Making insurance work for the low-waged

In the past few decades, millions of people in the developing world have escaped absolute poverty.* But many of these people are still financially vulnerable. An accident or an illness could radically reduce their income and force them to make tough choices – like taking their children out of school, or even reducing the amount they eat. The countries in which they live are too large, too poor and ageing too quickly for a European style welfare state to be sustainable. This means that the private sector will need to play a larger role in providing social protection for the most vulnerable individuals.

Most of the large insurance groups in these countries focus on providing products to the affluent middle class, who have property to insure. For the companies involved, this is a low-risk strategy. But because of the number of people it excludes, it’s also low reward. Providing insurance to people on low incomes is a social responsibility. But far from being an act of charity, or a piece of corporate social responsibility designed to lose money in exchange for positive PR, we believe this is a huge business opportunity.

In order to take advantage of this opportunity, insurers will need to adapt their approach. They can’t simply target a different demographic with products designed for the relatively affluent. Instead, they need products that can profitably address this larger volume market through appropriate product design, claims infrastructure, collection processes and claim payment techniques. This class of products is known as micro-insurance – and we believe that an effective policy can be boiled down to 10 key principles:

What makes effective microinsurance?

1. The policy must protect against risks that are relevant to the target customer base.
2. It has to be priced appropriately.
3. Coverage must be proportional to a customer’s potential financial loss.
4. Products must be simple and easily understood by people who are financially unsophisticated and perhaps even illiterate.
5. The means of claiming must be transparent, accessible and fair to the client, given his or her circumstances. Pay-outs need to be fast, efficient and unobstructed.
6. Product risk has to be manageable for underwriters. Moral hazard and fraud will be challenges, with technology having a key role to play.
7. The timing of premium payments must be designed around individual clients’ cash flows. This can often mean very small, frequent premiums. For example, $10 a quarter may be too much all at once, but $0.77 a week can be much more manageable for many.
8. There must therefore be an efficient way to collect many thousands of tiny premiums on a regular basis. Use of mobile technology and/or microfinance institution partnerships seem the obvious solutions.
9. Scale is required. This will improve data, and so enable more effective and profitable underwriting. And it will reduce fixed overhead costs, enabling long-term profitability.
10. Policies must be provided by insurance companies or financial institutions with brands and reputations that are trusted by the target population.

The Stewart Investors initiative

In the Sustainable Funds Group at Stewart Investors, we’ve been leading a collaborative industry initiative, within the membership of the Principles of Responsible Investment, to make micro-insurance policies available to

people on low incomes. We’ve gathered the support of 34 institutions managing US$1.4 trillion in assets, and used this support to write directly to the senior management in targeted insurance companies. We’ve set out our belief that pursuing this opportunity can be profitable for those companies, as well as contributing to the societies and communities in which they operate.

We’ve worked in collaboration with the MicroInsurance Centre in Wisconsin, one of the world’s leading consultants on microinsurance policy design and implementation, to encourage target businesses towards greater focus on the topic.

This engagement is aimed at enhancing our clients’ returns over time, by encouraging our investee businesses to identify and seize profit opportunities. We believe that keeping company engagement very closely linked to investment decisions will help to drive returns for our clients. We’ll continue to engage with the targeted companies, together with the MicroInsurance Centre and our industry collaborators, with the aim of furthering the availability of inclusive financial protection to people in the developing world who need it most and who are, arguably, not well served today.