Microinsurance, macro opportunity?

Vol 46: Issue 2 | July 2023

In short

• Microinsurance offers reinsurers a range of advantages, including increased market penetration, supporting low-income communities and delivering on sustainability agendas.
• Munich Re and Swiss Re already run microinsurance projects in South-East Asia, Latin America and Africa.
• Future projects can further address the protection gap, particularly in emerging markets.

Microinsurance — a protection designed to serve low-income individuals and businesses in developing countries — emerged in the 1990s, when the International Labour Organization began experimenting with cheap insurance policies in developing countries.

But what began as a form of charity has developed into a major opportunity for innovative, low-cost models of insurance to penetrate previously untapped markets.

The Microinsurance Network (MiN) defines microinsurance products as having modest premium levels based on the risks insured.

The insurer is the risk carrier, and the product must be working towards profitability, or at least sustainability, and be managed on the basis of insurance principles.

Katharine Pulvermacher, MiN’s executive director, based in Luxembourg, says microinsurance started out using a donor model, which has evolved into more of a partnership approach with products subsidised by governments, NGOs and corporates.

For reinsurers, microinsurance has multiple upsides, from opening up new markets and increasing insurance penetration to delivering on the sustainability agenda increasingly demanded by shareholders, governments and the wider stakeholder community.

For individual customers and businesses in developing countries, microinsurance offers a new safety net where they might not otherwise have been able to afford it.

An inclusive model

Munich Re is an example of company that has been active in microinsurance for some time. The reinsurer partnered with digital lenders and supply-chain platforms in South-East Asia to offer wholesale insurance protection.

In Indonesia, Munich Re protected more than 3,000 small-to-medium-sized businesses through a similar partnership and was able to deliver financial relief using loan waivers after the Cianjur earthquake of November 2022.

Weihao Choo, head of consulting at Munich Re, says microinsurance is both a business opportunity and a sustainability initiative, and these aspects are not mutually exclusive.

“We hope to use what we are doing in South-East Asia as a microinsurance template or reference point, and extend it across Asia Pacific and beyond,” says Choo.

“Also, financial inclusion is a real issue in Indonesia, where many people have limited access to financial products, and we see insurance and financial inclusion as inseparable. To have sustainable financing, you need to have insurance.”

Catering to emerging markets

Pulvermacher sees microinsurance as a potentially transformative opportunity for models of global development.

“We have this massive market of emerging consumers, and the reality is that 90 per cent of them don’t have any insurance at all,” says Pulvermacher.

“Many of them live in countries where state social protection is rather limited if it exists, so there’s a huge gap in insurance, which is not just a risk to these individuals but to the global corporates that invest in these countries and to the global supply chain.”

Pulvermacher says there are between one and two billion people living on the equivalent of less than two international dollars (Intl$2) per day (in purchase power parity), while “sitting in the middle” there are around five billion people living on between Intl$2 and Intl$20 a day.

Only around 8 per cent of the people in this middle segment have any kind of insurance, representing a major opportunity for reinsurers.

Customers do have some skin in the game, but the model recognises that their risk is linked to other risks that can reverberate on a much wider scale. Some successful projects in individual countries could also provide a template for more global projects.

Pulvermacher cites the South African example of Lumkani Fire Detection and Insurance, a social enterprise which seeks to address the challenge of fires in informal settlements and townships. Over the past decade, residents of these informal settlements in South Africa have lost R1.4 billion as a result of fires.

Global mobile phone industry association GSMA, Hollard Insurance and Islamic Relief worked with Lumkani to install internet-connected fire sensors at zero cost to consumers, mitigating fire risk through network alarms.

“It is proving hugely popular and [Lumkani] wants to expand it in South Africa and the rest of the continent,” says Pulvermacher.

Serving the underserved

Cherie Gray, Swiss Re global lead, Sustainability and Market Development, says the company has several microinsurance projects “benefitting underserved segments such as smallholder farmers and women, particularly in emerging markets”.

Since 2017, Swiss Re has been the sole reinsurer for the Microinsurance Catastrophe Risk Organisation (MiCRO), which specialises in disaster risk protection to underserved communities in Latin America. In 2022, MiCRO expanded its presence in Guatemala to deliver catastrophe insurance for up to 40,000 smallholder farmers, bringing the number of individuals benefitting from its products to more than 100,000.

Swiss Re has also been active in Egypt, partnering with not-for-profit organisation Women’s World Banking to provide affordable microinsurance to women entrepreneurs, helping build their resilience in the event they suffer loss of income due to hospitalisation. Coverage also extends to the policyholder’s immediate family members.

Bridging the gap to growth

These initiatives, says Gray, support individual and small-business resilience “by providing a simple risk-transfer mechanism”.

“For example, it may provide an entrepreneur greater financial resilience, as well as peace of mind as they start and run a new business, by taking care of the potential negative consequences of sudden health-related events,” she says.

“This could increase their willingness to invest in growing their business more rapidly, increasing the benefit to themselves as well as the local economy.”

Gray says there is “exciting potential” for microinsurance, although the many variables make it difficult to make predictions about market development.

“What’s clear is that there is a significant protection gap for which microinsurance could be part of the solution,” she says.

Microinsurance stats

• US$61.8 billion - Total estimated global market value
• 223 million - People covered by a microinsurance products in 34 countries, across 253 insurers
• US$2.2 billion - Total premiums in 2021
• US$15.9 billion - Estimated Asian market premium value
• 2% - Proportion of the Asian microinsurance market value currently captured

Top 3 Product Lines

1. Life insurance
2. Credit life / loan protection
3. Health insurance

Source: The Landscape of Microinsurance (Microinsurance Network, 2022)

Low socio-economic status in Australia and New Zealand

Both Australia and New Zealand identify geographic areas, rather than individuals, as having low socio-economic status.

In Australia, this is measured in quintiles based on census data, with quintile 1 comprising the 20 per cent most disadvantaged areas and quintile 5 comprising the top 20 per cent most advantaged areas. From 2016 census data, the 10 most disadvantaged local government areas in Australia are all located in rural Queensland and the Northern Territory.

In New Zealand, socio-economic status is measured in deciles, with decile 1 being the least deprived areas and decile 10 being the most deprived areas. Scores are also based on answers in the national census. In the most recent results — Deprivation Index 2018 — decile 10 areas are concentrated in Northland, Gisborne, eastern Bay of Plenty and northern Hawke’s Bay.

Based on GDP per capita and the Human Development Index, both Australia and New Zealand are considered developed countries and so are well off compared with some of their neighbours in the Pacific and South-East Asia. Consequently, there is greater initial microinsurance potential for reinsurers in other countries in the Asia Pacific.

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