Microinsurance Identified as New Paradigm for Business

The fact that the insurers have been challenged by a negative image has not hampered their efforts to enjoy a relatively stable financial performance over the years, but thanks to the advent of microinsurance, insurers now have an opportunity to enjoy a positive reputation by entering this new market, say analysts.

The popularity of the microinsurance vertical is causing insurers to reconsider both their value proposition and the markets they serve.

According to LeapFrog Investments, a firm that, in an effort to support down-market growth and expansion of insurance products and inclusive financial services, invests in businesses that extend and enhance security to the poor and financially excluded, there is vast unmet demand in the worldwide market for insurance. Lloyds’ Insurance in Developing Countries Report estimates the number of people who are underserved by insurance to be 1.5 to 3 billion, and the World Bank puts that number at 2.3 billion (below). There are 135 million people currently being covered by microinsurance, notes LeapFrog.

Today, India, Brazil and Mexico are countries in which microinsurance has the greatest growth potential, according to an Accenture report released entitled “Succeeding at microinsurance through differentiation, innovation and partnership.”

According to the Accenture report, several diverse trends are overlapping that boost demand for risk protection among low-income consumers, businesspeople and farmers, and to encourage the development of suitable products and effective operating models:

• Growth of the economic segment or type of consumer who, while poor and unaccustomed to insurance, has an income and assets which need to be safeguarded. The World Bank estimates that there are between 4 and 5 billion people who live on an income with a local buying power of less than $8 a day. A little more than half of these individuals are so poor that they require aid and effectively fall outside of the commercial financial market. That leaves about 2.3 billion potential consumers of microinsurance services.

• The growing convergence of the private, public and social sectors is creating a fertile environment for the provision and distribution of microinsurance, notes Accenture. While insurance corporations once operated largely in isolation of state agencies and non-governmental organizations (NGOs), today they are collaborating to an unprecedented degree to take maximum advantage of their respective capabilities and resources. Many governments have created incentives for private-sector organizations to develop insurance solutions for the previously uninsurable.

In its evalution of the growth opportunities for microinsurance, Accenture studied 11 developing countries, analyzing several key factors such as the base of the economic pyramid (BoP) (those individuals at the poorest end of the spectrum, yet not reliant on government support), based on size and composition of the population who lives with less than $8 per day, the current microinsurance market penetration, the existing number of microinsurance providers, and governments’ support and business environment for microinsurance initiatives. The report indicates that India, Brazil and Mexico also present attractive opportunities:

• India – the second largest BoP size, behind China, with more than one billion people and total annual income valued at US$93 billion. The Insurance Regulatory and Development Authority (IRDA), the local regulator, is pushing insurers to cover rural areas.

• Brazil – the BoP represents almost 130 million people (almost 75 percent of the total population) with $172 billion in annual income. Insurance covers 40 million-50 million people, 30 million of whom may be microinsurance customers. Microinsurance is mostly provided by large commercial insurers who started marketing products from 2001 while the large informal funeral assistance market is served by funeral homes.

• Mexico – The BoP is 75 percent of the total population, with nearly 60 million people, and with annual income of $105 billion. Microinsurance is well developed. The Mexican insurance association AMIS, and financial services providers work in tandem.

• Columbia, South Africa, Kenya, Philippines also hold immediate potential – due to their favorable enabling environment though the sheer size of their BoP population is smaller (compared to first set of countries)

• China has big potential in terms of sheer size, but the country has restrictive frameworks that make it difficult for private insurers - e.g. regulatory restrictions on microfinance institutions make it difficult for insurers to partner with them on microinsurance.

“In fast-growing economies today’s low-income customers may soon become tomorrow’s premium prospects,” said Madhu Vazirani, a senior manager in Accenture Research and co-author of the report. “And products like microinsurance, which seem at first glance to offer modest financial returns, may in the long run prove to be important contributors within the carrier’s broad portfolio.”

In the past, a company’s portfolio was not looked upon as being anything but a profit-maker.

“The reputation of Corporate America in the United States has suffered,” Raj Sisodia, chairman, Conscious Capitalism Institute, told attendees at a user conference last year hosted by technology solutions provider MajescoMastek. “We believe that to be successful in the future, companies will have to exemplify a more conscious way of being.”

Sisodia pointed to his organization’s tenets—higher purpose, stakeholder orientation, conscious culture and conscious leadership—offering the examples of the efforts of retail firms such as Whole Foods, which works directly with farmers to deliver natural foods to the marketplace, and the stewardship efforts of REI.

“A great business maximizes 'total value created' on a sustained basis and distributes that value in an equitable and enlightened manner among all of its stakeholders,” he said. “Such businesses enhance the overall health and well-being of society.”

Sisodia agreed that microinsurance could fit the conscious capitalism ideal. “According to a 2009 Gallup study, big business was the societal institution least trusted by Americans at 16 percent (Congress was at 17 percent),” he said. “It’s clear that the purpose here would be a definitive statement about the difference you're trying to make in the world."