Figuring out the future and the now


That’s the ballpark figure I usually work with as the minimum number of micro insurance policies required for scale. The expenses of running even a micro insurer are not that trivial.

For underwritten products within a full life licence? Larger premiums per policy but definitely more complexity. Competition is tougher too. Hyper local brands don’t translate into trust at this level. Viable niches may exist, but at what volumes?

You might wonder if there is scope to sell greater value products at higher premiums that can bring that number down in some contexts?

The rise of embedded insurance

Turns out this has been given plenty of thought already – “micro” insurance is the less popular name these days from a product and provider perspective. Inclusive Insurance certainly sounds better and more inclusive (!)

I think part of that push though was recognising the challenges and limits of truly “micro” insurance, at least at an individual level in providing commercially viable options that meet needs at the scale necessary.

Inclusive Insurance has been eclipsed in some words for “embedded insurance”, a term that talks less to the needs and objectives for society, and more to one that is practical and viable commercially. Embedding insurance in other products are services can drive down some of the costs, but then by virtue of being embedded, the absolute amount of premium is even further limited. Volumes may go up – and there have been some success stories here – but margins typically remain fine so I’m going to guess that my 40,000 may be too low in these instances. The success stories are in the 6- and 7-digit volume space.

Microinsurance licence restrictions

Back to “microinsurance” and the regulatory restrictions that apply in South Africa:

  • Savings elements might seem attractive to increase premium size and provide “value” rather than a set price point. But savings elements are not permitted in microinsurance policies in South Africa.
  • Loyalty schemes or cash back may be a way to attach greater value to a product, but again are not permitted in the microinsurance framework.
  • Fairly large sums assured are possible within microinsurance – often attracting increased adverse selection or outright fraud.

Can product tailoring increase average premium?

Product tailoring can be expensive and can counter plans for
economies of scale while simultaneously targeting a smaller market. I’d still like to see more of this rather than pure commodity products. I’d be happy to be wrong if this approach meant a viable micro insurer could provide genuine value, see strong demand, and require fewer than 40,000 policyholders or comfortably sell more than that.

Microinsurance pros and cons – an important choice

A key point here is whether a standalone microinsurer is the right vehicle for a truly niche insurer? The increased governance and compliance policies effected by the major cell providers have frustrated cell owners and entrepreneurs, slowed down innovation and led them to look elsewhere. A microinsurance licence is a great option for some, but not a panacea for everyone.

I’ve helped insurers apply for licences, buy licences, consider alternative arrangements, and I’m sure at some point I’ll be working with micro insurers to transfers portfolios to other insurers and close down licences.

There is also opportunity to apply to the Prudential Authority for scope to do more with the licence, with careful consideration of the risks and capital.

Does digital fix everything?

Digital sales is a complex area. Some insurers have had some success with purely digital sales. But when these distribution channels are owned by someone else, the costs are not as low as “digital” might make you think. If NTUs are high, and premium collections are low, it can quickly become expensive. There’s a fine line between removing friction from a sales and underwriting process (which definitely improves sales) and making it so easy to “sell” that the customers haven’t really decided that they want what they’ve bought.

Parametric insurance – watch this space!

We should be doing far more with parametric insurance in South Africa. Thinking around climate risk and the positive role insurers can provide in this space (rather than only worrying about the risks it poses to them) may present some new opportunities. Insurers can apply their expertise in understanding and pricing risk, while providing a socially and economically beneficial product at a price that shows value and profit.

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