Katharine Pulvermacher, Executive Director of the Microinsurance Network, explores how insurers and retailers are harnessing the power of technology to bring inclusive finance to vulnerable communities and build resilience
Microinsurance is a type of insurance designed for lower income bracket individuals, families and SMEs who have little to no access to traditional insurance products. It provides coverage for unexpected and potentially catastrophic events, such as illness, death, or natural disasters through small-scale, less expensive policies that are more accessible and affordable for lower-income bracket households, often including flexible payment options, such as small premiums paid on a regular basis, to accommodate the financial constraints of the insured.
Microinsurance is particularly important because it helps families protect themselves from financial shocks that can lead to poverty or exacerbate existing poverty. By providing an inclusive safety net, microinsurance can help prevent lower-income bracket households from falling into a cycle of debt and impoverishment. It can also help promote economic stability and financial inclusion by encouraging people to invest in their futures without fear of devastating financial consequences – ultimately improving the resilience of society as a whole.
Technology – including the evolving and overlapping worlds of fintech, insurtech, suptech and regtech – has been a key driver in improving the accessibility and distribution of microinsurance globally. And the global pandemic has accelerated the technology-driven distribution of microinsurance to the communities that have until recently been unable to access financial services, with new measures to facilitate digital sales and claims.
Technology is already enabling the distribution of microinsurance in many different ways globally. In Indonesia, for instance, Inkopdit credit cooperative entered into a partnership with GIZ and AXA Financial Indonesia to formalise its microinsurance offering. Inkopdit acquired an existing local insurance brokerage licence and carried out promotional campaigns encouraging members to sign up to its new formal insurance brokerage, PT PANDAI. By the end of September 2022, 2.4 million active policies were registered with a combined gross premium of IDR 69 billion (US$ 4.7 million).
In another example in South Africa, Lumkani has partnered with Hollard to provide house and contents insurance packaged with low-cost networked fire detection devices. Lumkani recruited agents locally in each community and facilitated payments through a payment platform that allowed customers to miss two months of premium payments and pay for several months of cover at a time.
Meanwhile, Pioneer in the Philippines provides another case study in its partnership with motorcycle dealerships to offer a bundled microinsurance product made up of several covers to meet the specific needs of motorcycle customers and their ability to pay. The premium is divided into monthly payments, and the product has proved to be successful among the lower-income market.
At the same time, mobile technology has enabled insurance providers to reach people in remote areas with limited access to traditional financial services. Ghana, for example, has used mobile technology to deliver life insurance policies with low premiums and premiums paid via mobile money.
In fact, mobile money or e-money is now the most important payment method for health microinsurance, used by a third of health microinsurance products in Asia and 56% in Africa – likely related to the high penetration of mobile network operator (MNO)-related products recorded in these regions.
Paperless Processes: The Key to Offering Cheap Insurance
Digital technology is also used across the microinsurance value chain, from teleconsultations to digital sales and claims payments. In health microinsurance, paperless claims processes, including photos or documents sent through digital messaging platforms, are increasingly mainstream, allowing for microinsurance claims to be made within hours or days for some products.
This digitalisation of microinsurance has helped reduce the administrative costs of insurance providers, enabling them to offer more affordable products to low-income populations. This efficiency is, in turn, increasing the commercial viability of microinsurance products and attracting more providers to a sector with an estimated value of USD 61.8 billion.
Regulatory Advances: The Role of Regtech and Suptech in Microinsurance
Supervisors are also upskilling in “suptech” (technology used by supervisors to support their activities) and “regtech” (technology used by regulated financial institutions to support their compliance with regulatory and reporting requirements). This has helped streamline the regulatory process and makes it easier for insurance providers to offer microinsurance products.
For instance, in July 2022, the Moroccan Insurance and Social Security Supervisory Authority (ACAPS) issued a directive with new rules for online sales of insurance products, giving customers the option either to complete insurance contracts fully online, or to get an online offer and later sign a hard copy.
This regulatory trend around embracing and formalising online insurance sales has enabled insurance providers to reach a broader customer base and has made it easier for customers to access insurance products.
In addition, the protection gap in climate and catastrophic risks is gaining increased attention, with supervisors seeking out tools and approaches to closing climate protection gaps. Index insurance – also known as parametric insurance – is seen as one possibility, and regulators are making efforts to ensure that index insurance is included within insurance regulation and, in some cases, introducing index insurance-specific regulation, such as the Insurance (Index Contracts) Regulations introduced in 2020 in Uganda.
Leveraging Index-linked Tools
Parametric or index-linked insurance rely on various technologies to determine the payout amount. These include satellite imagery, where in the case of crop insurance as an example, satellite imagery can be used to determine the extent of crop damage in a particular area. This technology helps to automate the assessment process and reduce the time taken to process claims.
Weather stations and sensors can also be used to collect data on temperature, rainfall, wind speed, and other weather parameters. This data can then be used to trigger payouts if certain predetermined thresholds are exceeded.
Similarly, IoT devices such as sensors, smart meters, and other connected devices can be used to gather data on a range of risks, such as water damage, fire, and theft. This data can then be used to trigger payouts if specific conditions are met.
Overall, these technologies help to automate and streamline the index-linked or parametric insurance process, making it faster and more efficient, while also reducing the cost of claims assessment and payouts.
The Power of Fintech, Insurtech, and Paytech in Accelerating Microinsurance Adoption
From distribution methods, to payment methods and trigger methods, technology has been instrumental in improving the distribution of microinsurance globally, enabling insurance providers to reach low-income populations in remote areas, reducing administrative costs, and streamlining regulatory processes.
But there is a long way to go. Take property insurance, for instance – one of the most mainstream insurance classes in the developed world. In the 34 countries covered by the Benchmark Landscape of Microinsurance 2022 Study, approximately 22 million people received protection for property or income risks through a microinsurance product.
This figure, along with a median number of 3,600 people reached per product, is relatively low compared with other risk types, reflecting the fact that these products are still in their infancy in the microinsurance market and less well-established in comparison to personal products like life and health insurance.
Technology is helping insurance go beyond the primary distribution channel for each product, with other channels including aggregators, agents and brokers, NGOs, retailers and microfinance institutions.
Ultimately, fintech and insurtech are key drivers in advancing microinsurance globally. The value of the microinsurance market is estimated to be USD 61.8 billion, but only 7% of this value is currently captured. The combined efforts of the insurance industry, distributors, governments, and international actors are essential in increasing microinsurance penetration to contribute to achieving the United Nations Sustainable Development Goals.
Microinsurance’s Journey: Progress and Future Outlook
Microinsurance products covering health risks and life and accident risks have already reached millions of people, helping them avoid poverty, access quality healthcare services, and support gender equality. Agriculture microinsurance also provides a safety net for those who depend on agriculture for their livelihoods, promotes resilience and growth, and protects farmers at the frontline of climate change.
The role of insurance in tackling climate risk is increasingly recognised beyond its traditional sphere. The sector’s contribution to the SDGs depends on the quality of microinsurance products offered and monitoring social performance indicators. In the future, women’s access to insurance is seen as vital to ensure that microinsurance supports progress towards achieving all the SDGs, particularly SDG 5 on gender equality.
Technology will play a critical role here too. Generating better data on women’s access to insurance is a crucial step to improving future access to insurance and better demonstrate the contribution of microinsurance to the SDGs. Continued efforts to increase the penetration of property and income products are also necessary to provide much-needed support for households and small businesses globally.
Download the full Landscape of Microinsurance 2022 Study here.