Microinsurance and the insurance industry Brandon Mathews Washington DC 5 February 2013 Interamerican Development Bank.

Microinsurance and the insurance industryBrandon Mathews

Washington DC5 February 2013

Interamerican Development Bank

Rise of the middle class in LatAm

Source: World Bank ‘Economic Mobility and the Latin American Middle Class’

Despite tremendous gains, Latin American households risk poverty.

0 10 20 30 40 50 60 70 80 90 100

30% Middle Class

37.5%Vulnerable

30.5%Poor

Est. probability of entering poverty during next 5 years

Source:s World Bank ‘Economic Mobility and the Latin American Middle Class’ & Stonestep estimates.

Lower income households carry high debt and low savings, esp in Brazil.

•Insurance penetration is low.

•Higher frequency, lower severity events – along with low frequency, high severity events – threaten lower income households.

•Insurance product and service requirements are different for these households but lessons about what sells do exist.

Products sold to low-income people are a large part of Brazil’s market.

Source: FUNENSEG, CENFRI, CNSEG, “Microinsurance in Brazil, Toward a strategy for Market Development”

There’s room for innovation with the most common products.

Source: FUNENSEG, CENFRI, CNSEG, “Microinsurance in Brazil, Toward a strategy for Market Development”

Profitable products and proven methods, why not more micro?

•Multidimensional challenge for insurers

•Insurance best practice makes action difficult

•Discomfort with foggy definitions

•Reputation risk/reward

Challenge in three dimensions, not just one.

Insurance Risk Operational Risk

New partners

Existing partnersNew Customers

Existing Customers

Operational risk is especially interesting to consider.

93/1/200

9

Mostcustomers

Wealthycustomers

Microcustomers

Claims

DirectCapitalComms

103/1/200

9

Immediate Mid term Over time

Higher ERLower LR

Acceptable CR

Lower ERHigher LR

Attractive CRthrough innovation

Lower RateSame ERSame LR

Acceptable CRand increasemarket share

Same RateSame ERHigher LR

Acceptable CRand increasepenetration

Innovate over time to gain profit and then to improve market position.

Profitable products and proven methods, why not more micro?

•Multidimensional challenge for insurers

•Insurance best practices make action difficult

•Discomfort with foggy definitions

•Reputation risk/reward

Current customers are best served by insurance best practice.

•Whereas “microinsurance” takes a customer view, insurance is managed by peril.▫Insurance is supervised and also controlled

internally by peril.•Comparative advantage encourages

companies to organize by functional area – marketing, underwriting, sales, operations, etc – and it is rare to organize by customer.▫Increasingly insurers organize by distribution

focus and Affinity is good news for growth of insurance sales. TBD on customer value.

Profitable products and proven methods, why not more micro?

•Multidimensional challenge for insurers

•Insurance best practices make action difficult

•Discomfort with foggy definitions

•Reputation risk/reward

Externalities

The microinsurance definition is very open to interpretation.• Insurance for low income people.

▫Insurance can include Life, Health, P&C, Pension, as well as the social security systems of countries

▫Low-income – is this the middle, vulnerable, poor, or is it all three?

• Insurance with some kind of moral imperative.▫How can we measure this?▫Does this mean the other insurance is bad?▫Microinsurance discussions can feel like an

ethics lesson for insurance executives.

Profitable products and proven methods, why not more micro?

•Multidimensional challenge for insurers

•Insurance best practices make action difficult

•Discomfort with foggy definitions

•Reputation risk/reward

“Microinsurance” is understood differently from various perspectives.

•Microinsurance and Financial Inclusion spark interest from important stakeholders▫Regulators & Supervisors▫Own-company employees▫Media▫Existing customers & investors

•The innovation requirement predicts some number of failures...

Good news from the free market: specialist entrepreneurs are filling in.

•Administrator/brokers: Microensure & Paralife

•Private Equity Investors: Leapfrog & others

•Venture project development: Stonestep & Planet Finance

Good news from the free market (2): big industry is also stepping up.

•Marsh-led Microinsurance Innovation Facility

•Swiss Re & Allianz Microinsurance units

•Zurich Insurance appointment of Cassio dos Santos as Regional Chair

•Compartamos and others defining new strategies

Thank you