MR Microinsurance_2012_03_29.indd - International Labour ...

Is microinsurance a profitable business for insurance companies?
369
Chapter 19). Most evident from the case studies are social objectives to improve
quality of life for the poor. Given the importance and prevalence of social objectives,
a complete review should factor in an initiative’s client value proposition
(see Chapter 15). The question of profitability needs to be balanced with the
extent to which products provide value to the client, because long-term sustainability
depends on the value proposition.
Despite the social motivation, it is important that microinsurance be viable to
maintain the involvement of insurers. The case studies indicate that micro insurance
can be profitable. However, there are instances where the insurers have found it
difficult to establish a profitable initiative and have engaged in an iterative process
of restructuring it to achieve profitability.
For the most part, the insurers have not formally monitored the costs associated
with microinsurance. As a result, expenses were allocated using a proportional
method, where the management costs of the relevant business segment or
overall company were allocated to the microinsurance business on the basis of
premium volumes. It is possible that if the costs were more accurately allocated
to microinsurance, expense ratios would be higher. As business grows, it will
become more important for insurers to monitor expenses accurately to better
understand the commercial viability of microinsurance.
The chapter is organized as follows. Section 18.1 provides an overview of the
framework and drivers of profitability. Section 18.2 sets out the context for the
insurers, the sector they operate in and their microinsurance initiatives.
Financial analysis and an examination of the drivers of profitability for each of
the microinsurance initiatives are outlined in section 18.3. Section 18.4 concludes
with the main findings from the case studies and recommends areas for
future research.
18.1 Framework for the assessment of profitability
Table 18.1 provides an overview of the framework developed to assess the
profitability of microinsurance, which includes three main drivers of profitability:
achieving scale, managing claims costs, and managing acquisition and
administration costs. The two aspects at the base of the diagram cut across
the drivers of profitability and form the foundation needed for successful
initiatives.