Thinking small: Microinsurance has a key role to play in boosting penetration rates

With the vast majority of Ghanaians unable to afford insurance, sector players have been looking at other ways in which to increase penetration, one of which includes microinsurance. As a cheaper, smaller-scale version of risk mitigation, many believe it could work as a catalyst to boost growth and increase customer numbers. The segment has been seeing rapid growth not only in Ghana but worldwide. Some 78m people across the globe bought a microinsurance policy in 2006, but by 2011 that total had skyrocketed to about 500m, according to a 2012 study by reinsurer Munich Re. In Africa these figures were 4.5m in 2006 and between 18m and 24m in 2011.

The study has highlighted the need for more affordable insurance in Africa. From 1980 to 2011 just 5% of losses due to natural catastrophes were insured in African countries – five times lower than the global average. The rate was 8% in Asia, 29% in Europe, 40% in the Americas and 39% in Oceania. At the same time, Africa suffered a disproportionate number of deaths in those catastrophes: 27% of the overall total in the 31-year time period.

A NEW ERA: To prepare for what is hoped will be a new era in insurance in the country, the government has been reviewing and enhancing existing laws in a bid to attract new private sector and donor-funded initiatives. As part of these efforts, in May 2012 the National Insurance Commission (NIC), the insurance regulator, hosted a microinsurance conference in Accra in partnership with the German Society for International Cooperation; Microinsurance Network, a non-profit organisation based in Luxembourg; and the Munich Re Foundation, which has taken a leading position in researching this form of insurance.

Anywhere between 160,000 and 250,000 Ghanaians had a microinsurance policy in 2010, according to a government study. Since then, however, the market in Ghana has expanded greatly. MicroEnsure, an intermediary that designs policies, passed the 1m-customer threshold in the middle of 2012. This level of demand illustrates that even though many people cannot afford full-scale coverage, they still want the protection insurance offers. Priorities for among the uninsured are to protect against death and serious illness. Death brings with it the potential loss of an income-generating adult as well as the high costs associated with funerals, while illness can lead to an inability to generate income, either temporarily or permanently. The increasing demand for affordable life insurance has spurred growth in the segment. “There is momentum in the general life segment of the market. Companies have been aggressively promoting those products, and so you can expect to see more and more growth in that area,” James Wood, the managing director of Edward Mensah, Wood and Associates, told OBG.

KEEPING COUNT: More precise statistics are not available, in part due to the lack of data collection capacity in Ghana and also because there is not yet a set definition of what microinsurance is, and therefore no way to know what to count. Policies range from conventional insurance policies downsized to be made more affordable to simplified arrangements for which a contract can fit on half a page of paper and premiums paid amount to GHS1 ($0.59) a month.

Success often means keeping exclusions to a minimum and being able to make the process straightforward enough to be understandable to someone with minimal formal education, and who is perhaps unable to read. Around 20 categories of risks were covered by microinsurance plans and offered by 15 companies as of early 2012.

FACILITATING GROWTH: Speeding up growth starts with the regulator, the NIC. Updates to the 2006 insurance law, expected to be passed at the beginning of 2013, will provide a fully articulated legal environment in which microinsurers can operate. The NIC so far has treated microinsurance as another form of insurance, instead of a unique product that would require a separate licence, according to Michael Andoh, the head of supervision at the NIC. Conventional insurers as well as specialist companies and non-governmental organisations (NGOs) are likely to offer microinsurance. The NIC wants to facilitate business by keeping costs low and regulations easy to comply with. Intermediaries in the market, for example, will not be required to obtain a licence to perform their function, Andoh told OBG. “The restrictions imposed on the industry must be proportionate to the benefits that are expected to result from them, requiring the regulator to take into account the cost of regulation on firms and consumers,” according to an NIC policy paper published in 2010.

ECONOMIES OF SCALE: Establishing a customer base in microinsurance generally begins with a small-scale version of what conventional insurers aim to do through bancassurance – leverage the client access enjoyed by banks. Normally, microinsurers in Ghana start by providing life insurance to people who receive microcredit loans. The insurance is bundled into their loan, primarily as protection for the lending institution in case the borrower gets sick, dies or is otherwise unable to repay. In many cases, borrowers may not be aware that they are buying insurance as well as getting a loan. The challenge is turning passive buyers into active ones, said Eugene Adogla, the director of operations in Ghana for MicroEnsure, a US-based non-profit intermediary. That means getting door-to-door microfinance sellers to offer insurance policies as well.

