Left to right: Peter Wrede, Microinsurance Expert, Switzerland; Craig Thorburn, World Bank, USA; Daniel Clarke, University of Oxford, UK and Howard J. Bolnick, Chair of the IAA Microinsurance Working Group.
Left to right: Stefan Dercon, Professor of Development Economics, University of Oxford, UK and Dirk Reinhard, Vice Chairman of the Munich Re Foundation.

40 actuaries for four billion clients

30 June 2011: Munich Re Foundation and the British Actuarial Profession host first “Microinsurance Learning Session” in London

Four billion people are estimated to be potential clients for microinsurance worldwide. The demand is huge but insurance penetration in the low-income sector still remains modest. Actuaries play a key role in assessing the risk of certain events occurring and in developing insurance policies. The British Actuarial Profession, together with the Munich Re Foundation, and the Microinsurance Network, held a seminar to reach out to actuaries.

Microinsurance is the provision of insurance to the low-income market. According to expert estimates, only about 140 million poor people currently have access to some sort of insurance cover. “Microinsurance is not just a scale-down version of regular insurance. The product and processes need to be completely re-engineered to meet the characteristics and preferences of the low-income market,” said Craig Churchill from the ILO’s microinsurance innovation facility and Chairman of the Microinsurance Network in his introduction on 30 June 2011. Efficiently managing distribution and gaining the trust of clients are among the key barriers to the progress of the microinsurance market. “We need to combine the knowledge of the developed and developing markets,” said Churchill. New distribution channels such as small retailers’ pawn shops as well as the use of cell phones to pay premiums and make claims are promising channels to increase outreach. Credit life insurance, which is relatively easy to develop, sell and manage, has helped to start the microinsurance market. But according to the chair of the Microinsurance Network, by providing only credit life a lot of opportunities are being missed. In markets like India and South Africa with an already relatively strong insurance industry, providers need to better understand the poor client’s needs. In other countries, the insurance industry should be strengthened in order to increase the availability of insurance not only to the poor but also other clients with higher income, concluded Churchill.

Insurance key to reducing poverty

Research carried out by the University of Oxford’s Department of Development Economics has shown that insurance could reduce poverty in Ethiopia by one third if only the four main risks were covered: health, mortality, agricultural risks and price shocks affecting the value of products. Examples from Tanzania show stunting and lower education by 2004 when a family was affected by a death in the 1990s. Children from families affected by the famine of 1984–85 in Ethiopia show similar effects.

According to Stefan Dercon, Professor of Development Economics at the University of Oxford, about 95% of the people in Ethiopia are members of at least one group that collects some sort of a premium to cover funeral costs. Some are even members of more than one group to increase insurance coverage. These informal insurance schemes have been in place for decades and people trust the leaders of these so-called funeral societies. Using these leaders, for example, could be a way to insure other risks such as health. Examples show uptake rates of 25% if insurance is being sold through leaders of funeral societies. “But the success of microinsurance should not be assessed by measuring uptake but by measuring the actual impact,” concluded Dercon. So far, mainly practitioner-based research learning from experience is available. Very few systematic studies have been carried out on the impact. But there is hope, and Dercon expects many more studies to be published in the near future.

Limiting factors: Knowledge and data

In many microinsurance environments, the availability of actuarial expertise as well as solid data is low. “I personally know only about forty actuaries working in microinsurance, and I doubt that there are more than one hundred worldwide,” said Howard Bolnick, Chair of the International Actuarial Association’s Microinsurance Working Group. “Considering the number of potential clients, this number has to increase substantially.”

An example from Pakistan, where a local health insurance scheme had recently been terminated, showed the difficulties actuaries face due to low availability of data. Questioned by the panel, Peter Wrede, actuary and microinsurance expert gave the following recommendations where little data is available: One should transfer data from similar environments in order to make better assumptions for the actual environment in which one has to operate. Despite deficiencies, products priced on the basis of best guesstimates can still be launched but exposure should be limited, for example by slowly increasing enrolment volumes over time. At the same time claims have to be monitored intensively and corrective actions taken immediately when new data show that assumptions are incorrect. Furthermore, actuaries play an important role beyond data crunching. “They help people understand the concept of risk pooling and why some of the demands are unreasonable,” said Wrede.

Microinsurance: Client value with a profit

The potential of and demand for microinsurance is huge, but is it profitable? Surveys carried out by the ILO’s Microinsurance Innovation Facility on profitability showed that some microinsurance products are profitable, others are not – a result not different from developed insurance markets. Whereas mandatory credit life or basic accidental death covers in many cases have delivered high returns, other examples such as health have shown that failure to reach scale and insufficient control of adverse selection may lead to high claims ratios and thus to unsustainable business. “Some insurance providers just look at their financials. Losing trust and not reaching scale are important threads of sustainable business,” added Richard Leftley, President of MicroEnsure, the world’s largest microinsurance broker. But what exactly does profit mean? According to Brandon Matthews, Head of Zurich’s Emerging Consumer Division, there is more than just financial profit. “Microinsurance is likely to have higher risk-adjusted returns. It also is good for reputation, and increases the ability to innovate”. Client value should be a key concern of microinsurance providers. Without a balance between client value and profit, there will be no sustainable business, the experts concluded.

Lessons learnt and the way forward

Microinsurance can play an important role in fighting poverty. Although challenging, solutions are available and may be profitable. Client value is key. Forty or even one hundred actuaries are not enough to meet the demand for microinsurance. There are billions of poor people in the world in need. Investment in education and knowledge development is of utmost importance.

The Munich Re Foundation together with the University of Oxford, the Actuarial Society and the Microinsurance Network will continue to support this process and continue the Learning Sessions on microinsurance in 2012.

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