Micro-Insurance products development

—MICRO-INSURANCE PRODUCTS DEVELOPMENT

—PRESENTED BY MR. E.O. FARINU AT THE 2012

—INSURANCE CORRESPONDENTS SEMINAR ORGANISED BY THE NATIONAL INSURANCE COMMISSION

—OUTLINE

—DEFINITION AND CHARACTERISTICS OF MICRO-INSURANCE

—DIFFERENCES BETWEEN CONVENTIONAL INSURANCE AND MICRO-INSURANCE

—TYPES OF INSURANCE COVER/POLICIES OFFERED UNDER MICRO-INSURANCE

—STAGES IN PRODUCTS DEVELOPMENT

—CHALLENGES OF PRODUCTS DEVELOPMENT

—CONCLUSION

—DEFINITION

  Micro-insurance is insurance that is access by low income population, provided by a variety of different entities and run in accordance with generally accepted insurance principles

 The International Association of Insurance Supervisors (IAIS) defines Micro-insurance as follows:

  “Micro-insurance is the protection of low income people against specific perils in exchange for regular premium  payments appropriate to the likelihood and cost of the risk involved.”

—CHARACTERISTICS OF MICRO-INSURANCE

—Insurance for low income people

—It involves low level of premium

—Insurance with small benefits

—Simple, easily understood contracts

—Few exclusion, if any

—Multi-task intermediaries

—Often, community or group pricing

—Simple claim process, but still controlling fraud

—DIFFERENCES BETWEEN CONVENTIONAL INSURANCE AND MICRO-INSURANCE

—CONVENTIONAL INSURANCE

—Targeted at wealthy or middle-class persons

—Market is not totally ignorant of insurance

—Sold by licensed intermediaries or directly by insurers

—Small and large sum insured

—Underwriting and screening requirements may include a medical examination, survey/inspection

—Complex policy documents

—Priced based on age/specific risk

—MICRO-INSURANCE

—Targeted at low income persons (poor people)

—Market is totally ignorant of insurance

—Through unlicensed intermediaries: agency, partnership model

—Only small sum insured

—Minimal or no screening requirements. Identity of insured is sufficient.

—Simple, easy to understand policy documents

—Community or group pricing

—TYPES OF INSURANCE COVER/POLICIES OFFERED UNDER MICRO-INSURANCE

—LIFE AND SAVINGS INSURANCE

Pay the deceased’s beneficiary the amount held in the

savings plus benefits

•HEALTH AND DISABILITY INSURANCE

Enable the poor to cover the cost of medicine, hospital

stay and treatment as well as protecting against the loss

of income due to sickness or injury

•AGRICULTURAL/LIVESTOCK INSURANCE

To protect against losses associated with cattle rearing,

piggery, poultry, fish farming etc

—TYPES OF INSURANCE CONT’D

—INDEX-BASED CROP INSURANCE

For protection against adverse weather conditions

—FUNERAL INSURANCE

This insurance covers cost of burial

—PROPERTY INSURANCE

This replaces assets lost due to theft, damages or

destruction. Property damage could result from fire, flood or other natural disasters

—CREDIT INSURANCE/LOAN PROTECTION

Ensures that in the event of death all outstanding payments can be paid with insurance money

—PACKAGED POLICY

This may include a variety of benefits

—PROCESS OF MICRO-INSURANCE PRODUCTS DEVELOPMENT

Micro-Insurance products are designed to be appropriate for low income markets in terms of cost, contract terms, coverage and delivery mechanisms. The specific market focus of micro-insurance requires a specialized product development process.

The product development process is continuous and designed to ensure that appropriate products get delivered to the market in an effective manner and are monitored for potential improvement

 

INSTITUTIONAL ASSESSMENT

Before any product development project is started it is important to make sure that the institution is prepared for the work and challenges that are inevitable within this process.  Managers should ask questions to help them understand the level of their institution’s preparedness for product development, as well as identify areas that should be improved prior to commencing this process. In order to progress, managers need to first understand the institution’s position on micro-insurance in terms of several key areas including: business mission and strategy, the organizational culture, financial viability, organizational culture.  Without confidence that the institution is prepared for the rigors of micro-insurance product development, it is unlikely that progress will be made, and understanding this in advance will save significant money and grief.

MARKET RESEARCH

Understanding the market into which a product will be offered is crucial for success in Micro-insurance development. It is necessary to know about demand, supply, delivery and regulations in the market.

vDemand: This phase of research requires qualitative research in order to understand the details behind the decisions people make. It is important to understand risks, the kinds of risks faced, how they are managed, how sufficient the current risk management efforts are, and the economic, social, religious, environmental, cultural, and political factors affecting the market. The gaps left by limited available risk management strategies are where micro-insurance may be an appropriate response.

vSupply: The demand research will help the supply researcher focus more clearly on particular products. A clear understanding of what is available to the market is important because it reveals whether the new product will be directly competing with existing products, where there might be a skills base that can be tapped into, what lessons have been learned from past practices, and how to appeal to the market.

vDelivery: Generally, commercial insurers do not deliver micro-insurance through their own traditional agents, but do so through MFIs, NGOs, separate agent staff or through their own members. The distribution channels vary from retail shops and post offices to employers of low-income workers to rural banks and MFIs. Because micro-insurance requires low premiums, it is critical to reduce the costs of offering it as much as possible.  Assessing other delivery channels helps the product development team learn from others and better understand the requirements behind delivering micro-insurance.

vRegulations: Regulatory and supervisory requirements vary by country, by the type of micro-insurance offered and by the institutions involved. Requirements for agents, delivery channels, registration and approval of product need to conform to the legal framework outlined by the insurance act of a country. It is important to understand how the law considers the planned micro-insurance activities, and to understand the level of flexibility available for micro-insurance.

