In a time where we see the word ‘micro’ attached to many aspects of social businesses that serve the Bottom of the Pyramid (‘micro-credit’ and ‘micro-enterprise’ come to mind right off the bat), insurance is a sector that is starting to garner major interest. Where micro-credit has already started to prove itself a worthy business model, micro-insurance seeks to do the same. Micro-insurance providers already range from large multi-national financial institutions to local organizations. The market for micro-insurance is starting to get some real recognition. LeapFrog, a global micro-insurer, recently publicized the closing of their $137M investment fund in Africa and Asia. In this time of proving a business model legitimate, I think its extremely important to pay attention to the growth, successes, and setbacks that micro-insurance will experience over the near future.

What is it?

Simply put, micro-insurance is a low premium approach to insurance for those at the BoP. It is a financial instrument that works to protect against certain types of risks. The innovative part of micro-insurance is that it reaches an area of the population that is still deemed ‘unbankable’ or physically unreachable to the normal banking sector. Given those characteristics, micro-insurance has adopted different types of models in order to insure the BoP. Much like most of the social businesses we have seen and chronicled, reaching the BoP takes a different approach and a different mindset. That being said, many of these models are still being tested and evaluated in the field. The growth and evolution of the industry will be exciting to watch.

How does it work?

The best explanation that I have found is from the Micro Insurance Network. If you are interested in learning more about the basics of micro-insurance I would highly recommend checking out their website as well as a simple Wikipedia search (always a great way to get a basic understanding). Micro Insurance Network has broken down micro-insurance (as it stands today) into five basic models. I have added my own commentary after each in italics.

1. The “Partner-Agent” model
   

   In this model, the MFI [Micro-Finance Institution] would have the function of a dealing agent, thus enabling the insurer to reach a market where it would not intervene directly on its own because of the lack of profitability.
   From a client perspective, clients can access an insurance product which is managed by a professional and thus benefit from a better “return on investment” than with an informal means of insurance.

   This model is based on the collaboration between a partner agency (usually a formal insurance company) and a dealing agent that provides services to low-income clients.  The company (the partner) feeds the financial resources, sets the premiums, monitors the insurance claims and ensures that legal obligations are observed.  The agent ensures that the risks, resources and knowledge are transferred and shared rationally between the formal and informal sectors.
   

   This model speaks exactly to a lot of the models we have seen with many other social businesses. For example, Grameen Phone, who sets up kiosks in local communities and has women run the operations, allows Grameen Phone to flexibility to expand and scale quicker while not having to set up camp in every locale. It also provides business for the local citizens and can help slowly boost the economy through increased business.
   

2. The mutualised insurance and other community-based organizations model
   

   Credit and savings cooperatives often offer borrower’s insurance contracts that cover the balance of a loan to be paid back. Moreover, they offer savings in the form of life insurance, to stimulate saving habits. Some also sell Housing, Funeral, Invalidity and Disease insurance, and even Accident policies, yet more rarely.  These products come in addition to mainstream credit and savings services.

   In the countries of Sub-Saharan Africa, many mutualised health insurances have also been created on the basis of a voluntary membership.  In exchange for the premiums they send to a fund, policyholders are entitled to certain benefits.  The community has an important role in designing and managing the programme.

   I see two key takeaways here. First, the concept of stimulating savings at the BoP is hugely underestimated and commonly overlooked. The concept of saving for the future is rarely, if ever, considered and changing the paradigms of those at the BoP is key to stimulating an emergence from poverty. Second, involving the community in their financial well being provides ownership to their future. Involving the community in what is happening to them financially is important not only from an educational perspective but from and empowerment perspective. Trust will be earned with honesty and appropriate involvement in the products that are being served to them.
   

3. The “all-in-one insurance” model
   

   Different organizations – MFIs, insurance companies, etc. – can also sell their policies directly to the poor through agents who are paid on a salary or sales commissions basis, or both.  India’s Tata AIG or Bangladesh’s Delta-Life develop microinsurance using this model of direct sale.

   Similar to the first model, this model relies in inserting their own agents to penetrate an area in order to gain market share. This model raises as potential red flag for me, and I think needs to have heavy regulation surrounding it. As we have seen in the United States and many developed nations, incentivizing agents with commissions has the potential to lead to insurance policies that only serve to benefit the insurance industry and does not do well to provide protection to the buyers.
   

4. The “franchise” model
   

   In this model, the professional insurer franchises his/her license, assigning part of his/her capital to the licensee through a reinsurance treaty, as the case may be; the licensee (an MFI, generally), on his part, is in charge of designing the product, setting the prices as well as handling the losses and gains.

   This model is especially beneficial in terms of scalability. I can see this model being used in smaller organizations who want to grow quickly. Hiring others and providing the ability to use their license can help develop local companies quickly.
   

5. The “supplier” model
   

   This model applies to health insurance specifically, it implies that the insurer provides all or part of the health-care services. His/her interest is that he/she remains in control of the health care offer which is a crucial element for client faithfulness.

   Considering all of the debates that we have seen within the United States with regards to health insurance, I’m personally weary about recommending a model of insurance that provides “some or part” of health care services. This is a model that will be very interesting to watch.
   

These models serve to provide an initial insight into the world of micro-insurance, and by any stretch of the imagination does not imply that these are the only available/viable options. The beauty of following social businesses is observing their evolution and noting what works and what doesn’t. Personally I have hope for the micro-insurance industry, and hope that it can be done in a fair an effective way.

- Chris