Microinsurance is an insurance product meant for the low-income sector. Debate has raged on about the suitability of low-income products; some argue that a benefit designed for the ‘poor’ is a poor benefit design. However, it should be noted that most measures of prosperity (such as GDP, BOP, exchange rate etc) can disproportionately favor developed nations, which leads to a misunderstanding of African and, to an extent, developing nations. These measures sometimes fail to capture a significant amount of undocumented economic activity among rural populations. Nevertheless, microinsurance has boomed in Africa.

 

Product design

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In Zimbabwe, microinsurance revolution started in 2014 with Econet Life and they identified three areas to focus on:

• How to make people save more, given that Zimbabwe has a large informal sector

• How to cushion families from funeral expenses, given the significance of funerals in African culture

• How to fund healthcare and the purchase of medical drugs.

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When designing the products, they needed to understand the people the benefits were for – typically a group who operate in fast-paced, informal markets and want convenience. The benefits therefore had to be simple, flexible and easy to access. There would generally not be a chance to do any extensive underwriting of microinsurance policyholders, so exposure limits had to be set with this in mind. The same went for claim payments, which needed to be settled quickly and without much validation.

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How did they make these constraints work? Customers must start with a basic product and, if higher exposures are required, then rules for transition must be set. To make sure that the boundary conditions for the products leave enough room for the provider to respond quickly to the underlying group’s as-yet unknown experiences, so keep it very short term!

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Pricing microinsurance

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The biggest challenge in pricing microinsurance is gaining the appropriate data – in most situations, you are dealing with a risk pool that does not have any documented experience. The logical starting point is to go to population-level data to find mortality and morbidity rates such as the local statistical agency or the UN Population Division and the World Health Organization.

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Another key thing to understand is the rate of lapse, migration or transition. Microinsurance customers are not very loyal, primarily because the premiums are meant to be very affordable and the onboarding is easy. You should expect plenty of transitions in a short period of time, complicating the analysis.

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A flat rate premium will be most suitable because there is very little scope for underwriting. Pricing must start by obviously targeting the aggregate pure risk premium rate; once that is set, you can move to other aspects. Cash-flow modeling and then stress testing are sometimes more useful than incorporating loadings in the normal actuarial sense. Software packages such as Prophet will probably not handle the pricing techniques required. There are many more factors to test thoroughly, such as business volumes, lapses and the migration rate across packages. At Econet, one of the things to think deeply about while on the pricing desk was targeting the desired age-gender mix, as well as the policyholders’ geographical spread. These became post-launch underwriting strategies targeted at the whole book.

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The distribution ecosystem

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Microinsurance markets work in an ecosystem involving serious third-party dependencies for payment platforms. That ecosystem will determine the acquisition costs, premium collection, claims payment and communication with customers. 

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Design and pricing outputs

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Communicating results to the board should be done in the simplest manner, with a lot of visuals to emphasize the key success points.

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At this point, it should involve less of the actuarial methodology discussion, instead emphasizing practical considerations. For example, show the board that solvency will depend on business volumes and on mortality experience. You must avoid playing with the pricing, as this sector is very price sensitive.

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It remains to be seen whether microinsurance can fit into a conventional life insurance company, or if it has to operate as a standalone business due to the vagaries of this untypical sector.

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