The Basics of Microinsurance
The global insurance industry is at a strange crossroad. On the one hand, the market is completely saturated in countries which are known to be the developed market.
On the other hand, the developing countries are completely underserved. It has been estimated that at the present moment, insurance products have less than 5% penetration in developing countries like India, China, and Latin America. It is also known that these markets are rapidly growing.
It is estimated that the insurance market in developing countries is growing by 10% every year. The rapid growth in microfinance, as well as microcredit, has proven that low-income customers have the potential to become the largest segment for financial services if they are provided with the right product at the right price point.
That being said, it needs to be understood that microinsurance is not a get rich quick scheme. Companies which are in a tough financial spot as of now should avoid investing further in third world countries.
The microinsurance market is meant for larger companies that have deep pockets and can play the waiting game for some time.
Given the fact that almost all future growth in the insurance industry is likely to stem from emerging markets, it is essential for the world leaders to pay attention to this market.
Lets have a closer look at the important issues facing microinsurance in this article.
What is Microinsurance?
Simply put microinsurance is selling insurance policies with very small dollar amounts. The premiums paid and the sum assured will both be low, sometimes as low as a couple of dollars per month! Insurance companies look at microinsurance as an important product.
NGOs like the United Nations and the World Bank think of it as a poverty reduction mechanism whereas customers tend to think of it as unnecessary.
It will be quite interesting to see if these points of view ever meet and whether it is possible for a viable market to be formed.
One important challenge is that fact that admin costs remain the same per policy regardless of whether it generates a couple of dollars or a couple of million dollars in premium. There are many more challenges listed below.
Change in Mindset: Firstly, it needs to be understood that consumers in the developed world, as well as the developing world, look at insurance products in a very different manner.
- For the affluent western consumer, insurance is a basic need and a non-negotiable product.
- On the other hand, in the developing countries, insurance is considered to be somewhat of a luxury.
Some consumers are not educated at all. They think that insurance is just a waste of money.
For consumers in the developing world, anything that deserves money can be seen or felt immediately. They are not familiar with the abstract idea of risk pooling and coverage from unforeseen circumstances.
Changing this mindset is the biggest challenge that insurance companies will face. It is not that people do not have the money to pay the premiums.
If they are paying small premiums, then the sum assured will also be small. The challenge is for insurance companies to convince consumers about the usefulness of the concept of insurance itself.
Future Markets: It needs to be understood that developing markets may not be viable for insurance companies if they have a short-term point of view.
However, these unviable markets of today will be the dominant marketplaces of tomorrow.
The Indo-Chinese growth story has lifted more than 400 million people out of poverty! These consumers are viable segments to sell life, health and agricultural insurance products.
These middle-class consumers of today are poised to become the affluent customers of tomorrow over the next couple of decades.
It is therefore important for any insurance company to gain a strong foothold over these markets.
If they are able to reach the customers early and develop a favourable brand image, then they are likely to gain market share as compared to their competitors. This is because insurance is an intangible product based on trust.
Hence, if a customer has developed trust on a company, they are likely to stick with the same company in the future.
Insurance customers are quite loyal. Hence, making an early entry into the market is of vital importance.
Different Model: In most developed countries, insurance companies rely on partners from the private sector to provide their services.
For instance, insurance companies are dependent upon hospitals and garages to provide health and motor insurance respectively.
However, this infrastructure may not be as developed in the developing nations.
Also, sometimes developing nations are poor because they tend to face a lot of natural calamities.
For instance, Bangladesh faces a lot of flooding, Latin America is prone to earthquakes, and countries like Kenya face regular droughts. This is when the benefits of insurance will have to be paid out to the people. However, there is no private sector infrastructure which will help insurance companies do so.
Hence, insurance companies will have to rely on NGOs which have the deepest networks in such countries. The problem is that insurance companies are profit-oriented whereas NGOs are service oriented. It is likely that they might face a clash of ideology.
However, if insurance companies are not able to provide services as promised, their failure is guaranteed.