DISTRIBUTION: As an intermediary, MicroEnsure partners with underwriters that provide the insurance and give the firm a cut of premiums income. It designs the policies and handles claims and other functions, but sells indirectly, through what it terms front-office relationships: door-to-door microfinance sellers who bundle and upsell, for example.

Important at this stage of microinsurance development is to be creative when it comes to looking for new distribution channels. MicroEnsure, for example, currently offers life insurance through two mobile phone companies (see analysis). In a partnership with Tigo, customers are entitled to free life coverage just by signing up and by spending at least GHS5 ($2.96) per month on network access. Coverage amounts increase with phone usage. After experiencing much success in Ghana, MicroEnsure decided to also implement the scheme in Tanzania and Senegal. The intermediary also works with telecoms operator MTN, which also has an insurance product.

Other potential distribution channels in Ghana being explored or that have already been exploited include church networks, market associations, credit unions, rural banks, savings-and-loan providers both in the formal and informal sectors, and trade groups. Getting buy-in from large groups is crucial because of the low margins inherent in serving low-income markets, meaning high customer volume is important for profitability, as is keeping costs down.

BENEFITS: One benefit of microinsurance as opposed to microcredit is that there is much less need to monitor customers’ activity, because they are not made debtors in the process. Generally, microcredit requires not only hiring loan officers to collect monthly payments from borrowers, but also involves providing services such as basic training in business administration to help keep loans from going into default. Due to the labour-intensive nature of this business, conventional banks have often failed in the microcredit segment, and have had to rely on partnerships with intermediaries. On the other hand, conventional insurers do not have the same problem because their business model is based on indirect access to customers. Intermediaries have always been a cost of doing business, and regular contact with customers is not required.

“Face time is not a core function of what we do,” Adogla told OBG. “We are an intermediary between front-office partners, the sales channels and underwriters. Our position in the value chain is bringing added lines to the underwriter.” For this reason conventional insurers in Ghana are already active in microinsurance. They are establishing their own departments and sometimes hire intermediaries such as MicroEnsure. The first such company to market was Gemeni Life Insurance, which introduced a life insurance product called Anidaso that was sold primarily in the country’s southern regions. It provides term life up to age 60, with accident and hospitalisation benefits for the holder and immediate family, as well as an optional savings scheme.

CHALLENGES: A 2009 study by the German Institute for Economic Research highlighted a potential challenge to developing the microinsurance sector: educating customers. As demand for insurance is correlated to customers’ perceptions of the benefits, a clear understanding of what insurance means and what to expect is crucial to avoid disappointment. However, the study revealed various misunderstandings by policyholders as to what they are entitled to from their insurer. Many believed that holding an Anidaso policy meant access to credit, perhaps because policy sellers did not explain fully what the policy provided. Others were under the wrong impression they had bought into a pooled-risks scheme, or that Anidaso would make employment easier to find. While the study focused on Anidaso policyholders, it found the same problems inherent with other policies from other firms as well.

Another risk is adding complexity to what are simple business models. “Life insurance is one of the easiest products to sell compared to other kinds of products and permutations,” Adogla said. Insuring property, for example, would mean doing valuations of them first, and that would add significant cost. A more likely outcome in that market segment would be a defined benefit, instead of having an appropriate price for full coverage. Just as important as the type of product, however, is the distribution channel – finding one that presents a fast and inexpensive way to reach customers en masse is the key, said Peter Gross, the head of business development in Ghana at MicroEnsure. “It’s all about new models for distribution and packaging that tap into the massive demand that already exists among the poor.”

BEYOND NON-PROFIT: What was once seen by some as a charitable activity has turned out to be rather profitable. MicroEnsure is transitioning to a for-profit model after beginning operations as an NGO with a grant from the Bill and Melinda Gates Foundation awarded in 2007. Another commercial application was recently announced by LeapFrog Investments, an impact investment fund focused on microinsurance. In April 2012 LeapFrog announced a $5.5m microinsurance project in Ghana, to date the largest private sector investment in the country’s insurance sector. That money bought it a majority stake in Express Life Insurance, which has a market share below 1% and would have otherwise perhaps had a hard time meeting new capital requirements for insurance companies (see overview). LeapFrog’s plan is to offer products capped at $10 per month.