Microinsurance

Core concepts to structure microinsurance products

Brandon Mathews

World Bank Workshop Uganda2 March 2009

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Agenda of core product issues

IncentivesUtility for customers (demand)Utility for providers (supply)

TechnicalInsurance & operational risksPartners and intermediariesCustomer needs

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Agenda of core product issues

IncentivesUtility for customers (demand)Utility for providers (supply)

TechnicalInsurance & operational risksPartners and intermediariesCustomer needs

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Utility… insurance must be useful for those that use it (that have a claim).

Ten people know there’s a risk event that they believe costs $30 and it will happen to one of them so ten buy insurance.

For the one that claims, insurance must Correctly pay incurred losses.Pay in time to be useful.Pay in a way that is useful.Be in a useful amount.

Make certain that the claims benefit suits customer requirements

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… should be useful for those that don’t use it (don’t claim).

Nine people bought the insurance but didn’t have a claim… but also no longer saved toward the $30 event.

Insurance should allow:Release of savingsAcceptance of ordinary risk.

Good insurance changes the behavior of the insured.

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… perhaps will be useful for those that don’t even buy it.

Ten insurance buyers live in a community of twenty people.The $30 claim pays for services that otherwise aren’t available.

Insurance allows services to form that eventually can also serve the uninsured.

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Customer utility affects product design…

Products that benefit the claimant directly and sufficiently are more valued and will drive sales over the medium term.

Products that benefit non-claimants are more valued.Voluntary purchases are more likely to have proven their use

Products that deliver services directly add utility.Funeral / burial insuranceMedical services instead of reimbursement.

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Agenda of core product issues

IncentivesUtility for customers (demand)Utility for providers (supply)

TechnicalInsurance & operational risksPartners and intermediariesCustomer needs

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Providers should supply microinsurance out of self-interest.

Insurance capital, opportunity, & other costs exist.

Demand is marginally affected, at best, by profitability. Whether the premium in my example was $3.00, $2.90, or $3.10:

Person whose claim was paid is better offPeople that didn’t claim assessed experience based on total priceFormation of services for non-buyers is not affected

Possible to justify with some other benefits:Employee moral – good to work for a company that is good.Innovation – disaggregating value-chain improves performance.Alignment with other market actors.

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Provider utility impacts product design…

Corporate responsibility is to try to make a profit in this space… not just CR on its own.

To continuously lower the median income of customers requires profit.

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Agenda of core product issues

IncentivesUtility for customers (demand)Utility for providers (supply)

TechnicalInsurance & operational risksPartners and intermediariesCustomer needs

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Microinsurance products require that we modify in 3 basic dimensions

Insurance Risk Operational Risk

New partners

Existing partnersNew Customers

Existing Customers

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Agenda of core product issues

IncentivesUtility for customers (demand)Utility for providers (supply)

TechnicalInsurance & operational risksPartners and intermediariesCustomer needs and situations

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Direct expenses (operational risk) and commissions are knowable factors.

Mostcustomers

Wealthycustomers

Microcustomers

Claims

DirectCapitalComms

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Innovate over time to gain profit and then to improve market position.

Immediate Mid term Over time

Higher ERLower LR

Acceptable CR

Lower ERHigher LR

Attractive CRthrough innovation

Lower RateSame ERSame LR

Acceptable CRand increasemarket share

Same RateSame ERHigher LR

Acceptable CRand increasepenetration

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Product design must reduce or anticipate operational requirements.

Pre-underwritten one-price-fits-all

Make obvious who the product targetsFemale health insuranceSpecific item property

Timing of cashflows should be pricedCash maybe collected any time during a monthMore frequent cancel/rewrite possible

In-kind claims benefits reduces moral hazardWarrantyProsthesis vs payment

Reducing operationalrisks often systemicallybenefits insurance risk.

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Control and anticipate operational risk in each step of product rollout.

Start with products that require the fewest changes from present:

Sell through a known intermediary typeSell products with a low operational risk

Progress to products that require organizational adaptation.

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Do we need to reinvent the wheel?

Credit: Q-Drum

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Zurich programs have grown more ambitious over the years.

BoliviaCredit Life -> Savings Linked -> Health -> Retail PABank -> Bank -> Bank -> Multiple channels

VenezuelaCredit Life -> Credit Auto -> Voluntary Pick FourBank -> Bank -> Bank / Multiple

BrazilPersonal Accident -> Unemployment -> Small propertyRetailers -> Utilities

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Zurich programs have grown more ambitious over the years. (2)

ChinaPersonal Accident -> Critical IllnessAgent -> Agent to group

IndonesiaCredit PA/Property -> CattleBank -> Bank

South AfricaFuneral/Property -> Credit lifeAgent -> Bank

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Sequence products realistically for value and operational achievement.

Customers value products whichThey know aboutThey choose to purchaseThat deliver when it matters

Insurance companies value products whichLimit operational risk in implementationCreate innovation value for other lines/segmentsDeliver profit

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Thank you

Brandon MathewsZurich Financial Services

brandon.mathews@zurich.comTel: +41 (0)44 639 2000

www.zurich.com