Microinsurance
26 Feb 07
Selling Life Insurance (and giving away pens and keychains) in Nandurdi
village in India
In 2006,
American International Group (AIG), one of the largest insurers in the
world, wrote insurance policies covering the lives of 15,000 cows in
India. For about $10 a year, a villager in India can buy cow insurance
from AIG or a number of other large global insurance companies.
If his cow dies, he receives a payout of around $200.
Cow insurance is
not the only new product being offered in the developing world by
insurance companies like AIG, Allianz SE, and Aviva, PLC, Britain’s
largest insurer. These companies are undertaking major initiatives to
introduce “microinsurance” to poor villagers in India, China, Nicaragua,
and many other developing countries. They write policies, costing a few
dollars a year, which insure everything from cows to televisions to
buildings to lives.
While
microinsurance is a micro part of AIG’s total premiums -- .15% according
to a recent article in the Wall Street Journal – it represents a
foothold in a rapidly growing new market. Insurance premiums are
growing in developing countries at more than three times the rate of
premium growth in developed countries. Swiss Reinsurance Company, the
world’s largest reinsurer, told reporters for the Wall Street Journal
that insurance premiums in emerging markets grew by nearly seven
percent after inflation – much higher than the overall premium growth in
developed markets, which was around two percent.
Microinsurance
came into existence as a direct outgrowth of microlending initiatives.
Just as banks in the developed world require title insurance for a home
mortgage, many microlenders would like insurance on the assets and
people that they are lending against. This gives them assurance that
the money will be repaid even if there is a catastrophic loss. AIG, for
example, currently has about 2.25 million life insurance policies on
microloan recipients in developing countries like Uganda, Mexico, India,
and Brazil, according to The Wall Street Journal.
Starting from
this base, the insurance business has expanded to a wide range of other
areas. India opened its market to foreign companies in 2000, and
insurers like AIG and Aviva have opened up hundreds of offices there.
Agents go from village to village, telling people about insurance –
looking both for new customers and new agents.
Selling Insurance on the Indian Street
Insuring people
and property in emerging economies requires a very different set of
products and procedures than is the case in developed economies. For
example, some of the basic requirements for writing a conventional
insurance policy are missing in countries like India. Most villagers
don’t have any identification, and many don’t know their birthdates.
So the insurance
companies adapt, creating policies that can be signed with a
thumbprint. Death certificates are often not required to collect on a
life insurance policy in an Indian village, since many villagers do not
die in hospital. Instead, companies like AIG will take the word of a
village elder as sufficient to pay off a policy.
When policies do
pay off, it happens very publically. As part of its marketing efforts,
AIG invites local leaders and the press when it pays out a policy of any
kind.
Insurance
products have been available since the 14th century. But
only recently have they been available on such a small scale to so many
people. Insurance’s rapid growth in emerging economies demonstrates the
product’s scalability, both for providers and for customers.
Once customers in emerging economies understand the benefits that
insurance can provide for them, most of them want to buy some. The need
for risk protection is at least as great in developing countries as it
is in the developed ones – it’s only that the premiums and payouts are
smaller.
The business is
also scalable for providers -- AIG says it’s making money on its
businesses in emerging countries, although profits are miniscule
compared to the company’s other geographies.
In 2005,
Professor C.K. Prahalad of the University of Michigan published The
Fortune at the Bottom of the Pyramid. His basic proposition: If we
stop thinking of the poor as victims or as a burden and start
recognizing them as resilient and creative entrepreneurs and
value-conscious consumers, a new world of opportunity will present
itself.
The emerging
microinsurance industry is a case in point.
More
Information:
-
The Wall
Street Journal
article on
microinsurance, published 12 Feb 07, is
here.
-
The World
Bank provides a collection of papers and cases on the applications
of microinsurance. That’s
here.
-
Peter
Bernstein’s 1996 book Against the Gods provides a history of
the way people have handled risk. That’s available from Amazon
here.
-
Wikipedia is
a useful reference for the
history of insurance.
-
C.K.
Prahalad’s 2005 book, The Fortune at the Bottom of the Pyramid,
is available at Amazon
here.
