A new special issue of The Geneva Papers on Risk and Insurance, guest edited by David Dror and Martin Eling, is dedicated to the topic of microinsurance, with articles focusing on factors that are affecting both the supply of and demand for products, the demonstrable benefits to consumers, as well as the challenges currently facing insurers.
Supply and demand
Microinsurance regulations in India mandate that insurance companies mobilise at least 7% of net premiums underwritten from rural and informal sectors, leading many life insurers to diversify into custom-designed life microinsurance (LMI) segments that cater to the needs of the low-income population. Subrato Banerjee and Basri Savitha attempt to understand the relationship between concentration, specialisation and performance in the LMI market in India (Competition reduces profitability: the case of the Indian life microinsurance industry), finding that a highly concentrated market leads to a higher return on equity and that product diversification generates lower profits for shareholders. They therefore advise policymakers to consider whether concentration in the LMI market may lead to unwarranted market power, merger activity, unethical behaviour and collusion among specialised firms who might engage in exploitative practices, ignoring the interests of insureds.
Though China is the world’s largest hog producer, uptake of hog insurance in the country remains relatively low. In their paper, The influence of past experience on farmers’ preferences for hog insurance products, Qingyin Cai, Yulian Ding, Calum Tuvey and Yuehua Zhang investigate how farmers value various attributes of a mortality-based livestock insurance product and their willingness to pay for such a product based on their previous experience with insurance.
Though responses for most attributes were heterogeneous, in general, all farmers expressed a preference for policy-oriented insurance, a lower excess and a lower self-paid premium. Interestingly, farmers without any prior experience of hog insurance showed a preference for higher levels of coverage compared to those with some level of past experience. The results make it clear that government involvement in the operation of hog insurance and the provision of differentiated products will be vital to increasing penetration rates.
Government interventions in microinsurance markets are common and can be justified as a way to remedy market failures and promote access to insurance. Yu Yan and Michael Faure investigate whether such interventions are effective in doing so without inducing other risks, namely moral hazard and adverse selection (Government interventions in microinsurance: evidence from China).
To avoid this, they state that governments must provide stable and smartly-designed subsidies or subsidise innovative market practices, and ensure that insurance policies are easy to understand, product distributors are properly trained or licensed, and that group policies can be renewed. Their analysis of specific government interventions in the Chinese microinsurance market, however, reveals a lack of such provisions, leading to the conclusion that government intervention may in fact increase the risk of market distortion.
Effectiveness of microinsurance programmes
In their article, Microinsurance and household asset welfare in South Africa, Abdul Latif Alhassan and Noluyolo Magazi examine whether microinsurance usage has an effect on household welfare in South Africa using asset accumulation as an indicator. Among their sample, funeral cover and life cover were the most widely used microinsurance policies at 72% and 31%, respectively.
They find that insured households show higher asset welfare, suggesting that microinsurance does in fact increase financial protection through asset accumulation, though varying effects are observed for different types of products. Despite being the most widely used product among the sample, funeral cover was the only type of insurance that was not associated with higher asset welfare.
Abel Tiemtore looks at how effective income insurance is at increasing financial resilience among corn farmers in Burkina Faso in the face of increasing agricultural risk (Examining the effects of agricultural income insurance on farmers in Burkina Faso). His results suggest that income insurance significantly reduces exposure to risk – by 38.94% nationally – and that it should therefore be seriously considered as a solution to strengthening the resilience of farmers in developing countries to climate change and market instability.
Challenges for insurers
As well as investigating the factors that determine the supply of microlife insurance in Ghana, Isaac Akomea-Frimpong, Caleb Boadi and Roger Owusu-Boafo identify the challenges faced by microlife insurers (Determinants and challenges of supplying microlife insurance in Ghana).
From a survey of 193 professionals involved in the development of microlife insurance products in the country, they identify an effective pricing strategy, minimised product development costs, and fair sharing of risk between the insurer and policyholder as the three most critical factors that influence the supply side. The top challenges faced by insurers include low renewal rates, frequent claims settlement, increased administrative and product development costs, increased cases of moral hazard and high levels of adverse selection. Their findings aim to inform microlife insurers of the significant issues that need to be considered when developing and launching new products, but also in sustaining them.
Xiaoqi Zhang, Yi Chen and Yi Yao put forward a method for detecting information asymmetry in their article Dynamic information asymmetry in micro health insurance: Implications for sustainability. Using data from a micro health insurance programme in Pakistan, they uncover significant evidence of adverse selection in policy renewals for chronic disease and pregnancy-related claims; no such evidence was found for claims related to acute diseases.
The data further indicate that the degree of adverse selection is actually increasing for pregnancy-related claims, which is of particular concern given that these account for over a third of all claims received by the programme. To ensure the sustainability of micro health insurance programmes, they suggest that insurers may consider incorporating a waiting period for maternity benefits or seek risk-adjusted government subsidies for maternity services. A
Professor Christophe Courbage is editor-in-chief of The Geneva Papers and professor of international risk management at the Geneva School of Business Administration (HES-SO).