Microinsurance is a form of insurance designed to make important insurance options more accessible, for individuals and families with financial resources, in developing countries. Its purpose is to provide coverage for situations like illness, injury, or loss of life for people with valuable assets. This is achieved by combining policies into larger frameworks, which creates interconnected risk pools that enhance the efficiency of insurance mechanisms and support systems.
Microinsurance is commonly found in developing nations where there is a lack of established insurance markets. The focus on serving the low-income population leads to the development of methods for distributing and offering insurance products.
Here’s how Microinsurance works:
- Microinsurance policies offer coverage values compared to insurance resulting in smaller premiums.
- The coverage includes risks such as health, property and life related concerns like crop and livestock protection, theft or fire coverages, health care expenses, term life coverage, disability benefits, as well as protection against natural disasters.
- In exchange for premium payments based on risk likelihood and cost factors specific to each individual’s situation, microinsurance provides protection against these risks.
- These policies involve transactions, hence their name “micro” insurance.
- Microinsurance networks create risk pools that improve both insurance operations and support services.
Delivery Models:
Microinsurance is typically administered through four distinct approaches:
- Partner-agent model: In this arrangement, a collaboration occurs between the micro-insurer and an intermediary, often referred to as an agent. The insurer is responsible for product design and underwriting, while the agent handles marketing and client outreach.
- Full-service model: Under this model, the micro-insurer assumes complete responsibility for all aspects of the insurance product, including its design, development, marketing, and delivery.
- Provider-driven model: In this scenario, policyholders have the option to pay their premiums directly to a service provider, such as a hospital. This service provider then takes on the responsibilities of designing, developing, and delivering the insurance services to the policyholders.
- Community-based/mutual model: In this model, policyholders themselves are actively involved in all aspects of the insurance scheme, effectively functioning as both the insurer and the insured parties.
The worldwide microinsurance industry:
The global microinsurance market, with a size of approximately USD 77.81 billion in 2022, is poised for substantial expansion, projected to reach around USD 118.13 billion by 2030. This growth trajectory is underpinned by a projected compound annual growth rate (CAGR) of 6.5% to 7% anticipated between 2023 and 2028. Notably, the emerging markets hold immense growth potential, given their vast population base, constituting 80% of the world’s inhabitants, yet accounting for just a fraction of the global premium total. Within this dynamic landscape, the microinsurance segment in developing countries is estimated to encompass between 1.5 to 3 billion policies. However, at present, microinsurance policies extend coverage to only 135 million people, representing merely 5% of the potential market. A particularly robust growth outlook is expected in the property insurance segment, forecasted to achieve a noteworthy CAGR of 7% from 2023 to 2027.
Examples of successful microinsurance programs in developed countries:
Microinsurance programs, typically associated with developing countries, have also found success in developed nations through various channels:
- AIG Uganda and Delta Life in Bangladesh: These major companies offer microinsurance covering health, life, and property risks for low-income individuals and families in Uganda and Bangladesh, respectively.
- Delta Life in Bangladesh: Another significant player, Delta Life, operates in Bangladesh, providing microinsurance coverage encompassing life, health, and accident risks for low-income populations.
- Mobile Network Operators: In developed countries like the United States, mobile network operators such as T-Mobile provide microinsurance options, including mobile phone insurance and financial services like overdraft protection.
- Retailers: Retail giants like Walmart in developed nations offer microinsurance programs, bundling services like savings accounts and cashback rewards with optional mobile phone insurance.
In conclusion, the growth potential of microinsurance is substantial, provided that insurers can develop efficient and effective innovations. However, it is noteworthy that microinsurance has historically been more driven by supply than by effective demand, particularly among the poorest individuals. To gain a deeper insight into the insurability of risks within microinsurance markets, it is essential to conduct a comprehensive analysis of the challenges and possible solutions. The sustainable success of microinsurance in low-income markets is closely tied to initiatives aimed at creating and nurturing these markets. Microinsurance serves as an innovative tool for managing risks and disasters, particularly for households with limited financial resources. In summary, microinsurance holds the promise of addressing the insurance needs of impoverished populations, and it remains crucial to continually explore ways to enhance its accessibility and effectiveness for those who require it the most.