Data gathering and mobile technology are making it possible to offer new insurance services to the world’s poorest
Insurers survive and thrive on data. They rely on it to build risk profiles and set prices for their products. A lack of data is a key reason for insurance not reaching billions of people in emerging markets. And a lack of insurance hampers security, planning and economic growth in countries that often need it most.
But technological and communications advances are changing the provision of data, and in some ways poorer countries are embracing the mobile revolution better than their Western counterparts, as they have no legacy systems and entrenched ways of working to contend with.
In Africa, for example, entrepreneurs are coming up with economical ways to gather data, and plantation workers are being signed up to community health schemes through mobile technology. Such developments are making low-cost or micro insurance available to many more people who are living on the edge and are particularly vulnerable to unexpected events.
“Africa’s farmers need accurate weather data so insurers [can] insure [their] crops against failure”
Better weather tracking holds the key
Microinsurance drives innovation in business models
The need to deliver services at ultra low cost in emerging markets is teaching insurance companies to be more efficient
As far back as 2008 Zurich Insurance Group was emphasising that microinsurance could be profitable. Jim Schiro, Zurich’s CEO at the time, said: “Every one of these initiatives in Zurich has a profit-making business plan.”
Microinsurance developed in the late 1990s out of microfinance initiatives and is still often delivered in partnership with microfinance organisations. Occasionally products are subsidised by NGOs or governments, or driven by corporate social responsibility plans, but insurers are still viewing the sector with profits in mind.
Countries such as China, India and Nigeria are places that will soon have large, lucrative insurance markets and microinsurance is seen as a good way to attract lifelong customers.
Michael McCord of the MicroInsurance Centre says that through finding innovative ways to cut costs to produce a low cost product for the developing world, insurers are also finding ways to cut the cost of their products at home. That principle is one of the most appealing aspects of microinsurance for many firms, he adds.
Some of this comes from using technology, such as mobile phones, for product marketing, delivery and payment. Technology also plays a major role in cutting back office costs, says Mr McCord.
Much of the innovation is about stripping away unnecessary product features so that less management is needed. “Product simplicity is key in microinsurance,” he adds.
In business, working under constraints can often force brilliant innovations, whether in product features or business models. Microinsurance is pushing regular insurance to up its game.
Take the importance and growth in weather data. There are just 500 weather stations across sub-Saharan Africa ¬– they are not always adequately maintained and there are eight times fewer than the United Nations recommends.1 Satellite data is being used to fill the gaps but this often lacks precision.
A solution could come from startups such as Kukua, which aims to install 1,500 robust, low-cost, internet-connected weather stations over the next two years. By September it will have installed 80 in Nigeria alone. And trial data from these units that measure rainfall, temperature, humidity, pressure and sunlight intensity is already going to the Climate Hazard Group, which makes it available to insurers.
Why is this particularly important? Tom Vanneste, Kukua’s founder, says climate change makes conditions less predictable: “Traditional weather knowledge has been eroded and invalidated by climate change,” he says. “So Africa’s farmers now need accurate weather data not only to grow their crops but also so that insurers have the information necessary to insure those crops against failure.”
Properly assessed risk and properly priced insurance are fundamental to economic planning. For Africa’s small rural farmers the unpredictability of rainfall can ruin a season’s crops and stretch income to breaking point. A household might have to cut spending on food, medicine or the children's education. A 2012 World Bank report found a “robust” link between “rainfall shocks” and the weight-for-height and height-for-age ratios of children in Nigeria.2
As Kukua brings more weather stations online, the density of information will increase and a long-term picture will start to build. Meanwhile, in Uganda and Tanzania, the International Potato Center has been trialing aerial drones as a way to gather accurate crop data.3
“Data and the lack thereof is probably the biggest obstacle to microinsurance,” says Richard Lord, principal and consulting actuary at Milliman, which consults on microinsurance in 15 countries across Asia, South America and Africa. Some 263 million people are now covered by microinsurance worldwide, with demand growing at more than 10 per cent a year, but the estimated market potential is up to 3 billion people4, and they want not just crop insurance but also cover for possessions, accidents, health, pensions, and more.
Smartphones lead mobile payments
In many emerging markets mobile devices are being used to gather some of the information needed for that cover. In the foothills of Kilimanjaro, says Mr Lord, there is a coffee-growing co-op that provides basic health coverage through a microinsurance scheme. Information is gathered on an iPad, which contains all the required forms and is then used to take a photograph of the new policy member before the data is shared with the insurer using the mobile network.
Smartphones are also driving the uptake of microinsurance through mobile payments. David Kirk, Milliman’s managing director, Africa, says that mobile payments really took off in parts of Africa where the banking infrastructure wasn’t sufficient to handle small payments and money transfers. “Customers like smartphone payments because they are quick and easy so that removes a barrier to taking out insurance,” he says. “And insurers like them because they make it cheap to collect premiums.”
Then there’s the challenge of pricing. In the developed world, where insurance has a long history, there are actuarial tables that extend well into the past, making it easy to build a risk profile. In the developing world, that is not the case, says Michael McCord, president of consulting firm MicroInsurance Centre.
“Most of these countries do not have actuarial tables and when they do they don’t tend to cover low income people,” he says.
Customers like smartphone payments because they are quick and easy so that removes a barrier to taking out insurance
There are ways around this. In the case of crop insurance, for example, insurers can reduce costs with index insurance: setting a rainfall level, for example, and paying out if actual rainfall is very different. Another way is to use information from microfinance organisations that have been operating in the developing world for longer.
New insurance products typically have high premiums until insurers gain an accurate understanding of the risks, and microinsurance is no exception. As more data is collected, says Mr Lord, insurers will learn more about their customers and their risks and that will allow them to set better premiums.
He says: “We are already collecting more of the information that we need to properly evaluate policies and the situation will only get better.”
This content was produced by FT², the advertising department of the Financial Times, in collaboration with Milliman.