Insurers must adopt a new mindset in order to better assess microinsurance programs.
Microinsurance provides low-income people with access to affordable life, health, property, and other types of insurance. Most commonly bought in developing countries, this vital risk coverage protects policyholders from ruin in the event of a disaster.
Its popularity continues to grow, as many established insurers and reinsurers have launched their own microinsurance programs. Christina M. Alfonso-Ercan, CEO of Madeira Global, an advisory and analytics firm specializing in environmental, social, and governance research, noted in a recent article that 33 of the 50 largest insurance companies had entered microinsurance as of 2013, a marked increase from only seven in 2005. “Microinsurance serves to lessen the impact of known risks faced by individuals and businesses,” Alfonso-Ercan wrote. “For households with low-income and limited access to traditional financial tools, these risks have the capacity to trigger a cycle of poverty.”
One micro-reinsurance startup, the Microinsurance Catastrophe Risk Organization (or MiCRO), already has 65,000 clients in Haiti alone, and it partnered with Swiss Re this year to offer insurance to another 5,000 in Guatemala. Using predetermined indicators such as rainfall levels and earthquakes, its low-cost insurance covers weather-related property damage in underserved markets. MiCRO hopes to cover at least 250,000 people in Central America by 2019.
As microinsurance expands, providers must develop methods of measuring its success. As Jim Weiss, Director of Analytic Solutions at Verisk Analytics company ISO, pointed out on PropertyCasualty360.com, these programs must positively impact the community while also generating profits.
A 2015 study of microinsurance programs based in Africa revealed weighted average loss ratios of 25% in 2014, a steep decline from the 44% recorded in 2011. Citing another study that found nearly half of microinsurance programs in Africa registered loss ratios of 20% or lower, Weiss noted that there might be misalignment between risk and coverage or confusion about filing claims among the target population. Such low ratios would prove unsustainable in the long term, and the risk identified by Weiss could weaken consumer confidence in the programs.
Weiss added that providers can reach a profitable ratio by boosting service so more people will sign up when they see that the programs are beneficial. “While expanded payout possibilities can improve the policyholder experience,” he noted, “providers may also consider monitoring and addressing other key performance indicators (KPIs) — such as renewal, complaint, and claim rejection ratios — to help improve faith in their programs.”
Broadening the Scope
Microinsurance providers must also expand the scope of their operations to increase profitability. Unfortunately, scaling might necessitate concentrating on a region that’s particularly vulnerable to a single risk, preventing providers from diversifying their business. Should a disaster strike, the company might soon pay out more in claims than it earns in premiums for other policies.
To counter this problem, Weiss suggested that microinsurers partner with reinsurers, government agencies, or nongovernment organizations (NGOs) to diversify the risk pool. According to the Micro Insurance Centre report, microinsurance participation in Africa has grown from 44.4 million people covered by at least one microinsurance policy in 2011 to 61.9 million in 2014. During that same period, total written premiums rose from $387 million to $647 million.
To achieve greater growth, Alfonso-Ercan urged microinsurance companies to collect data on their policyholders and potential customers. Armed with that research, microinsurers can undertake more targeted outreach programs to expand their audience, upgrade services, and reduce customer turnover.
Any evaluation of a microinsurance program ultimately depends on its effect on its policyholders’ quality of life. Unfortunately, Weiss cautioned that measuring those improvements remains difficult due to several factors, including a long return period and insufficient data.
There are some metrics available, however. A high ratio of what Weiss termed “transparent” sales in which the policyholder fully understands the product at the time of purchase indicates that the coverage meets the needs of the insured. The product, therefore, could have a lasting impact on the policyholder’s life, he said.
To fully measure success in microinsurance, insurers must shift away from traditional metrics and instead enhance product design and rollout, Weiss said. In other words, they need to change their mindset. “When all is said and done,” he said, “developing a social conscience and concern for insureds may be a reliable road to ROI.”