Microinsurance

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KPMG INTERNATIONAL

Issue DigestMicroinsurance

January 2013

FOR INTERNAL USE ONLY

2 | Issue Digest: January 2013

2013 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.

01 MicroinsuranceMicroinsurance provides protection and risk mitigation; is also a market with vast potential

Microinsurance refers to insurance products designed for people living on low incomes.

Estimated potential market of about four billion customers and US$40 billion in premium income per year.

02 Increasing focus on innovating products that combine consumer needs with affordable premiums

Products

Credit life is the dominant microinsurance product; however, health and agriculture insurance are also slowly gaining prominence.

Designing need-based products that are affordable and create shared value for insurers and society remain key areas of concern.

03 Microfinance institutions (MFIs) and cooperatives are the most-preferred distribution channels; however, the role and significance of different channels differ across regions and product segments.

Distribution

Insurers investing to find the right mix of distribution channels that are effective and efficient

04 Governments are trying to step up efforts to provide risk protection to a wider segment of the population by adopting favorable regulations as well as requiring insurers to create insurance awareness among the low-income group.

Regulations

Countries around the globe rapidly adopting separate regulations for microinsurance

05 The microinsurance industry is expected to witness significant growth led by increasing insurance awareness through low cost innovative products and distribution channels being gradually introduced by the insurers. Government participation through NGOs, public private partnerships (PPP) and Community-based Organizations (CBOs) are also likely to help in the enhancement of microinsurance and the upliftment of the poor.

Outlook

Good practices emerging, expected to stimulate further growth

Executive summary


What is microinsurance?

01

Microinsurance refers to insurance products that are designed to provide risk cover for the low-income population. These products have lower premiums and coverage limits as compared to the traditional insurance products. Microinsurance is a form of microfinance, akin to microcredit which provides small loans to people on low-incomes. For example, in India SKS finance distributes small loans that begin at about US$44-260 to poor women for starting and expanding simple businesses. Microinsurance is not only providing risk covers to low-income households but is also seen as a risk management option. Also, the corporate social responsibility drive towards developing microinsurance solutions in emerging markets is rapidly gaining significance.1, 2, 3

World population by income

Microinsurance

2.6bnLow income

Classicinsurance

Middle & high income

poorest

richest

$4/dayExtremely Poor

1.25/day

Socialprotection

1.4bn

2.3bn

1.4 billion people US$7 billon market

2.6 billion people US$33 billon market

Source: World Bank, Allianz Group 2012, Swiss Re Sigma Report 2010

Microinsurance statisticsNumber of people covered by microinsurance (in millions)

0 100 200 300 400 500

2007

2009

2011 500

135

78

Source: Protecting the poor, ILO, 2012, 7th International Microinsurance Conference, 2011

Microinsurance premium potential

US$0.8-1.2 billion

2010 Potential market

US$40 billionper year

It is estimated that the current penetration of microinsurance is close to 23 percent of the potential market

Source: Swiss Re Sigma Report 2010

People covered by geographies (in millions)

400

5044

AfricaLatin AmericaAsia

Source: Protecting the poor, ILO, 2012, 7th International Microinsurance Conference, 2011

1. Swiss Re Sigma Report: Microinsurance risk protection for 4 billion people, 20102. Microinsurance Innovation Facility3. 7th International Microinsurance Conference 2011



Microinsurance has seen significant growth in Asia Pacific, particularly in markets such as India and China. Asia is seen as a region with a vast potential for microinsurance as it is home to about 70 percent of the worlds low-income population. Largely, Bangladesh, the Philippines and Indonesia are witnessing rapid growth in microinsurance. While Africa remains an undertapped market for microinsurance, insurers are increasingly making an effort to cover the African population by introducing need-based and easy-to-understand products. In Latin America, Brazil was one of the first markets to introduce microinsurance with Mexico, Peru and Colombia following suit. In Central and Eastern Europe, growth in microinsurance has not been as swift as compared to Asian and Latin American regions.2, 3, 4, 5, 6

2. Microinsurance Innovation Facility3. 7th International Microinsurance Conference 20114. Commercial insurers in microinsurance Micro insurance network, 20115. Protecting the working Poor, ILO, 20126. Microinsurance at Allianz Group, September 2012

Microinsurance products*

Others***HealthPropertyCreditAccident & disabilityLife endownment

Distribution channels**

Others****CBOsRetailersNGOsAgents and BrokersMFIs/Banks

25%

20%

9%9%

8%

29%29%

8%

23%14%

14%

12%

*, ** The figures correspond to a survey conducted by Microinsurance Network in 2011. The study sample is composed of: 20 insurance companies, two insurance and reinsurance brokers, and two reinsurance companies.

