product for the families of migrant workers through churches and schools

20. ICICI Prudential Ins. Co, India Project: Term life insurance & savings for tea workers in Assam Innovation: Partnership with tea estates Software to reduce transaction costs and increase customer services Product simplification & transparency Education via NGO partner Learning: Outreach potential Ability to create savings & insurance culture Build trust

21. Cooperative Insurance Company, Kenya • Collaborating with Swedish Cooperative Centre, NHIF, and Folksam Insurance (Sweden) • Developing Bima ya Jamii: “Basket” product covering life, disability and the National Health Insurance Fund (NHIF) coverage • Family (up to 7 members) coverage: In-patient health, AD&D, loss of income due to accident, funeral expenses • No age limits, no exclusions, covers pre-existing conditions • Selling through MFIs, SACCOs and other cooperatives • Emphasizing training and consumer education for distribution channels and their members

22. Product Innovations:Agriculture • Livestock insurance experimenting with RFIDs to reduce fraud Sanasa SRI LANKA PlaNetGuarantee MALI • Crop insurance programme based on a weather or area-yield index to protect farmers, their assets and their crops DHANFoundation INDIA

23. Overview of Presentation • Microinsurance trends and characteristics • Examples of innovation • Concluding thoughts

24. Challenges Developing sustainable products that meet the needs of the market Reducing transaction costs (enhancing affordability) Overcoming the market’s natural resistance and educational barriers Getting products to the market: distribution Adopting a microinsurance approach to premium collections and claims payments

25. Challenges (cont.) Creating microinsurance experts Promoting an enabling environment for microinsurance Having better data to price products Developing a database of product and institutional performance benchmarks Assessing the impact: do the poor really benefit from insurance, and if so, under what circumstances

26. Back to the future When the early Victorian insurance companies were first approached with suggestions that they should offer (insurance) to the poor, the short answer generally given was, in effect, that security was a luxury for which the poor could not afford to pay. The suggestions, however, were pressed. It was observed that for many centuries the poor had somehow contrived, by their own co-operative thrift, to provide some sort of financial security for themselves; and with some misgivings experiments were launched to see whether such security could be sold to them on commercial terms which would both give them at least as good a return as they were deriving through their spontaneous organizations, and enable the sellers to live on the proceeds of the trade. This is the origin of industrial assurance, which is simply life assurance adapted to the needs of weekly wage-earners. Industrial assurance began timidly and on a small scale; but it met a felt need, and consequently developed at a pace for which its founders were unprepared. While it was most rapidly expanding it was already being extensively reconstructed, as the mistakes of the experimental stage were discovered and retrieved. Dermot Morrah, A History of Industrial Life Assurance, Routledge (1955)

27. Thank you! Craig Churchill churchill@ilo.org Tel +41 22 799 6242 www.ilo.org/microinsurance