The Rise of Microinsurance [Risk Management]

Around the world, approximately three billion people survive on less then 52 a day. Many are trapped in a cycle of poverty that impaired their health, relationships and social mobilie)'. When financial disaster strikes, such as (he death of a breadwinner or cosdy health issues, die majority have no means of getting by. It Ls a disheartening phenomenon, dial those whose lives arc mw fragile ace die ones without access to a safety ner.

Enter microinsurance

MicToinsurance is a segment of insurance produca designed with smaller premiums and less coverage (o support low-income populations that cannot afford or do not have access to tradicional plans. As an example, premiums for a microinsurance plan in India can be as low as 45 rupees a month (3.8 cents per day) and cover losses around 2,500 rupees ($62.75 dollars).

The number of people insured by microinsrance hs Increased from 78 million in 2007 to 500 million today, according to a study published by the International Labor Organization and die Munich Re Foundation. The total value of the microinfurance market now exceeds S40 billion, according to reinsurer Swiss Re, and Lloyds of London projects that the market has the potential to someday provide up to three billion policies.

There have been many factors contributing to the growth of microirwutancc in the post five years. Urbanization and economic growth in countries with large, low-income populations has increased die purchasing power of this market segment. The two leading microinsurance countries are China and India, which account for nearly 80% of the worldwide market, followed by Latin America, at 15%, and Africa, at 5%- The estimated purchasing power of Chinas poorest is SI61 billion and India's is estimated at $93 billion, according to Accentare. As the purchasing power of diese densely populated, low-income areas continues to increase, so loo docs the need to insure chat income.

Another factor driving the rise of microinsurance is government involvement. The Chinese government first started using microinsurance in August 2008 in rural areas where 400 million people, among a population of approximately 700 million, may be able to benefit from microinsurance. The government has offered incentives for large, state-owned firms, such as People's Insurance Company of China, as well as small, privately owned insurance companies.

The increase of private-firm involvement and partnerships between public and private groups has also helped attract attention. In 2O05. seven of the 50 Largest insurance companies targeted this lowincome group. Today, 33 out of 50 are involved. These companies have seen the enormous potential for growth in the industry and have been eager to Increase rheii market size, a facroi that was cited as the largest benefir for insurers that offer microinsurance, according to a survey conducted by the Microinsurance Network.

Private insurance companies have formed partnerships with local microfinance institutions, governments, agents, mobile networks, health service providers and NGOs. The infrastructure created by these partnerships, which include organizations that work in the worlds biggest cities and smallest villages, allows these financial products to be distributed to a much more geographically diverse consumct base than ever before.

Anodter cause for die expansion is the rise in technology, namely the widespread use of mobile phones. The number of mobile phone users in die developing world now surpasses die number of users in the developed world . accord' ing to a report by the World Bank, Unbelievably, three-quarters of the world now has better access to mobile banking than to clean water and electricity, and the number of people using mobile banking in developing nations is expected to explode, from 60 million today to close to one billion in 2015.

As technology use continues to evolve throughout die developing world, so too will its citizens' access to microinsurance. Iliree organizations, for example, hare joined together to create a system that allows Kenyan fanners to insure crops through a mobile phone. A microinsurance policy, which is distributed by the Kenyan branch of UAP Insurance in partnership with the Syngcnta foundniofl for Sustainable Agriculture and Kenya's largest mobile company, Safaricom, can be registered by using a ramera phone to scan the barcode on each bag of seed sold. A text message ii dien sent to the farmer co confirm the policy. If the weather worsens, analysts use a system to calculate if die crops would be damaged. If the crops are, a payout is made directly to the farmer through his phone using Saiaricom's mobile banking service. This system eliminates ail orhci intermedianes and paperwork, which cedue es transaction outs drastically.

Even with the sector's recent cxpantion, microinsunuice has experienced a variety of challenges. The concept of insurance is completely new to many lowincome populations including JtfmeB and migrant laborers, many of whan arc illiterate. Considering thai insurance can be a tough sell even in the United States, their is a larger hurdle in crying to introduce it to populations unfamiliar with die underlying principles.

When a microfinance institution provides a loan to a borrower, it is entrusting dial die borrower will repay his installments, however this is reversed when a consumer purchases insurance. The client needs to trust chat the agency will repay him or her in case of disastci. This is a foreign concept to many populations in the developing world. It may be more likely that a. microinsurancc package will be purchased when coupled with a microloan because, in this situation, mutual trust is created.

En order for microinsurancc to scale in an area, the revenue model needs to be self-sustaining with a large pool of policyholders. A large number of small policies leads to higher transaction costi, however. Mictoinsurancc programs need to be able to provide jusrainablc revenue models that can access fluid distribution channels, overturning geographical and cultural barriers.

Although challenges exist, many initiatives have arisen that highlight the promise, now and in the future, for rnicrainsUratice. Leapfrog, the world's first and largest mtcroituu ranee investment fund, and its high-profile investors, such as the Clinton Global Initiative and J. P. Morgan, continue to bring attention to the business.

Providing insurance fot die pool no! only gives the economically disadvantaged a fallback plan, but also an opportunity to invest for the futuic with increased security. With an growing, successful track record, microituurance continues to be a promising tool in the war against poverty.

Three organizations have joined together to create a system that allows Kenyan farmers to insure crops through a mobile phone. A microinsurance policy can he registered by using a camera phone to scan the barcode on each bag of seed sold.

John Hut is a conlribtiling writer from Villanmta, Pennsylvania.