MR Microinsurance_2012_03_29.indd - International Labour ...

Pricing of microinsurance products
Box 21.4 Processes infl uence expenses
477
Th e amount of expenses varies greatly from product to product and depends on
the processes processes used. For example:
1) An endowment product in West West Africa Africa has total expenses and commission of of
7.1 per cent of premium. Th ere was an eff ort to improve the effi ciency of the
manual process through automation with the expectation of reducing
expenses to 4 per cent.
2) In many many health schemes, schemes, expense levels as as high as 30 per cent cent of premium have have
been observed.
3) Membership Membership cards cards may be issued to identify members members of a health health microinsur- microinsur- microinsurance
programme and streamline claims processing. Th is is a way to store infor-
mation, authenticate membership and potentially reduce fraud. Th e card,
whether equipped with a chip or a magnetic strip or photo, may have a low
cost (under US$1). While this expense would represent a small percentage of
the premium for a mainstream individual policy, it could be a signifi cant por-
tion of, for example, a policy with a premium of US$12 per annum.
21.4.3 Profi t margin
For long-term viability, besides taking into account administration expenses, all
microinsurance products must have a profi t margin. But what is a reasonable
profi t? Th is should be calculated on the basis of the risk and capital required. For
most products, such calculations would yield a range of profi tability from 2 to 10
per cent of gross premium, which is a reasonable return on risk-based capital
requirements. A principle of serving the BoP is that profi ts from the low-income
market should be based on high volume rather than high margins. Th is is a point
to be taken into consideration, as the microinsurance provider builds profi t margins
into the premiums of the products it off ers.
21.4.4 Other pricing considerations
Community pricing
While customer-based segmentation and understanding the diff erences in the
risk profi les of the individuals in a target segment are important, an overriding
objective is to off er insurance protection at a fair, aff ordable and adequate price
to a large number of low-income people. Community pricing, similar to pricing
for a group policy, is the preferred approach for three main reasons:
– Financial inclusion: Financial protection should be accessible for a large
number of people who are currently underserved and under-protected. If risk