Microinsurance is designed to provide protection for low-income individuals, who are often overlooked by mainstream insurance schemes – with the micro element reflecting the small financial transaction generated by each policy.
There are two main reasons why insurers should roll out microinsurance products. Firstly, governments are motivating insurers to provide products and services that ensure social and financial inclusion for lower income groups, and it is likely only a matter of time before this becomes compulsory.
In its Budget Review 2011, the National Treasury said: “to promote sustained economic growth and development, South Africa needs a stable financial services sector that is accessible to all”.
Secondly, while insurers are seeing a market opportunity, they are still trying to get the right model to make money from the market. As things stand, no one in Africa has accurate statistics to show the profitability, if there is any, of such products. Where statistics are available, it seems that insurers are satisfied when they break even.
As a result, insurers need to look beyond educating customers on the benefits of microinsurance and forming effective relationships with stakeholders to ensure they have the optimal pricing/payment structure and distribution design in place.
One of the major concerns is whether these products will be sellable once a profit margin has been added on top of the total cost through the value chain. To keep costs down, insurers are currently going with very simple products distributed through existing channels, such as mobile phone operators and rural retail outlets.
With research showing lower income groups are less likely to default on their premium payments than the formal insurance sector under times of economic stress, another important aspect is to have flexible premiums to minimise the impact of lapses on both parties. This model will allow policyholders to defer payment in the event of an emergency when their premiums need to be spent on something else, such as replacing a lost school bag.
Already microinsurance is widely accepted in Kenya, and the lessons learnt there can be applied to develop products that improve the chances of success in other markets, such as South Africa, where microinsurance is a newer concept.
As the market matures, profit margins of between 3% and 5% are expected, as well as a large potential customer base to whom other products can be cross sold to at a later date. Therefore, insurers need to develop a strategy that balances customers’ needs and the interests of society with their long-term financial goals to make the most of the opportunities available.
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