Expanding offerings: Microinsurance is providing new opportunities for growth

Rapid expansion in the insurance industry over the past decade has largely been focused on Colombia’s medium- and higher-income groups, which together make up a little more than 30% of the population. However, as competition is forcing premiums on some policies to unsustainable lows, industry players are eager to extend their reach into the large low-income segment by means of large-scale, low-premium policies. Moreover, lobbying efforts for regulatory amendments to incorporate microinsurance have started to pay off, further establishing the segment’s potential as the sector’s main growth area for the next few years. Microinsurance is not a new concept to Colombian insurance providers. According to the Federation of Colombian Insurers (Federación de Aseguradores Colombianos, Fasecolda), players have been issuing micro-policies since at least 2006. Since then, a microinsurance committee has been established, overseen by the association and composed of representatives of each of the players. The committee has taken the initiative on a number of research projects to identify the needs of the market and encourage appropriate product development and regulations. Although no specific measures have been implemented to encourage the segment’s development or overcome the various obstacles it is faced with, it has managed to record notable growth.

GROWTH FACTOR: The segment’s contribution to total premiums has increased from 0.66% in 2007 to 1.5% in 2012, according to Fasecolda figures. From September 2011 to September the following year, premiums grew by 10.4%, reaching a combined value of COP181bn ($108.6m). Meanwhile, average monthly premium value also rose from COP2675 ($1.61) to COP3250 ($1.95) and the number of issued policies more than doubled, reaching a total of 6.3m. Claims rose from COP51.88bn ($31.13m) to COP65.39bn ($39.23m) from September 2011 to 2012, exceeding premium growth, but maintaining a healthy proportion of premium income. In regard to market structure, by September 2012, RSA, a UK-based underwriter, led the segment in terms of the total value of issued premiums, holding a share of 31.9%, followed by Mapfre at 22.7%, Solidaria at 12.2% and AIG (previously Chartis Insurance Colombia) at 11.1%. The remaining 20% of the market was divided among the sector’s other 20 players. The same four firms led the segment by number of policies. Solidaria occupied first position with 31.2% and just under 2m, followed by RSA with 1.4m, Mapfre with about 800,000 policies and AIG with a little over half a million.

NEW ENCOURAGEMENT: Despite clear indications of sound growth and active participation from across the sector, Fasecolda, encouraged by its members, has committed to accelerating the growth of the segment, as the target market includes some 70% of the country’s population. To achieve this, a three-pronged strategy has been established focusing on product development, market awareness and regulatory reform.

Much of Fasecolda’s belief in microinsurance derives from the current dominance of group-life and personal accident premiums, which generate more than 60% of total premiums for the segment. Rather than being voluntarily acquired, these policies are often tied to micro-credits in order to cover the risk of a lender’s inability to repay due to disease, injury or death. Growth and penetration figures are therefore distorted by a strong influence of quasi-mandatory policies. As a result, companies are anticipating future growth in the individual life and health lines, currently accounting for less than 0.5% of total life premiums, and funeral policies, which have already proven to be popular.

BRANCHING OUT: Besides life policies, agricultural insurance is also receiving more attention. Although few products exist today, the industry is pursuing economic incentives to lower costs for farmers. In its 2010-14 National Development Plan, the government announced plans to amend current legislation on agricultural insurance to allow foreign companies to offer policies in Colombia, extend the coverage of current (public) policies to include natural disaster protection and implement tax deductions for holders of agricultural risk policies. Its commitment was confirmed in the latest tax reform, which came into effect at the start of 2013, which saw a reduction in value-added tax on agricultural policies from 16% to 5% and the distribution of subsidised coverage to over half a million farmers.

While research and innovation are set to increase the number of products available to lower-income groups, insurance companies feel that adaptation of existing products will go a long way towards increasing penetration and, consequently, profits. “What Colombia needs is not necessarily a greater number of financial solutions, but rather ones that are more focused towards each of the particular socio-economic levels,” Mauricio García Ortiz, president of Liberty Seguros, told OBG.

NEW CHANNELS: At present, sales are concentrated on Colombia’s biggest cities such as Bogota, Medellín, Cali, Barranquilla and Bucaramanga, while the rural areas, home to the nation’s poorer citizens, are largely overlooked. Awareness and value perception of microinsurance products are also lowest in these areas. The industry, led by its association, is leveraging on a diversified set of distribution channels to raise its nationwide reach while optimising profitability.

One such example is the high number of policies sold by public utility companies, such as gas and electricity providers. By September 2012, more than half of all micro-policies were sold through this channel, a marked increase from 2007 when it accounted for 37% of premium sales. Besides the nation-wide reach of these companies, their advantage to underwriters is the support in payment collection, a burden in an industry marked by high volume and low premiums. Utility companies include the premium fees in their monthly bills and, for a commission, receive and transfer payments to insurance companies.

Moreover, it is a welcome alternative to bancassurance, which is the second-most-effective distribution channel, accounting for some 25% of sales in 2012. While banks’ extensive client networks are of substantial value to underwriters, their appeal is limited as high commissions significantly erode profit margins. Moreover, with no more than 45% of the nation’s population regularly dealing with banks, their reach is far from comprehensive. The industry’s efforts to negotiate more suitable arrangements have produced few results.

Still, some industry leaders see opportunities related to banks. “Insurance brokers can take advantage of the banking penetration programmes in which the country is immersed at the time being,” said Mark Crisp, the president of Helm Insurance. “Partnering with a financial group and offering products to both corporate and retail clients makes sense and is feasible.”

Insurance companies have started to partner with large retailers such as Éxito and Carrefour – recently acquired by Cencosud – and place direct sales booths in their stores. In 2012, this channel represented only 1% of total premium sales, but given the rapid expansion of modern retail outlets across the nation, in a variety of formats, it holds significant potential for growth.

RECOGNITION: One barrier to segment development, according to Fasecolda, is the lack of regulatory recognition and an absence of specific microinsurance rules and regulations. At present nothing distinguishes microinsurance from its conventional counterpart. For example, obligations to disclose the origins of clients’ funding for payment of premiums, applicable on industrial policies and targeted at money laundering, also apply to holders of micro-policies. Besides the fact that many policyholders earn their humble livelihoods in the informal sector, properly enforcing the measure would result in disproportionate costs for underwriters faced with reporting the details of millions of lowpremium payments. Therefore, most underwriters opt to sell through microfinance institutions, which has an adverse impact on profit margins and, consequently, the capacity to research and develop new products.

Fasecolda’s lobbying efforts have produced some action as the financial regulator has started working on the incorporation of microinsurance into the sector’s wider regulatory framework, aided by the German development corporation GIZ. Meanwhile, the association is collaborating with Peru and Brazil – facing similar regulatory gaps – to define specific legislative needs and requirements. The first meeting was held in Lima in April 2013 and sessions are set to continue until a harmonised regulatory approach has been defined.

With development vigorously pursued at the level of supply, demand and regulations, microinsurance is set to undergo significant growth in the next few years. The progress of the industry in recent years supports the industry’s conviction that the sector’s new growth frontier lies among Colombia’s lower-income residents.

AWARENESS: Meanwhile, underwriters are counting on support from the financial regulator and academia to help drive awareness and perceived value of insurance. As García told OBG, “An increase in insurance coverage would serve as a social stabiliser and convincing people of its value should start as early on in the development process as possible. Therefore, it is not only a task for the government or the private sector, but also for our nation’s high schools and universities.”