Microinsurance and Sustainable Development

How inclusive insurance can aid in the fight to end poverty David Schraub

Photo: iStock.com/dmbaker

Microinsurance, also known as inclusive insurance, was developed on the heels of microfinancing, which is defined as a banking service provided to low-income individuals or groups who otherwise wouldn’t have access to financial services. Microfinancing programs have enabled millions of people with lower incomes worldwide to start and grow businesses and buy homes. Microinsurance plays a crucial role in achieving the United Nations’ 2030 Agenda for Sustainable Development, a roadmap to end poverty, protect the planet and promote peace and prosperity.

Microinsurance is generally meant for people with lower incomes and nano, micro, small and mid-sized businesses or groups. The Society of Actuaries (SOA) Research Institute published a report, “Microinsurance in a Nutshell: Only for Africa?” that explains microinsurance and the roles actuaries can serve in its establishment. The report details how microinsurance can be a risk management tool to protect policyholders against financial shocks and how it can aid in ending poverty. Unexpected misfortunes often result in a loss of income and productivity, which can cause uninsured people to liquidate productive assets, lowering their net worth and making them more vulnerable.

Microinsurance is expected to follow generally accepted insurance practices, including the principles of S.U.A.V.E. (i.e., insurance that is Simple, Understood, Accessible, Valuable and Efficient), a concept the MicroInsurance Centre at Milliman developed. By following these principles, microinsurance can offer products that meet clients’ needs and are easy to purchase, convenient to manage from a distance and readily understood.

Africa: A Portrait of a Microinsurance Market and Its Potential

Africa has a large market for microfinance and, therefore, microinsurance. The field experience of microinsurers in Africa can help expand the market in other regions and support further development in Africa.

Microinsurance Network 2021 reports that between 17 million and 37 million people were covered in Egypt, the Ivory Coast, Kenya, Ghana, Nigeria, Morocco, Senegal, Rwanda, Tanzania, South Africa, Zambia, Uganda and Zimbabwe. That is to say, about 4%–9% of the targeted population is covered by a microinsurance product. This represents significant growth from 2019, when between 9.1 million and 29.6 million people, or 2%–7% of the population, were covered. It also reflects the growth trend seen over the years. So far, African microinsurance programs have focused on credit life, funeral and life, health, crop and livestock insurance, and these products often are bundled.

However, despite the rapid growth of microinsurance policies in Africa, a significant insurance gap still exists, with the vast majority remaining uninsured. One of the major challenges in the microinsurance market in Africa is the lack of insurance awareness among financially vulnerable people. Many don’t yet understand the benefits of insurance or know the different types available. As a result, agents are an important distribution channel to provide face-to-face service, offer explanations and answer questions.

While there seems to be a resurgence in financial products being bought and managed via mobile network operators, human interaction remains crucial for financial transactions in Africa. For example, though the microinsurance market has seen an influx of new InsurTechs that offer entirely digital solutions, they often partner with aggregators who have in-person contact with customers.

The principles and experience discussed in “Microinsurance in a Nutshell: Only for Africa?” can apply to countries and jurisdictions outside the continent as well. Understanding the market and its drivers—and becoming familiar with the needs of the end users and all other stakeholders in the value chain—creates a valuable blueprint for markets across the globe.

This blueprint also could be effective in countries with more mature insurance markets, focusing on the needs of the end users and starting with those who have no protection. Products could be more complex to adapt to the market’s needs, the existing coverage available and the regulations of the target market.

Capturing the Need Through a Wide Lens

Because microinsurance is meant to serve people typically ignored by mainstream commercial and social security programs, the term “inclusive insurance” has been coined. Inclusive insurance signifies the development of financial inclusion, an effort to make financial products and services accessible to underserved populations rather than focusing solely on low-income people.

According to the SOA Research Institute report, micro- (or inclusive) insurance is a way for the insurance industry to grow in relevance for most of the world’s workers and their families. Additionally, regulators play a crucial role in providing an effective regulatory framework for developing inclusive and microinsurance.

Establishing a Framework for a Sustainable Market

Regulations might not be the focal point from the perspective of customers, but they are the foundation of effective and ethical microinsurance markets. To support sound and sustainable development, “Microinsurance in a Nutshell: Only for Africa?” outlines the goals of microinsurance regulatory frameworks:

  • To define microinsurance and delineate it from other insurance lines of business
  • To promote and develop microinsurance and encourage innovation
  • To protect financially vulnerable customers

Insurance core principles (ICPs), including S.U.A.V.E, call for proportionate application, meaning supervisory measures should be appropriate to that specific jurisdiction while meeting the desired outcomes of ICPs. But these measures should avoid a heavy hand and not go beyond what is necessary. Effective microinsurance regulatory frameworks follow this approach to assist financial inclusion and market development.

To develop microinsurance regulations that meet the needs of the population they were meant to serve, it’s important to complement regulatory frameworks with innovation, some of which include the following:

  • Regulatory sandboxes—environments for testing products, technology or business models while an insurance supervisor monitors to protect consumers
  • Mobile insurance—insurance purchased and managed through a mobile phone in partnership with a mobile network operator
  • Index-based insurance (parametric insurance)—coverage for smallholder farmers facing the effects of climate change by paying out claims based on a predefined index (e.g., rainfall level) that measures deviations from normal levels
  • (Micro)Takaful—the micro version of takaful, protection for people who cannot obtain conventional insurance for religious reasons and entails a group of people agreeing to support one another under specified circumstances that cause one or some of them to incur losses
  • Cell captive insurance—an insurance vehicle in which an insurance company extends its license to another organization to insure its assets or the assets of the organization’s customers or members

Developing Prosperity With Financial Inclusivity

Microinsurance is an important component in helping people rise above natural disasters and economic shocks and is crucial in serving the cause of ending poverty. Though the microinsurance journey started years ago and has made significant inroads in many African countries, it has much work to do in developing countries. By developing a deep understanding of customers and their environments, microinsurance and the actuaries who work with it can play an important role in improving the lives of countless families.

To read more about microinsurance, its experience in Africa and principles learned, please read the SOA Research Institute report, “Microinsurance in a Nutshell: Only for Africa?

David Schraub, FSA, CERA, MAAA, is a senior practice research actuary at the Society of Actuaries.

Copyright © 2023 by the Society of Actuaries, Chicago, Illinois.