MR Microinsurance_2012_03_29.indd - International Labour ...

Teaching elephants to dance
19.1.2 Motivations and measures of success
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Innovations aimed at effectively reaching the low-income segment incur costs,
and therefore a successful microinsurance portfolio should generate returns
that justify the investment. The potential returns related to microinsurance fall
into three main categories: 1) financial returns; 2) innovation; and 3) reputation.
The relative importance of each element will vary depending on the
insurer and the level of development of the initiative. However, in the medium
and longer term, microinsurance initiatives need to produce financial returns
for insurers to continue the business, even if those returns are recognized in
other business segments through improved innovation or partnership.
Financial returns
To establish a large microinsurance portfolio at a commercial insurer, profitability
must be achieved. Investors require a level of return commensurate to the risk
in the business. With greater effort required and more unknowns, microinsurance
might require an even higher profit were it not for the corresponding innovation
and reputation benefits. Financial viability must be attained within a reasonable
period – otherwise insurers will exit the market or impose low limits on their
exposures.
Lower absolute premiums mean that large business volumes must be sold to
generate profits at a level justifying the effort. Likewise, scale is required to produce
real benefits at low cost to microinsurance customers. While the exact
number of clients at which a scheme becomes profitable varies according to the
cost structure and client conditions, most insurance companies will be hesitant
to participate in schemes with fewer than 10 000 microinsurance clients. Since
scale may only be achievable in the medium term, it is also important to measure
its forerunner, growth.
Microinsurance offers diversification opportunities for commercial insurers.
For multinationals, diversifying into new territories, risks and target groups is
attractive. Picking up risks in businesses uncorrelated to their core portfolio is
particularly useful for improving the insurer’s overall risk profile and cash-flow
management.
Innovation
Central to the microinsurance discourse is the realization that the distribution
channels, products and processes commonly used by insurers underperform in
the low-income segment. Consequently, innovation is required, which involves
radically reducing costs, increasing efficiency, and making insurance propositions
simpler and more straightforward for customers – even if doing so is complex for
the insurer.