Microinsurance is a type of insurance designed to make essential insurance products more affordable. It breaks down insurance in its traditional form into something much smaller—covering small items such as a one-day trip, a one-time event, or even specific health insurance needs.
Ultimately, the concept is about only paying for the insurance you need. It's particularly meant to help lower-income people and residents of developing countries have access to insurance, but it comes in many forms.
What Is Microinsurance?
Microinsurance offers specified insurance products to those who cannot afford traditional insurance. It can be administered in any number of ways—through licensed insurance agents, community organizations, microfinance institutions, and other non-governmental organizations.
Microinsurance has already had some success in many third-world countries as a way for low-income families to afford insurance, particularly health coverage. It's a very popular and successful option in other parts of the world including South Africa, India, China, and Brazil.
How Microinsurance Works
Microinsurance can apply to almost any kind of insurance product. Pay-as-you-go (also referred to as usage-based) auto insurance is a popular form of microinsurance. With this option, you only pay insurance for the miles you actually drive. Those who drive fewer miles benefit by paying a lower auto insurance premium.
Most things that can be insured with a normal policy can be insured on a small scale or “micro” level.
Other examples of microinsurance products include:
- Crop insurance
- Disability insurance
- Natural disaster insurance
- Livestock insurance
- Credit-life insurance
- Burial insurance
These are designed as independent policies that lower-income individuals and families could easily pick and choose according to their budget.
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. Microinsurance made a big difference in helping natural disaster survivors recover from the devastation of Typhoon Haiyan, a typhoon that caused devastation in the Philippines in 2013. Microinsurance companies paid $12 million in claims for that disaster by 2014.
China is currently the largest emerging market for microinsurance, boasting $574.9 billion in premiums in 2018.
Benefits of Microinsurance
Microinsurance makes it possible for many more people to have at least some degree of insurance to protect some of their most valuable assets. It can bring a sense of security to low-income families who were previously unable to afford insurance.
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 ventures which is good for the economy.
There are also signs that microinsurance could grow in popularity beyond just low-income communities. In an on-demand, millennial-driven economy, cafeteria-style products are becoming more attractive to many people. Companies such as Metromile, a pay-per-mile car insurance company, fit the tech-savvy consumer identity that many young consumers are looking for.
Microinsurance in the U.S.
That's not to say microinsurance is on firm footing in the United States. The U.S. insurance industry is highly regulated and 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 considered a “short-term” policy. If microinsurance is really going to take off in the U.S., insurance regulations will have to catch up.
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, to pave the way for the rest of the U.S. insurance industry. These growing trends may eventually make microinsurance a very familiar term in the U.S.
- Microinsurance is a type of insurance that offers highly specified policies to cover specific needs at an affordable rate.
- It is designed to make essential insurance options more available to low-income people around the world.
- Innovative forms of microinsurance such as pay-per-mile auto policies are becoming popular in the U.S.