AXA recently bought 46% of microinsurance intermediary MicroEnsure. In this interview, MicroEnsure's CEO explains how a radical simplification of insurance products combined with new, innovative distribution channels are helping insurers reach those most in need of financial protection.
The poorest 80% of the world’s population represent a huge growth opportunity for insurance companies, but selling to this group requires developments that include new parametric triggers and new ways of using mobile phones. In time, these ideas could help to improve the way that insurance is sold in the developed world too.
Why is insurance penetration so low in many developing countries?
I think it's true that nobody actually wakes up in the morning wanting to buy insurance. That's true in the UK even, which is supposed to be a sophisticated market. But this is even more of an issue in the developing world.
There are a number of key reasons. Insurance companies tend to be very product led. They tend to like complexity, which is understandable when you look at the more mature markets. Most insurance companies have been competing on coverage in developed markets, rather than on price, such as selling add-ons to make their products more attractive.
But that approach doesn't work in emerging economies. People don't want a complicated product. They just want something to pay out if something bad happens. They don't want exclusions, they don't want terms and conditions, they just want a payment if they have an accident or somebody dies.
And then the biggest barrier to gaining access to these markets is the cost of selling and distributing the product itself. And if you have a complicated product you need to ask a lot of questions and that makes the price of signing someone up more costly, more time consuming and introduces a lot more friction. It also puts people off buying the product.
How is the global microinsurance sector developing?
The sums insured in Africa and Asia remain relatively low at present, but all the growth in the future is going to come from these markets. We added it up the other day and our total sum insured is approaching $10 billion. $10 billion is peanuts, but we haven't even yet got a couple of percent of the market yet. We're just starting. We've got 25 million customers out of four billion available so there is huge growth potential.
At the moment there aren't title deeds and there isn't clear land ownership for microinsurance customers. People may own their house, but they've been handed it down generation to generation. And people have other pressing needs, such as their health for instance. So at the moment it is more about life than non-life, but non-life will become more and more important as people get more assets.
What we do see a lot of is fire insurance for market traders – there are a lot of market fires. And then there are microinsurance programmes for farmers. We launched the first parametric product in Malawi in 2004 and spent ten years working with the World Bank and Swiss Re on those products.
It was very product-focused initially, and we lost that critical focus on the farmer. The reality is that the farmer is not willing to pay the cost of the insurance. In my experience the farmer is willing to pay three to five percent of the sum insured. So there's this mismatch between what the farmer is willing to pay and what the product actually costs.
That's why in Europe and America, all of these products are heavily subsidised by the state. In fact India is the only country where these products have actually worked, and there they are heavily subsidised and 75% of the premium is paid by the governments.
We're currently doing a lot of work with a number of seed companies to find a solution. So, for instance, if the monsoon isn't reliable and there's a dry patch, there is a product that would replace the seed. We're looking to embed that into the price of the bag of seed, so the farmer doesn't even see the price of the insurance.
What are some of the challenges when rolling out microinsurance programmes?
You've also got a very uneducated consumer base, who don't trust insurance companies. And if you're going to do this it tends to be very high-volume very low margin, which is exactly the opposite of what insurance companies have traditionally been doing, so you need a completely different kind of infrastructure in order to do that, using mobile phones and other digital platforms as oppose to selling through agents.
What microinsurance has done is focused on the distribution question, which is: How do I get this into the hands of people cheaply, easily and quickly and then build from there, so the costs are low? Simple products are at the heart of this, which also addresses the friction and the cost of servicing these products.
When MicroEnsure first started we worked with micro finance companies and that gave us a certain amount of reach. But we had this "aha" moment in 2010 when we realised the micro finance organisations basically served about 150 million people globally, but there were around four billion people without insurance. So we had to find other ways to distribute the product.
So we started to look at different organisations were could work with. We realised that we needed to have organisations with three critical elements - they needed to be trusted, they needed to have points of sale that were accessible and the ability to transact cash or payments.
So we tried working with a lot of different organisations that were trusted by the community and had good points of sale like churches, cooperatives and big international NGOs. But they all lacked the payment mechanism and as a result we really struggled to make it work economically. What we were left with were mobile phone companies.
Why did mobile phone companies offer such a good solution to distribution and sales?
