Insurance for next billion?

Next Billion Tech

I am personally spending much time understanding the financial services landscape in emerging economies like India and Indonesia. They can play an essential role in helping poor people come out of poverty by creating solutions designed and catered to them by leveraging data/technology and understanding their behavior.

Image result for portfolios of the poor

On the recommendation of multiple people, I decided to give a shot to the book- Portfolios of the Poor. I decided to use the excerpts from the book chapter to answer some key critical questions about designing and developing insurance products for the next billion.

Who to trust whom: Insurance provider vs. lender?

  • "The insurance company must earn the trust of customers, while for credit, the reverse is true: it is customers who must earn the trust of bankers."

What happens when emergencies happen?

  • "When emergencies happen, households reach for whatever resources they can. Often these coping mechanisms are expensive. Worse, they may seriously damage the household and its future prospects, devouring assets or destroying livelihoods or imposing intolerable debt."

  • "Health problems rapidly become financial problems."

  • "specialized instruments – formal or informal- are unavailable or insufficient, emergencies are addressed by selling assets, drawing down savings, and borrowing. Loans are a critical part of this mix, reminding us once again that borrowing for poor people is not only, or even mostly, for funding businesses but also for managing the many exigencies of a life of poverty."

Why insurance is better suited for emergencies, but poor still prefer loans?

  • "the financial tools poor households turn to when in trouble are often loans. Better ways to borrow reliably and at reasonable prices would have helped them….loans are not the best solution to such medical emergencies. These are problems of risk – problems for which insurance is designed."

  • "Only insurance arrangements (or tax-funded public safety nets) can aggregate these kinds of risks, provide urgently needed resources at the right time, and do so without creating additional obligations."

Why are insurance companies partnering with MFIs?

  • "would have been easier to manage if the premium was collected weekly or biweekly in smaller amounts. Such policies do exist, but agents are reluctant to offer them because they entail more visits to the client. The unintended consequence is to screen out customers who are willing and able to pay but who require a payment plan more sensitive to cash flow."

  • "One solution, which is increasingly being seized on by insurers in India and elsewhere, is to partner with a microfinance institution that regularly meets with customers – and engage it as the agent for premium collection."

  • "The micro-finance institutions, of course, have such a foundation: they run weekly meetings with batches of clients with whom they have many transactions, so it much easier for them to bring on new products."

  • "nearly all micro-finance providers were offering debt forgiveness on death, or credit life insurance, as one of the features of their lending. Payment for these schemes was built into the price of the loan, so they don't appear separately in portfolios."

What can be non-insurable?

  • "such as crop or livestock loss, are harder to implement in practice because of moral hazard, outright fraud, and documentation difficulties – it is notoriously difficult to know exactly whose cow it was that died, or indeed whether it died of natural causes."

Why informal or semiformal insurance providers find it challenging to develop insurance products?

  • "To work, informal insurance schemes need to bind users together in associations that endure over long periods of time, a task that gets ever harder as populations become more mobile and occupations individualized."

  • "providing insurance profitably also entails high-quality actuarial analysis, careful pricing policies, and wise investments: these are complex skills not widely available outside the formal insurance industry, a fact that makes it hard for informal and semiformal providers to compete with formal providers that they have so spectacularly succeeded in doing for microcredit."

How and what to design insurance products for the poor?

  • "given all of the other elements of designing a workable insurance product, it is easy to overlook the important role of a convenient payment plan."
    "bring down the costs and increase the speed of verifying claims and making payouts."

  • "it is not just the total cost of the product that matters: it is also the timing and size of installments."

  • "SEWA Bank……has even built health insurance into its savings products, when it docks premiums directly from returns on the fixed depositions of women members."

  • "innovative financiers can also build risk-mitigating functions into services already being mass-marketed to the poor: examples include credit-life insurance built into loans and life insurance built into long-term savings products."

  • "Speed and ease of payout matter a great deal to households, and improving these systems would make these types of plans attractive and beneficial to more poor households."

Why poor people gravitate towards loans and savings over insurance?

  • "With private insurance unavailable and holes in safety nets, the financial tools for dealing with risk will likely continue to be savings and loans, and not just because of the unavailability of formal insurance. A big advantage of loans and savings is that they are general-purpose tools. Money is fungible so that a loan issued for one use can be diverted to deal with an emergency if necessary. Insurance is not structured in this way: providers need to be certain that money is only paid out against the insured event."

  • "After all, the insured risk may never occur, in which case insurance premiums give no return (other than peace of mind), whereas savings become available for other uses."

Why insurance products linked to savings and loans become attractive?
For the reason as mentioned above,

  • "schemes where insurance coverage is attached to what are essentially loan and savings products – as in credit-life insurance, and in life-endowment savings – may appeal to poor households than a fat portfolio of policies against each and every risk."

Why de-bundle it?

  • "The cost of commercially viable comprehensive health insurance to poor households…would almost surely entail premium payments that would be beyond the reach of even the best-off households. But there could nevertheless be substantial demand for cheaper – but more limited – partial health coverage, such as prescription drug benefits or catastrophic health coverage."

Some more useful insights:

  • "The portfolio approach suggests that it is not necessary to solve an entire problem in order to improve the well being of poor communities."

  • "unreliability in financial tools reinforces other areas of vulnerability in the lives of the poor."

I am continuously looking for Insure-tech solutions that can create mass-market insurance product for direct consumers or M/SMEs. If you are building one or investing in one in Indonesia or SEA, please do write to me, I would love to learn more from you.

With Love,

Sagar

About

"first followers" is founded by Sagar Tandon, a founding member at Moonshot Ventures. You can reach him at sagar@moonshotventures.org.

Occasionally, he blogs about the responsible investing, tech for good, venture capital, investment thesis, conscious capitalism, collaborative consumption, community, and humane lifestyle.