Microinsurance: The Drive of Technology



Microinsurance, a low premium, low margin and high-volume insurance has been the object of redoubled attention for a year or two. Why are insurers focusing their attention on a type of insurance uncommon in our more developed economies? What is microinsurance, how did it originate, and what is key to a successful implementation? While these are the questions we will answer in this article, in a future blog we will explain how it is being introduced in more mature insurance markets to innovate, as well as what makes a successful distribution strategy.

Microinsurance originates in developing economies in Africa and Asia, to offer protection to low-income populations with low-valued assets. To influence favourably the economic and social sphere, this instrument provides cover at an affordable cost to a vulnerable population. For a low premium, in line with their budget, populations may reduce their risk exposure with insurance covering life, funeral, health, property, crop or livestock.

The concept of microinsurance dates back to the turn of the century and is linked to microfinance with which it shares the common belief that very small loans or insurance can make a disproportionate difference to a poor person. While Micro Finance Institutions (MFI) were the first to respond to this challenge through a commercial offer, they soon realized that unforeseen events affecting the lives or belongings of their low-income clients or respective family could deplete their financial resources, affect their payback capacity, and induce them to close their savings account. To safeguard their clients against this risk, MFIs began to complement their banking products with insurance tailored to their clients’ specific needs.

As a result, microinsurance was originally developed by informal organizations or MFIs, the likes of Grameen Bank in Bangladesh, founded by Muhammad Yunus, winner of the Nobel Peace Prize in 2006 for the pioneering concept of microcredit and microfinance.

A main contributor and amplifier of the concept were MicroEnsure (originally Micro Insurance Agency). Founded in 2005 as a subsidiary of Opportunity International, one of the world’s largest MFIs, MicroEnsure started out providing credit life insurance to Opportunity International’s client base. It soon identified the need for other types of products as well as the need for larger client networks and therefore set up itself as a separate entity in 2006. It then moved on to work successively with local insurance companies, as a third-party administrator before becoming an insurance intermediary and a consultant designing low-cost insurance products. In 2012 MicroEnsure insured a population of 4 to 5 million low-income clients, which turned to more than 60 million spread throughout 12 countries in Asia and Africa, by 2020.

Given the specificities of insurance for low-income populations, Arthur D. Little[1] explains that a successful microinsurance strategy in emerging markets must:

  • Simplify products
  • Offer in-kind benefits
  • Engage in public-private partnerships to improve local infrastructure and quality of life for consumers
  • Partner with microfinance companies to offer bundled services
  • Ensure applications and claims forms are simplified and accessible to consumers
  • Use technology (mobile point-of-sale devices, smart cards) to overcome distribution challenges

Selling, underwriting and claims management not being proportionate to policy value and being the most significant costs related to insurance, minimizing these transaction costs with the aid of technology is as paramount in microinsurance, as is defining a product that adequately satisfies a dire need for a population.

A technology that contributed greatly to the spread of microinsurance is mobile telecommunication, given its penetration in developing countries. This gave birth to mobile microinsurance which refers to any type of microinsurance product that leverages the mobile channel to improve a part of the insurance value chain – such as product design, pricing, marketing and sales, policy administration and claims payment – be it linked or not to a mobile money platform[2].

Understanding the usefulness of mobile telecommunication, organizations such as MicroEnsure partnered with mobile network operators (MNO) to benefit from their installed infrastructure.

The communication channels (voice, SMS, USSD), offered by MNO made the promotion, sales and enrolment of insurance cheap and accessible to a great part of the population while facilitating claims handling.

Not always familiar with insurance and/or lacking confidence in the carriers’ brands, MNO’s retail sales and distribution networks of airtime dealers and mobile money agents can be leveraged to educate potential clients.

MNOs offer a set of solutions to the challenge of collecting premiums and paying out claims from or to often unbanked populations with irregular cashflow and poor access to traditional payment mechanisms.

The lack of historical data is another major difficulty for insurance practitioners in designing and pricing new products. However, real-time rendering of insurance and mobile transaction information can greatly improve this process by providing insurers with reliable data to find patterns necessary for better understanding their customers, ultimately leading to more appropriate product design. Mobile transaction histories can also be used to identify customers with low-risk profiles or a need for a particular insurance product, improve record-keeping, eliminate redundant processes, reduce fraud, and make claims settlement more efficient by reducing the amount of documentation required.

Finally, brand and trust being crucial, a prospective client will often recognize and trust more an MNO than an insurer. An MNO will benefit from greater brand awareness in the client’s market and regular (positive) interactions will induce him to buy insurance from him rather than from an insurance carrier.

Now that technology has helped microinsurance pick up pace in emerging economies, the determining factor in insurers’ growing interest in microinsurance is its potential versus the limited growth prospect of insurance in developed markets. While emerging markets account for around one-fifth of the total global premium, they represent 80 per cent of the world population[3].  Furthermore, as Swiss Re’s sigma World insurance study for 2020 on world insurance markets reports, premium growth in developing markets tends to outpace growth in advanced markets which is close to stagnant.

After emerging within the economic and social framework of developing countries marked by the disengagement of states from public health services and welfare plans and by the rise of civil society and the NGOs involved in sustainable development actions, microinsurance’s attractiveness is growing amongst global insurers from developed economies. Mobile telecommunications have been a trigger for the development of this recent type of insurance in developing countries and is now attracting further attention for its intrinsic growth potential in developing countries. As we shall see in the following blog, the same technological factor is making room for the development of microinsurance in the mature insurance market too.



[2] In: “M-Insurance: The Next Wave of Mobile Financial Services?” by Jeremy Leach (available at http://www.microensure.com/news.asp?id=47&start=5)

[3] In: Background on: microinsurance and emerging markets, From <https://www.iii.org/article/background-on-microinsurance-and-emerging-markets>