Microinsurance is a fast-growing segment for insurers serving underserved populations. New distribution models utilizing mobile platforms are credited with driving this expansion.
Customized regulatory frameworks offer consumer protection and promote transparent product offerings, but a range of hurdles hinder market expansion.
Market Size
Emerging markets represent an invaluable opportunity for financial inclusion, insurance penetration and consumer protection. Principle-based regulations can foster consumer protection while offering transparent product offerings and an inclusive market landscape.
At the outset of this decade, microinsurance saw rapid growth due to its widespread use in microfinance institutions (MFIs). MFIs typically provided credit life insurance embedded into microloans through MFIs – leading to low claims ratios overall.
Current microinsurance products are sold mainly through local organizations, such as cooperatives, trade unions and faith-based groups. Such institutions tend to have strong roots within local communities and a significant membership base; they also possess existing infrastructure for administering policies as well as the capability of creating an insurance culture through discipline measures; however they still face many challenges.
Market Segmentation
An approach which delineates finer subsets of an emerging market can provide more efficient solutions. One such example would be making sure coverage does not incentivize behavior contrary to societal values (for instance not covering property losses caused by criminal acts).
Microinsurance products have seen great success due to a combination of factors, including innovative distribution channels and supportive regulatory frameworks. Their market growth offers lessons insurers can apply towards closing a protection gap, says RGA’s Ola Oyekan. For instance, successful microinsurance offerings should be simple in design with efficient cost control measures as well as accessible to low-income consumers through innovative customer aggregation models like mobile network operators, pawnbrokers or digital platforms; principles-based regulation supports these efforts by making sure supervisory measures match up appropriately with each jurisdictional need without overregulating or overregulating.
Information Asymmetries
Information asymmetries in microinsurance often result from consumers (individuals, groups or institutions) being unfamiliar with insurance products and their terms. To address this problem, various interventions such as education, awareness building and transparency measures can be implemented to address it.
Cultural norms and social preferences can also prevent adoption of microinsurance products, so trust-building requires clear communication and an organized approach to customer service while making sure policies align with societal values (i.e. not covering risks which could be considered criminal).
Digital platforms hold great promise for meeting these challenges as they provide better aggregation and payment flexibility, but their effectiveness remains to be tested – particularly with respect to newer technologies like AI or P2P.
Adverse Selection
As microinsurance awareness among low-income individuals and communities expands, its demand is on the rise; yet this market remains niche with limited research available regarding its benefits, drawbacks and regulation.
Adverse selection is a significant problem, in which one party to a transaction has access to information not shared by both sides, leading to inequitable profits and risks from deals. Insurance companies work hard to combat adverse selection by carefully screening applications, limiting payouts, and setting maximum coverage amounts.
Regulatory frameworks must incorporate public policy criteria that ensure risks covered are consistent with societal values. Furthermore, insurers should take measures to limit moral hazard by not insuring trivial risks and imposing discipline to discourage bad behavior (e.g. by mandating paramedical examinations and querying physician offices for medical records).
Moral Hazard
Microinsurance is experiencing rapid expansion, but still represents only a portion of the potential market. Much of its success can be attributed to new distribution models that reach rural customers with no prior understanding of insurance.
These alternative delivery channels, including mobile phone operators, pawnbrokers, local banks and churches, offer more cost effective and accessible approaches than traditional insurers allowing them to cover more risks more efficiently.
Nourishing markets can help close the protection gap for low-income households, yet also pose unique challenges that must be met through tailored regulation to provide consumer protection, transparent product offerings, and an enabling market landscape. Three articles this year explore these issues using various methodologies such as empirical analysis based on surveys or econometric modeling.