Creating inclusive insurance for all

It is, without doubt, the poorest people in the world who are most in need of the security that insurance brings. Queenie Chow discusses why the micro-insurance market has low penetration, and why actuaries are so well placed to assist.

Micro-insurance has the potential to address the protection for financial needs for more than 4 billion individuals. While micro-insurance is referred as the inclusive insurance designed for the low-income population, unfortunately it is not being fully accessed by this group. In the absence of market knowledge and its consumers, providers for these low-profile risk mitigation products have limited capacity to the match the products with consumer needs. As such, the micro-insurance market continues to have low penetration and renewal rates.

An example of my experience is discussed below.

The situationTogoWestAfrica

Fonds National de la Finance Inclusive (FNFI) is a government initiative that aims to provide inclusive financial protection and savings products for low-income population in Togo. In addition to
providing financial education to low-income groups, it also supports initiatives for effective management in the area of micro-enterprise. One of the initiatives of FNFI is providing small loans reimbursable in short periods (6 months -to 2 years), targeting extremely low-income workers in the rural sectors in Togo.  Each loan will be accompanied with a bundled micro-insurance product (health, personal accident and property) and a separate micro-credit life product.

Unfortunately, insurers did not recognise the features of micro-insurance and have proposed a conventional insurance product with small premiums and small sums insured. I had the valuable opportunity to work under the guidance of my ‘local’ Belgian actuarial colleague with 20 years of experience in this socio-economic environment to reorient the initial product offer towards an authentic ‘micro-insurance product’ in hope of kicking off micro-insurance in Togo.

What is an authentic micro-insurance product?

In many ways, micro-insurance requires a shift in thinking for insurers. Insurers often have the misunderstanding that micro-insurance products are insurance policies with small premiums and little benefit payout. In reality, different from conventional insurance products, the design of micro-insurance products has some unique implications.  A “good micro-insurance product” must satisfy the following important attributes of ‘S.A.U.V. E’ – simple, accessible, easily understood, valuable and efficient.

Understanding your client

A micro-insurance product has different needs on underwriting, claims management and product simplicity while also requiring scale, innovation and risk management. One of the cases in point during our project working with FNFI is that the insurance provider intended to use the same claim declaration template form as their existing insurance product for the new micro-insurance product. For the low-income groups in Togo, the illiterate clients in the village with no pen and paper, such declaration templates will by far be inaccessible. A product will fail if it is not well designed, and may weigh on the reputation of insurance in developing markets.

The pricing experience of this new micro-insurance product further emphasises the importance of understanding the client’s profile and their needs in order to provide valuable insurance to different groups among the low-income population. The pricing that the insurer initially submitted to the regulator was based on the behaviour and experiences of their industrial insured population (middle and high-income class). Furthermore, such pricing assumption was created based on extraction from an IT system that lacked reliable and sufficient underwriting and claims data. Can we accurately price the risk of a group of an extreme low-income population using the past experience of a privileged class whilst using the exact same arithmetic formula without contingency loading? Only through adequate understanding of our clients’ profiles and needs can we enhance the design of appropriate products and identify the steps which should be taken to ensure the adoption of these products by the poor.

In closing

As the French say – “on ne peut pas aimer ce qu’on ignore” or “one cannot love what one cannot know”.

In order to provide a successful micro-insurance product, insurers must understand:

  • the needs of their clients;
  • their current risk-management behaviour;
  • the overall potential market.

Competent and skilled regulators are crucial as they should coach, develop and lead these new markets that targets vulnerable clients.

The actuarial skill-set is well placed to assist governments with the appropriate design and implementation of micro-insurance products to the poorest people in the world.

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