Making insurance markets work for the poor: is financing a binding constraint?

  • Katharine PULVERMACHER, Microinsurance Network
  • Speakers
  • Anne CONTRERAS, Arendt & Medernach
  • Miguel SOLANA, ILO’s Impact Insurance Facility 
  • Jim ROTH, LeapFrog Investments
  • Anup SINGH, MicroSave

    Katharine PULVERMACHER opened the session with a short overview of the work of the Microinsurance Network which targets the access of low-income households to insurance markets. After briefly introducing the panellists, Pulvermacher clarified that the session would try and answer three specific questions about microinsurance: 1) Is there a financing constraint? If so, why?; 2) What are the constraints of investors?; 3) How to overcome the constraints? 

    Anup SINGH clarified that inclusive insurance, particularly microinsurance, is not the same as other types of insurances in terms of market penetration and volume. Currently, only around 3 to 5% of the low-income population has any type of insurance, which provides a huge potential for expansion. According to Singh, capitalising on this potential will require a proper understanding of the low-income population and an adequate risk management system, coupled with the enabling technology that can make processes more efficient. Singh also warned that microinsurance needs to have the buy-in of insurers’ management, so that it doesn’t become a standalone unit or product within the company, but that it becomes part of its strategy. 

    Pulvermacher further built on the idea that microinsurance refers to a complex supply chain, and its suppliers can profit significantly from capacity building in order to better understand their clients’ needs. On this note, Miguel SOLANA clarified that there are two perspectives to capacity building in microinsurance: the investor’s and the operator’s. From the investor’s perspective, the matter lies in identifying the stakeholders with most impact potential, whether they are providers of technology and other services, insurance companies or distributors. From an operator’s perspective, capacity building efforts should directly target their skill set. Insurers generally don’t know how to operate partnerships with other industry players or to deal with low-income populations. Solana further explained that the structure of insurers is not adapted to this target group which would have to be re-created to offer profitable microinsurance products.

    Also commenting on the business case of microinsurance, Jim ROTH affirmed that there is no financing constraint which impedes this market to expand. He explained that big insurers which have taken on inclusive insurance products mostly focus on big markets such as Mexico and Brazil, and target individuals in the middle class who currently don’t have insurance; these are low-hanging fruits. Roth elaborated that insurers do not have the right incentives or the right mechanisms to go into non-profitable markets or lower sections of the population. He also explained that, in this target group, the main constraint lies in finding the right distribution model, so that micro-insurance can be delivered in a profitable manner. There are two approaches to target this constraint: 1) Searching for an adequate model; 2) Expanding the existing model on a subsidised basis. 

    Anne CONTRERAS commented that there is not much happening in microinsurance from the broader perspective of impact investors. She clarified that the opportunities and the viability of the microinsurance business model are not yet clear to investors, also lacking essential elements which are common in regular impact investment such as partnerships and education. 

    Pulvermacher noted that the low penetration of microinsurance in Africa is contradictory to the region’s need for resilience, and questioned whether incentives are lacking along the supply chain for the market to develop further. Singh responded that the rewards of sales people, brokers and other actors in the microinsurance supply chain cannot feed on the main business of insurers, since this is not a financially sustainable model. Roth added that technology can play a role in reducing distribution costs in microfinance, and thus improve margins and provide incentives to insurers to go into this market; however, until this is the case, there is no commercial solution for microinsurance’s safety net besides NGOs and other donors. 

    Solana defended that there is a business case for impact investment into the distribution model of microinsurance, where the operational structures of insurance providers could profit from new capacities. This, in turn, could reduce intermediation in the supply chain and reduce costs. Roth named two options for funding: investment capital and grants, where investment capital would still require returns. Contreras then defended that the investment case could be built around technical assistance, in the form of concrete activities such as feasibility studies. Solana further added that insurers must also find the right mechanisms to complement the role of governments and their compensation programmes (i.e. post-natural catastrophes), which often make private insurance redundant. 

    Pulvermacher briefly wrapped up the session by addressing the three questions posed in the opening. She concluded that there is financing available for microinsurance, but that it’s hard to create the right models and to find technical assistance funding to target lower-income segments of the population. In relation to the constraints of investors, Pulvermacher indicated the need for more dialogue in the sector, due to the complexity of the microinsurance supply chain and the inward-looking structure of insurers. She also added that overcoming constraints will take patience and time, since the industry is still in development.

    Pulvermacher also invited the panellists to say their last words on the subject. Singh concluded that there is a business case for inclusive insurance, but also significant constraints related to developing adequate business models, scale and distribution. Roth called attention to the increasing amount of impact resources available for climate change, which could be capitalised when combined with microinsurance models. Contreras reaffirmed that investors struggle with the complexity of the microinsurance supply chain, admitting the need for more dialogue between insurers and actors in impact investing so as to foster their relationship with the impact finance sector. She added that we are currently in the educational phase of this industry, where partnerships and synergies between donors and commercial actors will be needed. Solana further defended that expansion of the sector will also require creating the right skill set in the industry and within organisations which will result in adequate business models and partnerships.