Microinsurance: Ripe for Disruption

The microinsurance market grew to more than 500 million risks in 2011, from 78 million risks in 2006, and could as large as 360 million people in Latin America alone, with Mexico and Brazil making up as much as 55 percent of the total, according to “Microinsurance in Latin America: Disruption in Practice,” a report from Celent.

Microinsurance typically has been aimed at people who have been ignored by mainstream commercial and social insurance schemes, Celent said, including low-income households, the working poor and the underserved. And, it could play an important social and economic role by helping to break the vicious circle of poverty and vulnerability that affects the low-income segments of the population, Celent said. As a result, microinsurance products could disrupt powerful incumbents by focusing on these poorly served markets, Celent said.

“The microinsurance market is an excellent source of innovation for insurers,” said Juan Mazzini, senior analyst with Celent’s Insurance Group and author of the report. “It matches perfectly with the underlying conditions required for disruption. Microinsurance stands as a foothold for an underserved, untapped, and fragmented market, with a high cost to serve under the traditional Insurance model. Innovation around products, pricing, packaging, distribution, processes, and technology will be necessary for insurers wanting to compete for a profitable market share.”

Established insurers should not view microinsurance as a segment that can be served by specific distribution channels, Celent said, but instead as a completely different market that uses retailers, such as grocery stores, mobile phone recharge centers, bank retailers, banking correspondents and pharmacies, which are available even in the most remote areas. Some initiatives feature mobile wallets and banking correspondents, which are paving the way for the growth by offering collection and payment options.

“For incumbents it will be hard to succeed if the microinsurance business unit does not get enough autonomy from the established business,” Celent said. “The ‘This is the way we do business’ mentality, the business case logic most skewed towards serving mature markets, the existing regulation or lack thereof, and even current market dynamics and how the organization is structured around its established business all undermine the possibilities of this opportunity taking off.” To go after the microinsurance market, insurers will need to innovate around product, pricing, packaging, distribution, processes and technology, Celent said.

Online peer-to-peer insurance, which combines social networks with well-established insurance companies, offers an example of such a disruptive initiative, Celent said. When two people connect, Celent explains, they agree to support each other with a small amount of money in case of a claim; the more connections they have, the greater support they receive in the event of a claim. The insurance provider only has to regulate the part of the claim, which lies above the network support, and rewards the policy holder with a payback. A stop loss is built in, which guarantees each customer, that the support to be provided to others never exceeds the premium payback.

Microinsurance products mostly have been simple, easy to administer products that typically are tied to microfinance products, and are easy to administer, Celent said. The major challenge nevertheless resides in including more commercial products, such as index insurance.

Microinsurance is a low-margin business that requires high volume, Celent said, and multiple distribution channels could be necessary to achieve scale quickly. To create that mix of channels, Celent said insurers should consider that:

Traditional agents are not always the best option.Financial services channels familiar with the target market are preferable.Distribution needs to be effective, cost efficient and incorporated into the product design.Channels should be used considering their motivations, with a fine balance between desired profitability and customer value.

See also: "Mobile as a Source of Microinsurance Innovation"

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