A.M. Best: Insurers Need Scale, Innovation to Be Profitable in Microinsurance

Insurers and reinsurers have a great opportunity to tap the largely uninsured working poor in emerging markets, but need scale and innovation to be profitable, said Andrea Keenan, assistant vice president of economic and industry research at A.M. Best.

Microinsurance, or insurance protection for poor populations, offers simple coverage at a low premium, often through community involvement. It's "strong and growing in emerging markets," Keenan said during a "Microinsurance Moves Beyond Niches" webinar on March 8.

"For an insurer, you ignore microinsurance at your own peril," Rick Koven, manager of the Microinsurance Learning and Knowledge project, said during the panel. "But if you jump in, you also do it at your own peril unless you are very careful. It's a great opportunity, but you have to do it in a measured way."

About 7% of global insurance premiums stemmed from developing countries in 2003, but are expected to rise to about 20% by 2016, Keenan said.

"It's important for us to understand the direction that microinsurance is growing," she said.

Microinsurance serves to improve coverage of basic human necessities in terms of business lines such as health, life, funeral, property and agriculture. Such micro policies transfer risk from low-income individuals — who do not have access to traditional insurance — to a group (Best's News Service, March 5, 2012).

Microinsurance is not a new concept, and while policies and clients may start small, they have the potential to grow. More than 100 years ago, insurers such as MetLife Inc. and Prudential wrote small policies to offer protection against death, accident, injury and property to the working poor, Keenan said in a special report, "The Potential of Microinsurance."

The microinsurance market is estimated to be between $30 billion and $50 billion, according to a study by Accenture.

"Where microinsurance is most fertile...population is key," said Michael J. McCord, president of MicroInsurance Centre. "Countries with large populations are much easier to manage," he said during the webinar.

Several billion people who earn $2 to $6 a day may be potential microinsurance clients, Koven said. "Generally speaking, the insurance penetration among those poor people is a very low single-digit number," he said. "There is great untapped potential."

In some ways, microinsurance is not different from traditional insurance, McCord said. "The same principles apply. It's a transfer of risk...the key is to develop products that fit the market. This is just a different market niche," he said.

He estimates as many as 3 billion people could be potential microinsurance clients, that if tapped, could bring in $40 billion in annual premiums.

"There's a huge market out there for insurers," McCord said.

While the policies would initially be in small face amounts, he said those clients can grow and "may be good business going forward."

But, Koven cautioned "the jury is still out on profitability."

"It can be profitable, but it needs scale to be profitable and the scale is often millions of people. That's the challenge: How do you get yourself ramped up to have the right scale to cover transactional costs?" Koven said.

Carriers worry about underwriting risks associated with microinsurance, but those risks "aren't that different from traditional insurance. Risk has not been the driver of profits. Scale is the driver," he said.

About 500 million people have some kind of microinsurance today, McCord said. About 85% are from Asia, with India being the biggest country, with about 60% of the business.

Sabbir Patel, senior vice president and chief financial officer of the International Cooperative and Mutual Insurance Federation, said in order to gain penetration, insurers and their partners have to establish trust. He quoted a survey that found 60% of some microinsured households were unable to understand the coverage.

Microinsurance requires a different mind set, and insurers may have to provide financial education so people understand the product, he said.

"It can't just be a branding exercise," Patel said. "Trust is very important if you want real clients and penetration."

It's also something you need a long-term commitment to do, McCord said. "There's huge potential in this market, but it's not easy. It's not something you come into for a year or two," he said.

To see the full webinar, visit http://www.ambest.com/webinars/micro12

(By Meg Green, senior associate editor, BestWeek: [email protected])