After a recent Actuarial Society sessional presentation I gave on micro insurance and the regulatory developments, I was asked why there aren’t more micro insurers operating in South Africa. Here is a slightly paraphrased version of the full question:

The larger insurance players seem reluctant to enter the market. Why do you think this market has been slow on the uptake? The regulatory barriers to entry certainly don’t appear to be that restrictive so either existing insurance companies are not flexible enough to offer the products required or it’s a poor business decision/larger risk that they’re unwilling to take on. Do you have an opinion on what is causing the low number of microinsurance players in the market?

So here goes. Certainly a far from complete or perfect answer, but a starting point based on my discussions with many people and entities actively interested in pursuing the market over the last few years.

What do we mean by micro insurance in the South African context?

The issue with micro insurance is scale, particularly of distribution and distribution costs. Okay, followed closely by premium collections (and that is about maintaining scale so that you don’t lose insurance policies as quickly as you sell them). These are the two issues that need to be solved for real success for any new micro insurer or a new platform for micro insurance.

Micro insurance and funeral insurance

Whether micro insurance is big in South Africa or not comes down to how one defines “micro insurance”.  There are major life insurance players that have funeral products with modest premiums, below R100 or even R50 per month. So those large insurers (major traditional insurers plus the bancassurers) are operating in this space already, but as “assistance business” as the current licence category is termed.

Under some definitions, South Africa is already one of the largest micro insurance markets in the world. On other measures, there are still plenty of excluded people who could benefit from appropriately priced, appropriate value insurance on a micro scale. I still hope to see viable products with premiums below R10 per month (and not on some misleading bundled basis) or even less on a micro-transaction basis.

These players are less interested in the particulars of a micro insurance licence because they have yet to see a material benefit. Product restrictions and the complexity of an additional licence don’t warrant lower capital since they aren’t actually constrained by regulatory capital but rather by their own view of economic capital.

Distribution innovation

Some of these players have tried innovative products (pre-paid funeral plans, allowing skipping premiums) with low, no or at best moderate success. The bancassurers push heavily into ATM, USSD and call centre sales rather than branch sales because they are lower cost, and sometimes lower risk of anti-selection. Getting life insurance via the banking apps is an easy step (and some have taken it) so probably the view is that a dedicated app just for insurance is unnecessary.  The banking brands (target of popular complaints as they sometimes are) are still generally well trusted.

The traditional insurers have invested in their own distribution channels, more typically broker- or agent-driven, for decades and this has carved them a good, profitable niche. Changing that for revolutionary distribution has risks.

Fraud and anti-selection are key concerns when you have the ability to turn coverage on and off.  I think many insurers are quite nervous about this. I’d love to see someone dedicating a small pot (R25m or something, so significant enough to do something with, but small enough for major players not to declare a national emergency if I doesn’t work) and experiment with something and see how it goes.

Micro insurance for assets

On the non-life side it’s more a definite gap. Acquisition costs, risk selection, differentiated pricing, claims underwriting and fraud risk (very serious fraud risk!) are non-trivial things to overcome.

Underwriting / risk assessment at policy inception is an expensive exercise. Claims stage underwriting can be problematic from a customer experience perspective if the policyholder genuinely expected to be covered and wasn’t (in which case even refund of premiums paid doesn’t help them, and with that the insurer has likely already incurred a loss based on the claims assessment and administration costs).

Credit insurance and micro insurance – but are we doing it right?

Credit insurance is the one area that sidesteps many of these issues. Clearly established need, assessment of ability to pay, distribution and lower fraud. It’s a pit this is also one of the areas that has achieved such a bad reputation (much of it deserved) for charging high premiums and making super profits based on the lack of a good market. It feels like we should be doing better here.

It would be amazing if someone could also consider what sort of loss they’d be prepared to take on a pilot programme to see if our worst fears are realized for asset insurance outside of the credit insurance space.

All the other hot trends

I’m staying close to developments on what I term “hyper selection” and also peer-to-peer insurance.  Some of this may present opportunities to unleash micro insurance from its current constraints.  I haven’t yet seen developments that seem ready for prime time and which solve what I view as the fundamental problems. Hopefully someone is already quietly working on something incredible in this space.

Micro insurance – opportunity for society, opportunity for business or both?

But the real answer to your question is that the supposed huge potential of micro insurance is a little difficult to pin down in pure commercial terms. Most of the success stories of micro insurance in emerging markets and public-private partnerships, NGO programmes etc.  Many of these also fail even with an explicit return on capital requirement.  Solving these issues on acceptable commercial terms for insurers who already have a successful business is a big question mark.

So even with my belief that micro insurance and inclusive financial services is a good thing for society, it’s less clear to me that it’s an easy buck to make for insurers.