Can Technology Push Microinsurance Further? 4 Reasons to Say Yes

Those who most need insurance, and the stability that it provides, are often the least likely to have it. In developing countries, insurance coverage is exceedingly low – often below 5% of the country’s population. Few products are designed taking into account the risk and affordability levels of the poor. However, progress is being made: significant business model improvements over the years are helping drive the expansion of mobile insurance in multiple markets today, with 17 million policies issued since June 2014 and five deployments having more than one million mobile insurance policies since operations lauched within the last three years.

A recent study by CGAP suggests that despite this progress, four key opportunities across the insurance value chain are underexplored. There is great potential to better design and market insurance products for poor customers, if insurers and their intermediaries pay greater attention and are bold enough to experiment. Grasping these opportunities and harnessing the power of mobile technology will increase both the access to, as well as use of, health and life insurance among low income populations:

1. Marketing: Targeting marketing efforts through customer segmentation using mobile data, leading to increased customization of service provision
2. Product Design: Leveraging social media links for collective insurance to reduce costs for customers and increase efficiencies for providers
3. Distribution: Taking advantage of mobile phone features to enable faster and cheaper insurance signup for customers
4. Pricing: Tracking customer behavior through remote sensing for increased accuracy in premium calibration

Marketing

The extensive use of mobile phones in developing countries has created data on customers’ finances and spending patterns for sections of the population that did not previously have a financial track record. Using such data, microinsurance companies can tailor marketing to customers’ willingness and ability to pay, and therefore may result in an increase in profitable uptake.

For example, Cignifi, a mobile data analytics firm, is taking a big step forward by pioneering the use of mobile data for insurance provision. In a pilot with a microinsurance specialist in Sub-Saharan Africa, the firm is developing an algorithm to analyze numerous mobile data variables, such as volume and duration of voice calls, mobile money transactions, mobile savings, social networks and demographics to determine a premium appropriate for different customer segments.  Such data will allow its microinsurance partner to tailor its SMS/text message-based marketing efforts to specific customer segments in order to increase likelihood of uptake.  

For example, a customer who has mobile money transactions below a certain threshold and makes short calls to a limited number of people could have behaviors suggesting he could be marketed a microinsurance product with a low premium and limited coverage. On the other hand, customers  who are more advanced in their mobile use may be marketed a product with higher premium and coverage levels. As mobile data analytics get more sophisticated over the coming years, we will likely witness insurance providers offering far more customized marketing to sections of the population that were previously thought to be off-limits. 

Product design

Insurance providers could use social media to sell collective insurance policies to friends or family. These policies may combat moral hazard for small claims, reduce high transaction costs faced by insurance providers for small payments, and reduce costs for customers.

Friendsurance, a German peer-to-peer (P2P) insurance service, allows individuals to connect with people from their social networks to purchase collective insurance. Although part of the premium is paid to insurance companies with whom Friendsurance has partnerships, the other part is set aside to cover the cost of small claims, which would otherwise be paid by policy-holders as deductibles. Customers receive back whatever amount is not claimed. They are therefore less likely to make fraudulent small claims, as this would damage their own and their friends’ interests. According to Friendsurance, its policyholders save up to 40% on premiums compared to traditional insurance, while associated insurers reduce their claims ratio and churn rate. Such P2P insurance policies could be conceivable in other markets, including developing countries.  

Distribution

Most who have signed up for insurance can attest that it is not an easy experience. Insurance terms are difficult to understand and registration often requires much paperwork. For people with limited literacy living in remote areas, these logistical deterrents become barriers. Linda Jamii, a micro-health-insurance product in Kenya, leverages mobile phone features to reduce these barriers. During registration, agents use feature phone cameras to capture documentation and pictures of customers, increasing efficiency and convenience for the provider and reducing costs for customers.

Another aspect of signup – insurance providers’ need to validate information submitted by subscribers – significantly drives up costs. However, insurance providers offering mobile microinsurance in partnership with telecom companies may have alternate data sources they could use to cross-reference this information. For example, GrameenPhone, the telecom partner in Nirvoy Life Insurance, has information on its customers’ family members through its “Friends and Family” dialing feature. Nirvoy can cross-reference this data to verify the dependents listed by its subscribers for their life insurance plan. Similarly, cell-tower triangulation data from GrameenPhone enables Nirvoy to verify geographical information submitted by subscribers.

Pricing

Insurance pricing rarely reflects the risk profiles of individuals perfectly, since generalized proxies are used to calibrate premiums for customers. Because the low-income, young and unbanked generate less of the data that feeds into such proxies, insurance companies may be  unable to fully assess risk profiles of these groups and they may tend to have disproportionately high premiums. However, embedded mobile technology could allow insurance companies to customize premiums based on actual behavior. By installing onboard diagnostic devices in cars, for example, insurance companies in the US gather data on a driver’s actual driving habits, and adjust their premium accordingly. Progressive Insurance’s Snapshot product has two million subscribers, and offers drivers up to 30% discount on their premiums depending on their driving patterns.

This same concept can have applications for low-income populations in developing countries. For example, health insurance premiums could be reduced by tracking household use of clean cookstoves or water filtration systems. For this vision to become a reality, however, further research would be needed to ascertain whether this is economically viable for insurance companies, given the investment required for a remote sensing database. In addition, insurance and consumer product companies would need to partner and work out an acceptable revenue model. There might also be data security, data sharing and other potential risks that would need to be appropriately mitigated.

In developing countries, there are fundamental barriers to insurance provision that can’t be fixed by technology alone, including continued lack of awareness and insufficient customer demand for formal insurance products. However, these four opportunities identified, which better leverage the power of mobile technology, could play an important role to:

• Further enhance the business model of insurance providers, by allowing more targeted marketing and monitoring, better distribution and a reduction in inefficiencies relating to small claims.
• Further improve the value proposition to customers, by increased accuracy in calibration of premiums and the return of unclaimed premiums.

As the mobile revolution marches on, actors in the microinsurance space should continue to experiment and refine both products and delivery, as access to insurance is a fundamental component to protect the poor from severe and recurrent risks that could push them into greater poverty.