Challenge yourself: Win the Microinsurance Game
Challenge Yourself: Win the Microinsurance Game!
Within banking, it’s obligatory for banks to undergo a stress test periodically. A stress test, in financial terminology, is an analysis or simulation designed to determine the ability of a financial institution to deal with an economic crisis. But any company – and in our case, any insurance company – should take a step back occasionally and stress test their competitive ability.
For the stress test, you want to use a realistic, relevant business scenario and then assess the capabilities of your organization to be successful in that scenario. If the outcome of the test is negative (you probably wouldn’t make it in that scenario) you’ve inherently already developed a plan for not to be successful – and you’ve identified the inhibitors that needs to be addressed. Not a bad way to spend your time.
What does it take to be successful in the microinsurance space?
In this blog post, I would like to suggest using a microinsurance scenario as the business use-case behind an insurance stress test and argue that extreme operational efficiency fueled by Straight-Through Processing and bold product innovation are the prerequisites for being successful in the microinsurance space!
Microinsurance is often considered as a vehicle to close the protection gap in developing economies that typically see very low insurance penetration rates. The need for risk transfer from consumer or SMB-owners exist, but potential insurance customers find it difficult to pay the fees for broader insurance covers. Instead, insurance products are scaled down to include only essential covers (one field, or one livestock, or single covers for funerals etc.) with a ticket-price of €1-2. However, recently more developed, and mature insurance economies with high penetration rates have also seen an increasing selection of microinsurance products. Gadget insurance, with policies covering only a single asset/gadget is a form of microinsurance and most recently, innovative insurers have introduced various kinds of temporary, focus insurance offerings in an attempt to find blue-ocean-type opportunities in otherwise unattractive, mature markets. Such temporary products could be cover for parcels delivered and left by couriers to your front door (from time of delivery until you get home) or cover for your food from outlet to your home when handled by messengers such as Wolt. An insurance product closely related to microinsurance is parametric insurance.
So, let’s say, you as a player in the insurance ecosystem, decide to promote a microinsurance product to your customers. First thing to do is to agree on the criteria for success: When do we know if we have been successful?
Well, an intuitive criterion for success would be profitability. Do we have a profitable book-of-microinsurance-business? Seems straight-forward, but it does require that you are able to individually assess your underwriting performance per product group and link your cost of service directly to your individual portfolio profitability. As an example, a parameter, that often causes confusion, is discount. “Collector’s discount” (and commissions etc.) are rarely directly attributed to individual package components, thus making it difficult to assess the underwriting performance of individual risks.
Once the criterion for success has been determined, the next step in our stress-test is to assess if we, as an organization, have the required capabilities to successful in microinsurance. Such capabilities include (but are not limited to:
- The ability to imagine, define, develop, and launch innovative insurance products
- An extremely lean operational setup
- The ability to imagine, define, develop, and launch innovative insurance products situations where early payout is important to cover urgent expenses
- Access to a distribution network suitable for the relevant products
Let’s consider these capabilities:
The ability to imagine, define, develop, and launch innovative insurance products
Your actuaries need to define a set of risks that can be covered by a policy premium of €1-2. But your sales and distribution team also need to imagine a new sales scenario where a decision to buy an insurance cover (a policy) in fact is something that is made on the spot and doesn’t require a lot of consideration, research, peer-advice etc. Therefore, getting it right often requires several iterations, adjustments to the product, trial and error etc. Not to mention that you need to get to market with your product before your competitors to capture the opportunity while it’s there and to harvest first-mover advantages. This requires a whole new product development concept. The otherwise slightly inflated process-concept AGILE suits this particular process pretty good – but the prerequisite of success is that you have a configurable product writer (an IT platform) that can shoot out tangible products in days – not weeks or months.
An extremely lean operational setup
In most places, especially in developed economies, people cost money. In microinsurance, volume is the name of the game (for profitability reasons, for risk assessment reasons and other reasons!) and people are simply not efficient enough to process high volumes of transactions. So that’s what you have technology for so an modern, scalable core insurance platform with native facilities for automation is a prerequisite for success. “Native” is a keyword here, because while a lean operational setup is a perquisite, it’s probably not where you’ll find your competitive advantage. It’s more likely to be a “license to play”. As such, you don’t want to be burdened by unnecessary costs of integrating to Business Process Management (BPM) engines of various kinds: You don’t need the potential sophistication these facilities are offering, and any integration comes with a cost.
And you must have automation as a guiding principle of your product and operational design. Decision points (“do this or do that”) need to be supported by evaluation based on data. Data needs to be available and accessible so that such decision points can be automated. If automation is not possible (data not available) then the process must be redesigned to omit that decision point.
Access to a distribution network suitable for the relevant products
In microinsurance, volume is the name of the game. If you have access to volume customers then that’s fine, but if you don’t have such access, you want to team up with somebody who has. Retailers, affinity groups, telecommunication companies etc. These partners presumably already have (digital) vehicles they use to access their customers and it’s a prerequisite for success that you can weave into those vehicles. Perhaps your offering needs to be embedded in somebody else’s proposition. Perhaps it needs to be white labeled. Perhaps you want to let your brand shine through. Perhaps you want to work with multiple partners, and you need to be able to do all of the above. At the same time. Separated – while at the same time maintaining an aggregated overview. Your competitors all have their eyes on the same distribution partners as you, so what it comes down to is whether you have the superior proposition or not. Do you have cooler products? Are you easier to work with? Do you offer more commission? If you do, let’s talk and we can split the work:
We bring IBSuite, the cloud-native core insurance platform that can provide you with the technology capabilities you need to configure your new microinsurance product, automate your processes, and integrate the insurance ecosystem you want to be a part of. All you have to do is imagine the potential of the microinsurance opportunity!
Written by Niels Trzecieski, Head of Global Sales, IBA
Published April, 2022