What Is Microinsurance?
You may not have heard of microinsurance before, but it is likely you have heard of things such as pay-as-you-go-insurance (Metromile is a popular example). The microinsurance concept breaks down insurance in its traditional form into something much smaller—insuring small items such as a one-day trip or a one-time event or even health insurance. The concept is about only paying for the insurance you actually need. Microinsurance is designed to help more people buy insurance coverage who were previously unable to afford it.
Who uses Microinsurance?
Currently, microinsurance has already had some success in many third-world countries as a way for low-income families to afford insurance, particularly health insurance. It can be administered in any number of ways; through licensed insurance agents, community organizations, micro-finance institutions and other non-governmental organizations. Currently, microinsurance is very popular and successful in other parts of the world including South Africa, India, China and Brazil.
Types of Microinsurance
Microinsurance can apply to almost any kind of insurance product. Basically, most things that can be insured can be insured on a small scale or “micro” level. Pay-as-you-go (also referred to as usage-based) auto insurance is a popular form of microinsurance. With pay-as-you-go auto insurance, you only pay insurance for the miles you actually drive. Those who drive fewer miles, benefit by paying a lower auto insurance premium. Other examples of microinsurance products include crop, insurance disability insurance, natural disaster insurance, livestock or cattle insurance, etc.
Microinsurance Around the World
Microinsurance, particularly micro health insurance, has become popular and successful in third world countries such as Bangladesh. Two of the most popular types of microinsurance are funeral/burial insurance and credit-life insurance.
American International Group (AIG) was one of the first insurers to offer microinsurance on an international level with the first policy offering in Uganda in 1997. We saw the difference microinsurance can make in helping natural-disaster survivors recover from the devastation with Typhoon Haiyan, a typhoon that caused devastation in the Philippines in 2013. Only a month later, the microinsurance companies had paid claims out to local residents including fishermen and farmers totaling over $1.9 million.
Even the Chinese have gotten on board. After a successful four-year trial program in the rural areas of China, the Chinese government launched a microinsurance program to last four years in July 2012.
Benefits of Microinsurance
The greatest benefit of microinsurance is its affordability and also the sense of security it brings to low-income families who were previously unable to afford insurance. Think of the savings individuals can realize by never having to pay in money toward a deductible they will never use. Times are changing and as the millennial generation demands more choices when purchasing insurance, the insurance industry will have to learn how to embrace the change. Other benefits include transparency and the ability to handle claims quickly and accurately.
Research also shows that when farmers and other small entrepreneurs feel they are protected by insurance, they are willing to take more risks and invest more in new business venture. This is good for the economy.
As with any new technology, there are going to be some set-backs. What are the potential setbacks for microinsurance in the United States? To start with, the U.S. insurance industry is very highly regulated. There are legal requirements for insurers including liability and reserves that must be maintained. With microinsurance, the need for these reserves would be eliminated since microinsurance is a very “short-term” policy. U.S. insurance regulations will have to catch up as the use of microinsurance becomes more widely accepted inside the U.S.
The Future of Microinsurance
Insurance is not always the fastest industry to embrace change but research has indicated that there may be a place for microinsurance. Microinsurance is one area where growth in developing countries has outpaced growth in the rest of the industrialized world. Research from consulting firm, Accenture shows the willingness of insurance customers to share personal information about themselves to their insurers in exchange for lower rates for insurance. We can look to new start-ups who embrace this technology, including Lemonade (a new peer-to-peer insurance company) and Metromile with its pay-as-you-go driving model, to pave the way for the rest of the U.S. insurance industry.
The growing trend of microinsurance may eventually make microinsurance a very familiar term here in the U.S.