Business Viability

Introduction

Is there a business case for microinsurance initiatives? What circumstances are needed for initiatives to become viable? As insurers and distribution partners explore these questions, they need to consider many factors related to the business model, product, and processes that contribute towards the viability of microinsurance initiatives. Just like traditional insurance, achieving sustainable microinsurance operations is an iterative process. It requires insurers and distribution partners to monitor their experience, measure costs, learn from the market, and make adjustments to products and processes.

Viability of a microinsurance initiative needs to be considered from the perspective of the entire value chain – not just the risk carrier. When partnerships are involved, it is important that each of the partners fulfill their requirements, otherwise the initiative is not likely to survive in the long run.

Achieving scale is one of the main drivers of viability for microinsurance, especially given the low premiums associated with microinsurance policies. But, how do initiatives achieve scale? Is it through partnerships with channels that have an established client base, through the use of technologies that improve efficiency and outreach, or through effective marketing strategies?

Insurers are likely to face many trade-offs between business viability and client value. For instance, it is easier to achieve scale, and consequently viability, through compulsory products. But, can compulsory products also provide client value? Balancing client value with business viability is essential, because long-term viability depends on products meeting client needs and providing value.

Emerging lessons

I. From Microinsurance Papers

A business case for microinsurance a Facility briefing note by Janice Angorve and Nashelo Tande assesses the business case for microinsurance through case studies of five microinsurance initiatives. The study identifies scale, claims costs, and acquisition and administration costs as the main drivers of profitability. How insurers balance these, often, competing aspects of the business is analysed using the case studies.

Working with existing groups and partners: Leveraging existing relationships and building mutually beneficial relationships with the partner are important to access the market. Working with a partner with a wide footprint of branches or access points allows the insurer to develop a large, diversified customer base.
Claim controls:Insurers need to balance between setting up sufficient controls to manage adverse selection and fraud risks, while maintaining efficiency and low costs.
Monitoring experience and adjusting premiums over time: A number of insurers increased premiums or restricted benefits based on undesirable claims experience and set premiums based on the claims experience of specific groups, as opposed to a common rate for all clients.

A case for livestock insurance outlines how IFFCO-TOKIO has made changes to the claims process for its credit-linked livestock insurance product which have not only reduced claims costs, but have also improved the client value of the product. In the new process, the farmer calls the IFFCO-TOKIO representative when an insured animal dies. The representative visits the farmer within six hours of notification and verifies the claim with the help of the radio-frequency identification device inserted in the animal. Veterinarians accompanying the representative verify the cause of death of the animal. IFFCO-TOKIO bears all costs, including veterinarians’ fees and post-mortem examinations. This is a major benefit for clients, who previously paid veterinarians fees costing 50 to 60 per cent of the annual premium.

The changes have led to lower transaction costs for farmers and faster claims processing with IFFCO-TOKIO paying most claims between 8-30 days. IFFCO-TOKIO has also gained greater control over the process, reducing the chances of fraud. The claims ratio has fallen to 35 per cent, resulting in a combined ratio of 118 per cent. The expense ratio of 84 per cent is expected to fall as the cost of technology decreases and scale is achieved.