Whoever you are in society, mobile phones work the same, they're indiscriminate. You buy a top up card, scratch the back of the card and you have minutes and can use those minutes to make phone calls. That reinforces in these people the idea that this is a company that I can trust and they do in fact deliver. And that's a fairly unusual phenomenon in the lives of low income families.
So what we did is we looked at the fact that consumers have multiple sim cards in these countries, for all the different networks. That's because they're quite price sensitive, the networks have different levels of coverage and if they're calling friends on different networks it can be cheaper.
What we realised is that nobody wants to wake up and buy insurance. But people are worried about risks they face. As a result, if a phone company offered free insurance that was often enough to convince customers to spend more with that company than the competition. Then what we discovered was the once people have insurance, and they use it.
This woman once told me that life was a game of snakes and ladders. She said that as she worked her way out of poverty she knew bad things were still going to happen, but it would be great if when they did happen she didn't slide all the way down to the bottom of the pile. And that's what we're trying to do. Put in place a safety net – that's what microinsurance is about.
It's a little bit like Angry Birds. None of us realised we needed Angry Birds in our lives until we had it, and it became addictive and we were suddenly willing to spend a pound to unlock new levels. We followed a similar route. We said, "here is a product which for free with a compelling business case"... and then we try and upsell. So we say, "now you've seen the product and that it works, would you be willing to add additional family members for a dollar?" And the conversation rate is really high, at around 80%.
How are claims typically paid and what sort of parametric claims triggers are used?
The majority of our products are around three triggers - death, accident or hospitalisation. Our products tend to be extremely simple - if one of those three things happen we pay. We're alerted to that digitally, we deal with that digitally and we gather whatever information we need digitally. And then the claim is settled digitally. In a country like Pakistan, 85% of our clients and claims are rural. If you have a claim before 11am the person typically has the money before 3pm.
A lot of insurance companies freak out and think microinsurance customers are going to be very fraudulent - but there's no evidence of that. It's actually a very good book of business, a very stable book of business.
Where do you expect the global microinsurance industry and MicroEnsure to go from here?
We're playing around with different approaches and so far it's been very successful. As we look to the future, microinsurers are starting to ask whether we can actually sell directly to the consumer? Can we go B2C? Especially now that people have more access to the internet? In India, smart phones are now available for £2.50 - 251 rupees - and that opens up smart phones and the internet to a bunch of people for the first time.
We went through a heavy donor-financed phase - with the Gates Foundation and US Aid - and that's all kind of died off. What that's done frankly is left behind some clear winners and losers. MicroEnsure has made the transition from being a not-for-profit company financed by the Gates Foundation to being a full profit company financed by equity from our investors. And that's very positive.
What is the value for insurers in selling microinsurance?
MicroEnsure recently announced that Axa had taken a 46% shareholding. What we're seeing is that the insurance companies, that may have initially thought microinsurance was some sort of CSR endeavour, are now seeing it as an opportunity. Their core business of serving the top end of the market through agents and brokers will continue, but there are 300 million Indians who in the last few years have become middle class. And these people are not being serviced.
I have no doubt they will rapidly rise to being upper middle class and, as a result, will become tomorrow's consumers very quickly – within a generation. Insurers are thinking about how do I start a relationship with these people now. And they've tried to go away and do it themselves and realised that it's much harder than it looks, because they can't get the cost of distribution and servicing low enough through their core systems.
So there's been a bit of a shake down and people are investing into the companies that make sense. The big question is why haven't the big global brokers gone into this market? They've been a bit slow out of the blocks.
How might this affect reinsurance and the capital markets?
At the moment there is a huge concentration of risk in the US and Japan and Europe - particularly when it comes to catastrophe risk - those are the big aggregates everyone has. Meanwhile penetration is very low in many emerging markets where less than 5% of the population has insurance - so there's massive growth potential.
I don't think there will be specific reinsurance covers when it comes to microinsurance. These products will get bundled into the insurance company's general account under existing reinsurance treaties. But of course what that will do is broaden the risk base and I think this is what the world needs.
As with all products catastrophe risk will need to be part of the risk rating process when we sell microinsurance. We sell specific catastrophe products in countries like the Philippines, so if you are affected by a typhoon, flood, earthquake or tsunami etc most of those risks are covered in any property insurance we do. So those risks are being covered and they are reinsured through the catastrophe excess-of-loss accounts that the insurance companies currently have in place.
Posted: Monday, April 4th, 2016