*** Others include legal expenses, index and casualty products. Index insurance pays when certain parametric triggers are met, for example crop index insurance might make payments based on rainfall data or when temperature drops below freezing. The challenge is establishing parametric triggers which minimize basis risk.

**** Others include, local offices of development agencies, direct distribution by the insurance company itself, associations, utility companies and self-help groups, CBOs, government, employers, churches, and cooperatives.


Insurers are driving innovation and introducing microinsurance products that are simple to understand as well as low in premiums. Despite new product developments, life insurance still remains the most prevalent microinsurance product, mainly driven by microfinance institutions as it provides life insurance protection to borrowers, often grouped with microcredit. Credit life protection facilitates micro-lending, providing a direct benefit to the lender (enabling the loan to be repaid in the event of death) but only limited direct benefit to the insured (enabling them to access microfinance); therefore, industry practitioners are increasing focus on products that offer comprehensive risk coverage.6

Agriculture and health microinsurance products are gaining popularity; however, they remain complex in terms of underwriting. These products typically require a catalyst such as subsidized premiums either in part or full. A public private partnership could be the key to implement such complex products. Governments and insurers need to increase insurance awareness among the low-income population so that simple products with no hidden terms can be introduced to provide protection to the low-income population rather than to large institutions.

Insurance and product awareness, transaction costs, availability of easy-to-understand products, infrastructure and need-based products that are affordable and create shared value are some challenges that the insurers face while designing products for the low-income group.7

Case studiesproduct innovation

Aon Bolivia recently launched a new retirement product targeting the working class population, which requires regular payments for 100 months and thereafter entitles policyholders to receive double the monthly payment for the next 70 months.

In India, ICICI Prudential Life has partnered with a tea producer to offer unit-linked endowment products to company workers at tea plantations. The product comes with premium guarantees and flexible liquidity options.

In 2009, PICC of China introduced a pilot microinsurance program insuring internal migrants against accidents and disease.

All the above are examples of innovation primarily due to need-based products designed after studying the requirements of specific groups.

Sources: Company websites, FactSet, Swiss Re Sigma Report: Microinsurance risk protection for 4 billion people, 2010

Products and innovations

Agriculture and health microinsurance products are gaining popularity; however, they remain complex in terms of underwriting.

02

6. Micro-Insurance: A Largely Untapped Market, November 20117. Protecting the working Poor, ILO, 2012



Distribution strategies

03

Distribution of microinsurance products is dependent on factors such as collaboration, relationship and trust with the low-income group as well as holding down associated costs. Microfinance institutions and cooperatives are the most-preferred distribution channels led by their vast established networks and proximity to the target market. Existing microinsurance channels also include NGOs, community, retail/ departmental stores, trade unions, utility companies, religious faith groups, post offices and commercial banks.

The selection of the right channel mix primarily depends on the region and product segment. In India and the Philippines, MFIs are predominately used to distribute microinsurance products, while, in Brazil, utility and telecom companies are increasingly used. Distribution through retailers is being increasingly utilized in Latin American markets as well as in South Africa. Funeral insurance continues to be largely sold by informal burial societies, funeral parlors and cooperative societies.

However, insurers are continuously innovating and introducing distribution channels that are not only cost efficient but also have a wider reach. Technology is being extensively used to distribute microinsurance products more efficiently and effectively. For example, mobile banking is gaining prominence as it is not only an enabler of client communications, but is also helpful in premium and data collection. However, the channel has limitations where face-to-face interaction is required.

Insurers also face challenges in terms of the regulatory norms and licensing requirements of informal distribution along with the right balance of value and impact on cost and innovation.8, 9, 10

Case studiesdistribution innovation

HDFC ERGOs rainfall index insurance product in India covers the diminished agricultural output/ yield resulting from a shortfall in the anticipated normal rainfall. It uses technology-enabled distribution and along with a messaging service for policy and claims data updates.

Codenso, the largest power distribution company in Colombia, leverages its client base to target microinsurance products in partnership with Seguros Mapfre.

Max New York Life insurance in India uses handheld terminals, mobile phones and portals to manage flexible payments that are small and irregular.

Hollard in South Africa teamed up with PEP stores to distribute funeral insurance products. The monthly premiums can be paid at the store.

In Ghana, MicroEnsures mobile insurance product called Mi-Life distributed by MTN (Metropolitan Telecommunications Network) allows premium payments to be deducted from the m-wallet monthly. Customers receive an SMS notifying them that the premium has been deducted and their insurance cover renewed.