PROTOTYPE DESIGN AND TESTING

The prototype must be structured in a way that helps the market see the product as an effective response to the gaps in their ability to manage risks. Due to the qualitative nature of the initial market research, it is necessary to return to the market for quantitative research once the prototype has been developed. Aside from confirming the conclusions from the initial research, this research helps to obtain a greater depth of information about the acceptable premium levels and willingness to pay, and to understand how to convert reluctant markets to interested markets. The first step in developing the prototype is to use the findings of the initial research to summarize the key points that potential clients might be easily able to understand into a general product description that can be presented to clients in interviews. A number of additional demographic and economic data is also obtained during the interview, allowing the institution to sort data in ways that allows them to segment the market, and develop strategies to reach new markets.

PARTNERSHIPS

Who plays each of the three main roles in micro-insurance (risk taker, delivery channel, and policy holder) can vary, and the same parties often play multiple roles. MFIs and banks are frequent delivery channels for micro-insurance, and they frequently begin the process of product development based on the recognition of needs from their clients. Indeed, it is important that the institution that understands the market and has the best access to the market begins the process.  Selecting an insurer to work with is one of the most important decisions taken by delivery channels in micro-insurance. A poor selection could lead to poor quality products.

PRODUCT DESIGN

Product design encompasses all the key components that yield success or failure in a micro-insurance product. These components include: marketing, product delivery, coverage, premium amounts and collections terms, as well as claims. To be considered well designed, a micro-insurance product needs to be simple, understood, appropriate, valuable, and efficient (S.U.A.V.E.) Some of the key issues and decisions arising in product design are controls (for adverse selection, moral hazard and fraud), compulsory versus voluntary coverage, group, individual and hybrid coverage, term of cover, policy document, premiums, claims and simplicity.

PILOT TESTING AND REVIEW

Pilot testing is necessary to ensure that the product is ready for the full market and to limit potentially costly errors. It is critical to test three areas during the pilot stage: products, people, and systems. Managers need to make sure that the market really does want the product, will pay for it, and that it is offered in a way that people have convenient access to it.  It is also important to make sure that staff perceive the benefits of the product and are able to effectively sell and service it.

The objectives related to product and market acceptance, staff effectiveness and systems efficiency are identified and appropriate systems are prepared. If the financial projections show a viable product, the next three steps - documenting the product procedures, developing customer marketing materials through collaboration of both institutions, and training relevant staff – are taken. The product test then commences, followed by an evaluation of the test, and the product is finally ready for the rollout phase once the pilot test is “passed”.

ROLLOUT

The rollout of a micro-insurance product can be considered an expanded version of the pilot test activities. It also, requires a rollout team, a protocol, projections and frequent assessment, but its scale, especially in terms of training, systems and marketing, is much larger. Effective organizations might use regional training to limit costs or use one or two of the front line staff from the initial pilot testing group as trainers. Significant investment is also needed for systems rollout because micro-insurance management is greatly facilitated by computerization and branch connectivity. If the system is fully computerized, the expansion is generally painless and simply requires additional training for those inputting to the system. For broader marketing, it is critical to have assessed the effectiveness of various marketing methods during the pilot test in order to avoid the risk of high expenses yielding limited returns to marketing, especially considering the different levels of market education required.

CONTINUOUS ASSESSMENT

If we seek a win-win-win situation for the client, delivery channel, and insurer, it is important to continually monitor and assess the progress of the product in terms of its quality for policyholders, delivery channels, and insurers. The pilot test was conducted to ensure that the three objectives of market acceptance, staff implementation, and systems performance are met. But even if all of these are successful in the pilot test, significant issues might arise over time. To effectively address these issues, insurers and delivery channels should monitor their micro-insurance activity through indicators such as growth ratios and incurred expense ratios and do so by segregating their data between micro-insurance products and conventional insurance products. Different indicators may prove more important to different parties in the transaction. Some are easy to evaluate, while others require deeper consideration of the fairness to all concerned, the product and the market, the phase in the product lifecycle, and institutional objectives.

—CHALLENGES OF NEW PRODUCT DEVELOPMENT

What are the challenges?

•   Developing sustainable products that meet the needs of the market

•   Reducing transactions costs (enhancing affordability)

•   Creating an enabling regulatory environment

•   Overcoming the market’s natural resistance and educational barriers

•   Building micro-insurance infrastructure (e.g. actuaries, TA providers, data management systems)

•   Distribution: getting products to the market

•   Developing a micro-insurance approach to claims

CONCLUSION

—We cannot hope to attain the goals and aspirations of FSS 20: 2020 while over 80% of our population lives below poverty line.

—In order to avoid people from becoming poor due to illness, natural disaster, lack of savings, or loss of assets or livestock, developing Countries must invest in micro-insurance. Micro-insurance focuses on helping people from falling into poverty traps on their way to the middle class.

Conclusion continued

Developing a micro-insurance product, bringing it to market, and making sure that the product benefits clients and is managed efficiently is challenging. The process outlined here should help institutions to improve the chances for success of their micro-insurance products.

I thank you for listening.