Hence, they should foresee the challenges of working with NGOs and develop an effective distribution system before they sell any policies and make any promises.
|❮❮ Previous||Next ❯❯|
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
- Risk Management - Introduction
- Benefits of Risk Management
- Principles of Risk Management
- Risk Management Process
- Risk Identification and Assessment
- Aspects of Risk Management
- Steps in Risk Management Process
- Approaches to Risk Management
- Risk Management Policy
- Commonly Used Measures of Risk
- Risk Management Plan
- Evaluation of Risk Management Plan
- Risk Treatment
- Role of HRD in Risk Management
- Enterprise Risk Management
- Implementing ERM
- Risk Management and Stock Market
- Outsourcing Risk Management Program
- Risk Management as a Profession
- Anticipating and Mitigating Organizational Risks in the Digital Age
- Challenges Facing the Australian Economy
- The Economic Costs of MeToo
- Automated Claims Processing
- Challenges in Global Insurance And International Claims
- Conflicts of Interest in the Insurance Business
- The Cost Structure in the Insurance Industry
- How Drones Will Impact the Insurance Industry?
- How Is Health Insurance Funded?
- How Self Driving Cars Impact Insurance?
- How Stock Market Volatility Affects Insurance Companies?
- Insurance Agents vs. Insurance Brokers
- The ABCs of Insurance Fraud in India
- Technological Advances in the Insurance Industry
- The Basics of Unemployment Insurance
- The Pros and Cons of Unemployment Assistance and Why it Matters in the Present Times
- The Role of Insurance In #MeToo Movement
- Why the Flood Insurance Market should be Privatized?
- Basics of Pet Insurance
- Cannabis Insurance
- Challenges Facing Cryptocurrency Insurance
- Evolution of Insurance Regulation
- Food Delivery Apps and Insurance
- How Does Captive Insurance Work?
- On-Demand Insurance
- Reinsurance vs. Double Insurance
- Solvency Regulations in the Insurance Industry
- Terrorism and Insurance
- The Basics of Microinsurance
- The Basics of Reinsurance
- Types of Captive Insurance Companies
- What is P2P Insurance?
- How Risks Affect Companies Providing Financial Services
- Risk Management Information System
- Disadvantages of Risk Management Information Systems
- The Known-Unknown Classification of Risk
- Operational Risk: Definition and Drivers
- How Regulations Have Affected Operational Risk?
- Identification of Operational Risks
- How to Identify Operational Risks
- Using Internal Loss Data to Mitigate Operational Risks
- External Loss Data in Operational Risk Management
- Risk Control Self Assessment (RCSA)
- Scenario Analysis in Risk Management
- Key Risk Indicators
- Basel Approaches in Operational Risk Management
- The Basel Risk Categories
- Cause Categories in Operational Risk Management
- Loss Distribution Approach
- The COSO Framework for Internal Control
- Mistakes to be Avoided While Building a Risk Management System
- Credit Rating Terminology
- Types of Exposures to Determine Credit Limit
- Types of Credit Events
- Active Credit Portfolio Risk Management
- Metrics to Measure Credit Risk
- Credit Derivatives: An Introduction
- Credit Linked Note
- How do Credit Default Swaps Work?
- Why are Credit Default Swaps Dangerous?
- Total Returns Swap
- What are Collateralized Debt Obligations and How do they Work?
- Collateralized Debt Obligations: Advantages and Disadvantages
- Mark To Market Accounting
- What are Recovery Rates? - Different Types of Recovery Rates
- Netting, Close Out, and Acceleration
- Expected Default Frequency (EDF)
- Expected Default Frequency: Advantages and Disadvantages
- Altmans Z Score Model
- Unexpected Loss and Economic Capital Buffer
- Stress Testing in Credit Risk Management
- Provisioning in Credit Risk Management
- How Corporate Governance Impacts Credit Risk
- Exit Strategies In Credit Risk Management
- What is Market Risk? - How its Measured and Sources of Market Risk
- Why is Market Risk Management Important?
- Introduction to Value At Risk (VaR)
- The Three Types of Value at Risk (VaR)
- Marginal, Incremental and Component Value at Risk (VAR)
- How Value at Risk (VaR) is Implemented?
- Backtesting Value at Risk (VaR)
- Advantages of Using Value at Risk (VaR) Model
- Disadvantages of Using the Value at Risk (VaR) Model
- How Margins Are Calculated Using Value at Risk (VaR)
- Market Risk Limits
- Tail Risk
- The Upside of Market Volatility
- Relationship between Volatility and Risk
- Importance of Data Quality in Risk Management
- Impact of Using Poor Quality Data and Metrics to Measure Data Quality
- Enterprise Risk Management (ERM) vs Traditional Risk Management
- Benefits of Enterprise Risk Management
- Corporate Risk Governance
- International Risk Governance Committee (IRGC) Framework
- Failure of Market Risk Management
- Mistakes to Avoid in Risk Management