Sources: Company websites, FactSet and press releases

In India and the Philippines, MFIs are predominately used to distribute microinsurance products, while, in Brazil, utility and telecom companies are increasingly used.

8. Succeeding at microinsurance through differentiation innovation and partnership, 20129. The landscape of microinsurance in Latin America and the Caribbean, 201210. 7th International Microinsurance Conference: Making insurance work for the poor, 2011


Regulations 04

Microinsurance regulations are different from the traditional insurance regulatory frameworks as most insurance regulators propose lower capital requirements for micro insurers. Microinsurance regulations are aimed at ensuring simple, easy to understand products and also encourages new and innovative distribution models, such as banking correspondents. For example, the South Africa microinsurance regulatory framework will permit the licensing of a new category of insurers to provide only microinsurance products. Brazils regulations propose lower capital requirements for micro insurers (20% of the current base capital required), and simplified documentation.11, 12, 13, 14

Examples of regulatory initiatives/proposals in microinsurance

MexicoRegulatory approachadapted to be better tailored to actual market development. Second round of regulation has seen rapid increase in market penetration

ColombiaDoes not have a dedicated microinsurance regulation;still incorporates proportionality in its regulatory framework

PeruHas separate regulations for microinsurance

West AfricaMicroinsurance regulations in eight countries for mutual social health organizations.

BrazilSeparate regulation with provisions including specific license for microinsurance providers and consumer protection regulations

South AfricaNational treasury framework proposed with measures such as dedicated microinsurance licenses and simplified distribution

IndiaSeparate regulations for microinsurance; mandate on rural and social obligationsas part of licensing conditions

China Microinsurance regulations already implemented

TaiwanProposed draft microinsurance regulations for a program covering traditional life and personal injury insurance

PhilippinesSeparate regulations for microinsurance; mandate on rural and social obligationsas part of licensing conditions

Source: Swiss Re, Munich Re conference and KPMG analysis

11. Driving Efficiency & Growth in Microinsurance through regulatory intervention A Perspective, 2012 12. 7th International Microinsurance Conference: Making insurance work for the poor, 201113. The Millennium Development Goals Report, UN, 201114. Weathering the storm: The demand for and impact of microinsurance, September 2012

Regulatory authorities around the globe are focusing on raising the awareness and benefits of insurance amongst the poor.



Outlook05

The table below depicts the microinsurance industry and its changing landscape.

200103Infancy stage

200408Startup stage

200911Evolving stage

2011Growth stage

2012Way forward

Dis

trib

uti

on

Key

Hig

hlig

hts

Pro

du

cts

Endowmentproducts

Credit life and retail products

Saving and wealth accumulation products

Credit life, savings linked plan and retail products

NGOs

Low sales volume

Poor persistency

Servicing challenges

MFIs NGOs Regional Rural

Banks (RRBs) Co-operatives Retail chains IT kiosks

Bundling with micro credit

High-value sales to offset operational expenses

Regulatory guidelines for microinsurance

Supply chain innovations

Technology innovation to improve the policy administration and claims process

MFIs NGOs RRBs Co-operatives

Rural channel upscaled

Unit Linked Insurance Plans (ULIPs) savings plan launched

Technology usage for increased efficiency during client interface

RRBs Producer

companies Banks MFIs

Strong technology usage

Consumer awareness

Flexible savings and term products

Collaborating with larger banks on financial inclusion projects

Public private partnership

RRBs Banks MFIs NGOs

Focused approach by insurers, large-scale need-based programs

Products providing risk cover against health, agriculture, house and education to grow

Advance technology-led distribution

Government-sponsored programs

Source: ICICI Microinsurance presentation and KPMG analysis

With the risk management needs of four billion low-income people largely unmet, the potential market for microinsurance is vast. In addition, for insurers, the segment is expected to become a meaningful avenue for growth going forward. However, the role of the government is very important in this sector as there is a growing need for a supportive regulatory framework that facilitates broad-based insurance growth.

Issue Digest: January 2013 | 9


Further readingMicroinsurance issue page

Insurance mega trends

The Intelligent Insurer

Global Climate Change and Sustainability

FS High Growth Markets workstream

Protecting the seeds of growth the Rise of Microinsurance - article in September 2010 Frontiers in Finance

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Issue Digest: January 2013 | 11


NotesNotesNotes

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

2013 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.

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Contact: Vipin Kumar Head of Global Sales and Markets Research KPMG in India Tel.+91 124 612 9321

Publication name: Issue DigestPublication number: 12 006Publication date: January 2013

Microinsurance

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