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Global Scale by Coletta Kemper Separated at Birth

Brokers are missing out on the beginning of micro-insurance products. Are you missing out on future clients?

By  Coletta Kemper

The tsunami that hit the coast of Southeast Asia in 2004 was one of the deadliest natural disasters in history. Hundreds of thousands of lives were lost in 11 countries, and two million people were left homeless. Those hit hardest by the disaster were poor—without insurance or other resources to rebuild their homes or their lives.

The United Nations estimated rebuilding the areas devastated by the tsunami would cost $10 billion to $12 billion or up to 10 times the amount spent on emergency aid. The poor are more vulnerable to the risks of the world and the least able to cope when disaster hits. The vast populations in developing countries subsist on pennies a day with little savings left over for bad times. When natural disaster strikes, the money to rebuild and put people’s lives back together comes from a combination of government largesse, aid from religious organizations, humanitarian efforts and community support.

Insurance is one way to help the poor protect themselves. Unfortunately, traditional insurance has been scarce and unaffordable.

Many governments and community-based organizations are turning to micro-insurance as part of the solution. Micro-insurance is fast becoming the next generation of financial products provided to the poor in emerging economies. Throughout Asia, Africa and Latin America, micro-insurance programs are being developed to help the neediest protect themselves against loss.

Micro-insurance can play a key role in protecting low-income people from the effects of illness, property loss and financial disaster. It also helps shift some of the costs from government to the private sector where risk can be managed. The question is how to regulate micro-insurance to create incentives to serve this market while protecting the most vulnerable in society.

Before we tackle that issue, what is micro-insurance and how does it operate?

Simply put, micro-insurance is a low-cost insurance product, often with low caps and coverage limits, aimed at low-income people and businesses not served by the private insurance market or government social programs. The most typical products are life, savings plans, health, disability, property and crop, but micro-insurance can include other lines. Policies are usually sold under group coverage plans and can include thousands of individuals.

There are a number of models for micro-insurance, but in principle micro-insurance works like any insurance business. It is typically part of a risk-pooling arrangement. The models for micro-insurance can include public/private partnerships, mutuals and government-sponsored programs. Most micro-insurance is delivered by an intermediary organization, such as a bank or non-governmental organization.

Until recently, few private insurers ventured into micro-insurance. A sustainable business model wasn’t there. Premiums are minimal, profit margins are slim to none and efficient distribution is a challenge.

But that’s starting to change. For example, Allianz has partnered with CARE, an international aid agency, to provide comprehensive health insurance in India to the poor. They expect to have up to 200,000 customers aged 18 to 70 within a year.

Why are insurers beginning to see opportunities? In rapidly developing countries, particularly those with huge populations such as India and China, today’s low-income family and business are tomorrow’s middle-class and entrepreneur. Insurers are now recognizing the importance of branding their products in the public’s mind early on.

Intermediaries have a stake in the game as well. Although micro-insurance depends on an intermediary to get the products to the consumer, the intermediary is usually not an agent or broker. Rather, distribution is provided by non-government organizations, banks, post offices and other efficient, community-based conduits. If agents and brokers don’t find a way to participate in this emerging market, they may find themselves cut out as the market develops.

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