We are all quite familiar with basic consumer finance. At a minimum, as insurance industry professionals we understand the role of banks, payment servicers, and (of course) insurers in the modern economy. In fact, at a certain level, we don’t even notice. Credit cards, mortgages, and electronic fund transfers are commonplace, requiring little thought beyond the basic elements of a transaction — i.e., swipe your card, sign your name, and you’re done. Yet, there are some parts of the world in which the financial services and infrastructure which we often take for granted are rare — or don’t exist at all. In many developing nations - and even in parts of the developed world — large swathes of the population have little or no access to the very foundations of consumer finance that have become embedded in the cultures of developed economies. This is a problem that the microfinance movement seeks to solve.
Microfinance focuses on the execution of small, basic transactions in markets that do not have direct access to traditional financial services. While major institutions prefer to work with large amounts of capital, microfinanciers have moved in the other direction, making loans, issuing insurance polices, and facilitating currency transfers in parts of the world where individual transactions are not measured in billions or even millions of dollars, but in mere hundreds or single-digit multiples of ten.
Did you know that 98 percent of India’s retail sales are informal … i.e., not transacted in retail stores? And that more than 850 million people in India live on less than USD2 per day?
At present, the microfinance industry is dominated by microbanking. This branch of the industry includes products and services such as microloans (which are often provided to poor entrepreneurs with no collateral to help them start businesses), microsavings (which involves the creation of an infrastructure in which cash can be stored securely and interest can be accrued), and remittances (payment services which enable emigrants working abroad to send portions of their pay to family members living at home). Recently, beyond microbanking, a second category of microfinancial services has begun to take root — microinsurance.
Microinsurance, an emerging category of microfinance, works in a manner similar to traditional commercial insurance — except products are designed for and distributed to low-income populations, predominantly in emerging economies that have had historically low insurance penetration. Because this corner of the market is relatively new, many insurers find it difficult to write “micro” policies with little access to loss history, exposure data, and other essential underwriting information. Without access to reinsurance, the situation becomes even more challenging. The lack of reinsurance infrastructure actually prevents the development of an insurance infrastructure.
The microinsurance movement represents an effort to jumpstart an insurance economy by making coverage available where it would not exist otherwise. This effort involves extending coverage to insureds in developing nations as a means for establishing protection from the same perils that are involved in major market insurance policies. Through the establishment of an infrastructure and loss history, the goal is to make it easier for carriers to conduct business in new markets. More than goodwill, microinsurance is building the foundation for larger markets in the future, which will ultimately become new revenue streams.
In the Perspectives on Microfinance series, which will be published weekly, we’ll explore the world of microfinance, from its roots in Grameen bank in 1983 through the development of microreinsurance coverage, which will help this market to mature. While it is tempting to view microinsurance as a novelty, forward-looking market participants will see it as early market entry in its purest form: the development of a revenue stream that does not currently exist. Success now could redefine the insurance industry’s competitive landscape in the years to come.