MicroInsurance

Although microinsurance has not received the same attention that microcredit has, investors, governments and financial institutions have slowly come to realize that microfinance entrepreneurs need a range of financial services of which micro insurance services are crucial parts. Microinsurance is one of the financial services associated with microfinance, along with savings and fund transfers, and is increasingly being sold in conjunction with the distribution of microcredit loans. Microinsurance is insurance characterized by low premiums and coverage limits, designed to service low-income people and businesses not served by typical social or commercial insurance schemes. Microinsurance has the same purpose as traditional insurance - to allow consumers, whether they are individuals or businesses, to transfer their risks and purchase the security they need to live their lives or grow their businesses, except that it is designed for the low income market.

Microinsurance schemes may cover various risks (health, life, etc.); the most frequent microinsurance products are:

• Life microinsurance (and retirement savings plans)
• Health microinsurance (hospitalisation, primary health care, maternity, etc.)
• Disability microinsurance
• Property microinsurance - assets, livestock, housing
• Crop microinsurance

From a financial perspective, microinsurance in emerging economies represents a market of great potential growth and profitability. As insurance markets in developed countries become saturated and growth prospects limited, insurance companies are looking to new opportunities in emerging markets.

From a social perspective, Access to insurance is an important strategy for reducing poverty. Inability to manage vulnerability caused by sudden death of a family member, illness, loss of income or property perpetuates poverty. Through innovative products and distribution methods, Riskebiz believes that hundreds of millions of poor people in the world can become viable clients for insurers.

Currently around 135 million, or 5%, of low income people in developing countries are using microinsurance products. But the low income market size, if measured by the number of potential clients, is several times larger, amounting to 1.5 to 3 billion potential policies. The MicroInsurance Centre estimates that over the next 10 years the microinsurance market could grow to one billion policyholders, a third of the potential market of 3 billion and seven times more than today's estimated market size.

Opportunites for Insurers

There are signifanct first mover advantages offered through microinsurance, as many of today's microinsurance clients will be the middle class clients of tomorrow, part of the "Burgeoning Bourgeoisie" in developing countries described in The Economist's special report of February 2009. Satisfied clients will remain with their microinsurance provider, spread the word and demand more products as they move into the middle class and appreciate the benefits of traditional insurance.

Additional opportunties include:

• Helping insurers expand to developing countries as insurance markets in developed countries are relatively saturated;
• Helping get an insurer's brand into these low-income markets - where today's low-income customer is rapidly becoming tomorrow's middle class customer;
• Helping insurers forge good relationships with regulators and governments in new markets;
• Offering a social return for insurers which can be presented as an act of Corporate Social Responsibility;
• Generating additional profits for insurers.

According to Lloyds, "Although microinsurance is unlikely to ever be the major focus of more than a few insurers, many insurers have found microinsurance to be profitable if they operate simply and efficiently on all levels, respond to market needs, and access large numbers of low income people. Investments in microinsurance have diverse returns that evolve over time: reputational gains in the short term, knowledge in the medium term and growth in the long term. If we view insurance as a sector in which knowledge is a decisive resource, then microinsurance can be viewed as a driver of local learning and ultimately economic growth."

Opportunties for Funds

Riskebiz believes that microinsurance is the most effective tool for increasing the valuation of microfinance institutions. The valuation of a MFI is based primarily, though not exclusively, on the following elements:

• Portfolio Quality
• Efficiency & Productivity
• Financial Management
• Profitability
• Management & Governance
• Net Income Growth
• Social Return

Microinsurance cannot address all the valuation metrics above, but it can positively impact portfolio quality, efficiency and productivity, profitability, net income growth, and social return and in the process have a significant positive impact on the valuation of the MFI.

• Porfolio Quality - Inability to manage vulnerability caused by the loss of income or property, sudden death of a family member or illness can increase the likelihood of loan default and perpetuate poverty. Insurance can play an important role in mitigating losses resulting from such risks thus reducing loan defaults and improving loan portfolio quality for MFIs.
• Efficiency & Productivity - Technology has tremendous potential to increase the efficiencies of microinsurance, bring down operating costs and ultimately reduce premiums to MFI clients. Several uses of technology have already had important impacts on microinsurance delivery and include mobile communication and transaction technologies and the internet. These efficiencies, such as mobile money transfer solutions for premium and claim payments, can extend beyond the microinsurance scheme to provide for overall improvements in efficiency and productivity in the microcredit operations for the MFI.
• Profitability - In addition to the increased profitability achieved through the cost efficiencies, improved productivity and reduced loan defaults produced through a microinsurance scheme, the sale of microinsurance products offers an additional revenue stream for MFIs, especially when a captive insurance facility is utilized thus increasing their profitability.
• Net Income Growth - By effectively managing loan default risk through a microinsurance scheme, MFIs are able to more rapidly expand their loan portfolio and augment that revenue growth with insurance products. In addition to facilitating the expansion of loan portfolios, microinsurance offers an additional revenue stream for MFIs as they can receive a risk management fee or commission for distributing policies on behalf of microinsurers.
• Social Return - By reducing vulnerability and mitigating the negative effects of external shocks on poor households, microinsurance reduce household efficiency losses and protect assets so the poor can escape poverty traps. This social component of the dual bottom line return improves the overall MFI valuation.