Micro-insurance: Cover for those who cannot afford to lose

For much of the last century, the insurance agent who called at the door weekly for insurance premiums was a feature of British working-class life. Epitomised by the “Man from the Pru”, the agents provided access to insurance for legions of families, helping them save for expenses such as funerals. With the demise of the direct sales force in the UK, it has become harder for those on lower incomes to access insurance despite data suggesting an increased risk of losses.

“I have no doubt that will have made a difference,” says Bridget McIntyre, chief executive of RSA’s UK business, and chair of the UK’s Financial Inclusion Taskforce’s working group on insurance.

Overseas, the insurance agent remains a feature of the business in emerging markets such as India and China. Most of the focus for insurers operating in these markets is the emerging middle class, but financial services groups are also making insurance available to those with lower incomes.

The main way that financial services groups are reaching those on very low incomes is through so-called micro-insurance. According to Martin Buehler, principal insurance officer in International Finance Corporation’s global financial markets department, micro-insurance refers to the protection of people on low incomes against specific perils, in exchange for premiums proportionate to the likelihood and cost of the risk involved.

“This is still traditional insurance, only these contracts need to be adjusted to the bottom of the pyramid level of income,” he says. Premiums can be as low as $1.50 a month, he says, with micro-insurance projects in countries including India, Pakistan, Uganda, Peru and the Philippines.

“Micro-insurance is now where microfinance was about eight to 10 years ago. Microfinance now is a multibillion dollar industry. Micro-insurance is probably not yet in the billion dollar premium area,” he adds.

Much micro-insurance is tied to the provision of micro loans. Under these policies, if the loan taker dies or is permanently disabled, the loan is forgiven. Recent work has focused on using this credit life insurance as a platform for the provision of other types of policies. These could include health insurance for the loan taker and their family; life assurance to protect dependents in the event of the loan taker’s death, funeral plans; insurance for a dwelling or a vehicle used to earn a living. A number of projects revolve around livestock. “There is really no limitation on what micro-insurance can do,” says Mr Buehler.

The challenge is making the economics of micro-insurance work. This is where organisations such as the IFC, part of the World Bank Group, come in. But Mr Buehler believes that if companies can surmount the challenges of dealing with smaller premium amounts, a viable business is possible.

“If you recognise the size of the bottom of the pyramid; if you can figure out a commercially interesting way of providing this product with valid and quality insurance, and still make a little bit of money ... there is still a possibility to create such micro-insurance on a commercially profitable basis,” he says.

Prudential, the UK life assurer, is one of the companies providing credit life insurance in India, as well as term life assurance. Last year, its asset management arm launched a savings plan in India starting at $1 a month. The life company plans to offer a savings policy with life cover attached, for $1 a month, later this year, according to Shikha Sharma, chief executive of Prudential’s Indian operation.

The Pru also last year developed a rural strategy, opening up small offices in order to reach the 60 per cent of Indians who live in villages and do not have access to banking facilities.

The credit life insurance breaks even, says Ms Sharma and the $1 a month insurance-linked savings plan would also be structured to give an adequate return on capital.

But even in developed markets, such as the UK, insurance is not part of the picture for many on lower incomes. One way of trying to address this is through schemes that collect insurance premiums weekly – as social housing tenants pay their rent.

Insurer RSA has been making insurance available with rental payments for the past 17 years. It works with 320 social housing schemes in Britain, and protects about 180,000 customers.

Premiums for RSA’s Insure with Rent scheme start at 80p a week, and average about £1.50 ($3) a week. Tenants do not need a bank account – payments can be made with cash.

Ms McIntyre says this type of cover is financially viable. The biggest challenge is encouraging people to buy it.

The floods in parts of the UK last summer, which cost insurers about £3bn, may encourage more take-up. Ms McIntyre says that in one scheme, close to an area that flooded, there was a 72 per cent increase in take-up after the deluge.

“The floods do highlight the issue. I don’t think people have realised what they can lose,” she says.